India’s plans to enter the niche LNG shipbuilding business may end before it really begins.
NITI Aayog, the Centre’s think-tank, seems to be of the view that the plan is “not feasible” given the high initial government investment required and the huge associated risks. After 10-month-long consultations with stakeholders, a team of senior officials led by the then Vice-Chairman Arvind Panagariya concluded that the attempt was not worth the money, effort and time. “NITI Aayog has submitted its report to the PMO,” an official in the know said, adding that “a final call will be taken there.”
The Prime Minister’s Office had asked the Panagariya panel to undertake a feasibility study after GAIL (India) Ltd scrapped a tender — the second in three years — in October 2016 to hire about nine new LNG tankers to haul 5.8 mmtpa (million metric tonnes per annum) of gas from the US from January 2018.
For now, the shipbuilding plans are as good as scrapped, multiple sources told BusinessLine .
The ‘Make-in-India’ plan
An attempt was being made to get some of these technologically advanced tankers built locally as part of the ‘Make in India’ initiative.
Accordingly, global fleet owners winning GAIL’s charter deal, estimated at over $7 billion, would have had to build three of the nine new tankers locally. The move was also intended to foray into a market now dominated by Japan, South Korea and China.
But costs and high risks seem to have been the party spoiler. GAIL’s new tender is likely to omit the stipulation mandating indigenous construction. The high cost of constructing LNG carriers in the country also acted as a deterrent for the bidders.
Such tenders are typically decided on the basis of the lowest charter rate quoted, and the expenses involved in the building of the ship are the biggest element factored in.
The high cost involved meant fleet owners would had to quote two different rates — one for the carriers built overseas and another for those made indigenously. That would have rendered the exercise of evaluating the bids complex, said an executive with a global LNG shipping company that had participated in the tender.
Besides, bidding groups said the tender terms foisted the risks from Indian-built LNG ships onto them, as GAIL was not willing to bear responsibility.
GAIL had asked the government to take a call on the potential risks.
Breaking down expenses
The initial cost of building an LNG vessel here was estimated at $338 million per carrier (excluding taxes, exemptions and concessions). In South Korea, the vessel would cost about $100 million less.
A key reason for the higher costs was a $104-million technology transfer fee that India had to pay Samsung Heavy Industries for technology-sharing with Cochin Shipyard, the only local yard eligible to construct the cryogenic tankers.
The technology transfer expenses were to be amortised over two carriers at the rate of $52 million per tanker. The cost of building the LNG carriers would have dropped to about $220 million after the first two ships were constructed, which is about the cost of such vessels built overseas.
“The manner in which the project was planned would have necessitated the country to make substantial initial investments to get started,” another official said, adding that this led to questions like: “Do we need to make this investment? The general feeling among the stakeholders was that the government should put in efforts somewhere else.”
“From a technology point of view, we are ready,” said Madhu S Nair, Chairman and Managing Director of Cochin Shipyard. “But it all depends on whether the system actually wants to move forward or not,” he added.
Source: The Hindu Business LinePrevious Next
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