News Detail

The Ministry of Petroleum and Natural Gas has written to the heads of major oil and gas companies and Shipyards in the country encouraging them to explore the possibilities of involvement of Indian shipyards in building LNG carriers. The MoPNG has further shared the following note on the possibility of involvement of Indian shipyards in building LNG carriers to transport volumes from the US.

Note on the possibility of involvement of Indian shipyards in building LNG carriers to transport volumes from the US

Upon execution of two contracts by GAIL for sourcing of 5.8 MMTPA of LNG from the US, a substantial number of LNG carriers would be required. Though GAIL is trying to capture the available marketing and shipping arbitrage through trade/  volume swaps, exact number of carriers that would be chartered would depend on the outcome of the exercise currently underway.

GAIL has signed an MoU with Shipping Corporation of India Limited (SCI) and has agreed to provide SCI with a step-in right to take upto 26 percent equity in each of the LNG carriers that would be chartered by GAIL. GAIL would also retain a similar right of upto 10 percent equity participation for itself. This arrangement would ensure the likelihood of 36 percent equity ownership by these entities. Besides, GAIL has also agreed to consider engaging SCI as its Post Fixture Manager for an initial period of three years to manage the carriers on its behalf.

GAIL is in the process of floating a tender for award of time charter contract which would be evaluated on a lifecycle cost basis and bidders with least lifecycle cost will be awarded the time charter contract. The ship owners thus selected will sign Time Charter Party Agreements (TCPAs) with GAIL and will, in turn, execute ship building contracts(s) with shipyard(s) in a manner so as to be able to deploy the newly built LNG ships to meet LNG supplies which are likely to commence from September 2017 onwards. In order to provide adequate time to get the LNG carriers built, execution of the TCPAs is targeted to be accomplished by Q3 of 2014.

Based on the preliminary discussions with SCI and the consultants, it has been decided to incorporate in the tender, a shipyard eligibility criteria to assure that only good quality LNG carriers are delivered. In this regard, the bidders are required to propose ships from shipyard(s) that, inter-alia, meet following criteria:

1. must have constructed and delivered at least 5 LNG ships each of capacity not less than 135,000 cum of membrane type containment system and dual-fuel diesel electric (DFDE) / tri-fuel diesel electric (TFDE) propulsion system in preceding 7 years
2. be licensed by Gaztransport & lechnigaz (GTT) to build LNG carriers equipped with a  membrane type containment system (No. 95 or Mark III)

It may be stated that under the two LNG sourcing contracts. GAIL shall be carrying annual take or pay exposure to around US$ 2.5 billion calculated at an FOB price of US$ 9/MMBTU. Besides, there would be downstream liabilities pertaining to supply or pay on account of any default by GAIL. Hence, GAIL's exposure along the chain is substantial. Besides, the distance between US east coast and India is large entailing a return voyage time of around 50 days thereby warranting that GAIL must rely on a robust transportation arrangement. Hence, it would be preferred that reputed ship owners are assigned the responsibility who would deploy LNG carriers from shipyard(s) with proven track record.

The Government has been contemplating policy initiatives and measures for promoting the possibility of LNG ship building within the country.   Based on the rising LNG demand, firm LNG contracts being in place, the increased capabilities of domestic shipyards; it is perhaps the right time to explore the possibilities of putting in place the right policies for such a venture. The matter also came up for discussions during the Asia Gas Partnership Summit concluded in the first week of December 2013.  World over the domestic LNG ship building capability has developed based on a strong domestic demand. The Chinese insist that ships must be built in China if chartered on long-term to Chinese oil majors.

However, in order to develop domestic ship building capacity in the LNG space, if an arrangement is to be worked out, the same needs to be done in a cautious manner while ensuring that GAIL's interests are protected from the effects of any under performance of the domestic shipyards. In this regard, it needs to be ensured that an Indian shipyard enters into a tie-up / collaboration with a foreign shipyard which meets the qualification criteria mentioned above. However, before such an arrangement can be included in GAIL's tender, wider consultations would be required with prospective ship owners to gauge their comfort level as they would have to guarantee performance of such LNG carrier for a period of 20 years from deployment. Besides, consultation would also be required with prospective domestic shipyards to gauge adequacy of their facilities, status of tie-up with qualified shipyards, licensing arrangements entered into with major vendors / suppliers as well as their preparedness to accept such an involvement which may entail rendering of back to back performance guarantees. As the long term business plan for an Indian shipyard contemplating to venture into building LNG vessel would have to be underpinned by international clients, it needs to gauge its ability to compete with Korean, Chinese and Japanese shipyards in the long run before deciding to enter into the business.

As per the draft tender conditions, any delay in delivery or unscheduled maintenance during the contract period would attract a hefty penalty. As the ship owner would be required to abide by such terms and conditions, the Indian shipyard could be required to underwrite such liability on a back to back basis.

Source: SNP Infra Research