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Business News/ Opinion / Can India’s LNG boom become a blockbuster for its shipyards and fleet owners?
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Can India’s LNG boom become a blockbuster for its shipyards and fleet owners?

India is looking to leverage its liquefied natural gas buying power to help develop capabilities for building LNG carriers locally

Indian shipbuilders need to grab the opportunity to build LNG carriers as the country planned to import LNG in huge quantities and cannot afford to depend on foreign builders.Premium
Indian shipbuilders need to grab the opportunity to build LNG carriers as the country planned to import LNG in huge quantities and cannot afford to depend on foreign builders.

India is looking to leverage its liquefied natural gas (LNG) buying power to help develop capabilities for building LNG carriers locally. A $2.8 billion tender to be issued shortly by state-owned natural gas firm GAIL (India) Ltd for hiring as many as 14 LNG ships on long-term charter to haul 5.8 million tonnes per annum (MTPA) of LNG from the US for 20 years beginning September 2017 will potentially shape India’s entry into the big league of nations that construct sophisticated LNG ships.

In today’s market, it costs around $200 million to construct an LNG carrier from scratch.

GAIL is discussing a proposal, backed by India’s oil ministry, wherein shipowners winning the deal to lease these LNG ships to the firm will have to build some of these carriers at local yards.

Though the country has adequate ship-building capacity, none of India’s shipyards have built an LNG ship. South Korea, Japan and China dominate the LNG shipbuilding sector. This is an opportunity India can ill afford to squander.

But without a policy and fiscal support from the government—similar to those available in South Korea, Japan and China—for shipbuilders to construct such tankers, India will not be able to encash the opportunity.

China has made it mandatory for LNG imported into that country to be carried on ships that are constructed at Chinese yards and majority owned by Chinese firms.

Initially, Chinese shipbuilders had problems in constructing LNG ships, but now they are firmly entrenched in this business.

Indian yards, plagued by persistent delays in constructing ships on time and the attendant cost escalations, could find the entry into LNG ship construction a big challenge. India’s oil secretary Vivek Rae said on 4 January in Kochi, Kerala, that his ministry was working on leveraging India’s LNG buying power to encourage local yards to qualify for constructing LNG carriers.

Rae said Indian shipbuilders need to grab the opportunity to build LNG carriers as the country planned to import LNG in huge quantities and cannot afford to depend on foreign builders. Rae is right because India is one of the few countries that hires ships on long-term basis to haul its LNG cargo.

So far, the majority of shipments were from Qatar and, given the shorter distance, the number of LNG carriers required for Indian imports was in single digits. That will change as India starts sourcing LNG from the US, Australia, Mozambique, Russia, West and East Africa on long-term contracts. If by 2018, the average round-trip for an import shipment increases to 26 days, the number of ships required for Indian imports will rise to 50. Building a fleet of this size will require an investment of $10 billion. This could just be the blockbuster the beleaguered local yards were looking for. India’s shipbuilders expanded capacity and new firms entered the business, investing a few thousand crore of rupees to cater to a global shipping boom between 2005 and 2007. But the financial crisis and the economic downturn that began in September 2008 dashed their hopes as slower global trade cut demand for goods and created a capacity imbalance in shipping. Indian yards are now virtually surviving on government-funded defence/naval contracts after commercial ship orders dried up.

It has also become equally imperative for India to look at policy measures to help its local fleetowners diversify into this lucrative business.

In 2004, India introduced tonnage tax—based on the cargo carrying capacity of ships—a regime in which about 95% of the global fleet operates. The tonnage tax cut tax incidence of Indian firms to just 1-2% of their income, compared with the corporate tax rate of 33.9%.

Still, Indian shipowners are burdened by a dozen other taxes levied by the government, which foreign shipowners do not pay, thus negating the benefits of tonnage tax and reducing their competitiveness.

State-owned Shipping Corp. of India Ltd (SCI) is India’s only local shipowner with interests in the transportation of LNG. SCI is part of a consortium that has leased three LNG tankers to Petronet LNG Ltd for hauling gas from Qatar to its re-gassification terminal at Dahej in Gujarat. SCI holds 29.08% stake each in two of these LNG ships and a 26% stake in the third LNG carrier. The consortium includes three Japanese firms—Mitsui OSK Lines Ltd, NYK Line Ltd and K Line Ltd.

In December 2013, the same consortium won a long-term contract to lease a fourth LNG carrier to Petronet to ship LNG from Australia to its re-gassification facility at Kochi in Kerala.

Petronet, India’s biggest natural gas importer, is also working on a plan to help Indian yards qualify for the construction of LNG ships for its future needs.

India’s state-owned gas importers should remove the stipulation that require fleetowners to have a minimum experience of two years to be eligible to bid for the LNG shipping tenders. The existing LNG shipping policy approved by India’s cabinet in 2005 gives LNG importers the flexibility to transport the cargo either on f.o.b. (free-on-board) or c.i.f. (cost-insurance-freight) basis by deploying foreign or Indian-registered ships.

In f.o.b contracts, the responsibility of making the shipping arrangement rests with the buyer whereas in c.i.f deals, the seller has to arrange the transportation.

The cabinet took the decision after LNG importers lobbied the government not to insist on bringing the cargo only on Indian-registered ships, arguing that this would raise their ship hiring costs and push up the cost of LNG sold to end-use customers. As a result, barring SCI, no local fleetowner managed to enter the LNG shipping business, which is marked by long-term charters stretching as much as 25 years and stable revenue.

In June 2013, GAIL signed a cooperation agreement with SCI that include SCI assisting GAIL with the tender for hiring LNG ships and GAIL assigning a step-in right to SCI to take an equity stake of as much as 26% in each of the ships from the entity winning the contract. GAIL is expected to take at least a 10% stake in each of the LNG ships, thus taking the total Indian ownership in the LNG tankers to 36% (including the 26% by SCI) while the majority stake will be held by global shipowners.

It would be a monumental loss if the Indian maritime industry does not benefit from the huge increase in shipping LNG into India. Because, with 36% Indian ownership, there won’t be any economic spin-offs for the local shipping community such as ship financiers, managers, brokers, maritime training institutes, marine insurance firms, ship classification societies, marine equipment suppliers and repairers and maritime lawyers. For such ancillary activities to develop, carriers hauling LNG cargo into India have to be majority owned by Indian entities and such ships have to be constructed and registered in India. Such support, however, should not have an adverse impact on LNG importers and end-use consumers.

P. Manoj looks at trends in the shipping industry.

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Published: 17 Jan 2014, 12:29 AM IST
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