Posted - January 27, 2014 - Hellenic Shipping News Worldwide
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.
Source: LiveMint
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