Reliance’s ship purchases put India’s maritime policy shortcomings in focus

India’s bid to move up the shipbuilding value chain and start constructing sophisticated vessels received yet another jolt when Reliance Industries Ltd ordered six very large ethane carriers, or VLECs, the world’s first such ships, from South Korea’s Samsung Heavy Industries Co. Ltd for a combined $720 million.

A very large ethane carrier is a hybrid of a liquefied natural gas (LNG) carrier and a liquefied petroleum gas (LPG) carrier. The ships, each costing $120 million, would be used to transport liquefied ethane from North America to the petrochemical plant of Reliance in India. Mitsui OSK Lines Ltd, Japan’s biggest shipping company, will first supervise the construction of the 87,000 cu. m capacity ships and, when delivered, operate and manage the vessels to ship the fuel. The blow is all the more severe because Reliance picked Mitsui OSK Lines to operate and manage the ships due to the expertise of the Japanese firm in running both LNG and LPG carriers.

In the process, it overlooked local shipowners such as Shipping Corp. of India Ltd (SCI), India’s state-run firm which has gained sufficient capabilities in operating and managing LNG and LPG carriers. Very large ethane carriers are fast becoming a new opportunity for shipbuilders and shipowners/operators. Ethane, a natural gas component, is expected to be produced in huge amounts in North America due to the shale gas revolution, which has generated an abundance of LNG and LPG. Ethane is primarily used as a petrochemical feedstock, to produce ethylene by steam cracking. South Korea, the world’s biggest shipbuilding nation and Samsung Heavy Industries have gained by winning this prestigious order from Reliance to build the world’s first set of very large ethane carriers. It is undoubtedly a loss for India.

The development also comes at a time when Prime Minister Narendra Modi is trying to give an impetus to local manufacturing, including shipbuilding through the “Make in India” campaign. Worse still, India’s bid to construct at least three of the nine LNG ships required by state-run natural gas firm GAIL (India) Ltd to haul the cargo from the US is in jeopardy because it is not able to get a technology partner to build these carriers. In view of this, GAIL was forced to extend time twice on a tender to hire nine LNG ships from shipowners and operators.

Reliance will register these ships in overseas, tax-friendly jurisdictions, dealing a further blow to India’s plan to boost its home fleet—both owned and controlled tonnage—by an ambitious 400% to 43 million gross tonnage (GT) by 2020 from the current 10.31 million gross tonnage. India’s junior shipping minister P. Radhakrishnan informed the country’s Parliament of the ambitious target but did not reveal how this would be achieved. One of the first policy decisions that the Modi government took after coming to power in May was to formulate a controlled tonnage scheme for local fleet owners.

According to this policy, local fleet owners can buy ships abroad and also flag them in the country of their choice. This decision is aimed at encouraging Indian shipping companies to have their registered offices in India itself while allowing them to acquire further tonnage without forming subsidiaries overseas to own such foreign flagged vessels. This will enable Indian shipowners to have access to cheaper funds overseas to acquire additional tonnage while not having to set up multiple enterprises abroad to acquire and maintain such tonnage.

The policy, however, prescribes that the additional tonnage that can be acquired and flagged abroad by these India-based enterprises is limited to the tonnage of the Indian flagged ships already registered by them in India. The additional tonnage that can be acquired abroad is also subject to the employment of a certain proportion of Indian crew, thereby creating additional employment opportunities for Indian seafarers. Almost six months after the policy was announced, none of the Indian shipowners have availed themselves of the scheme. Shipping experts say that the scheme needs further refinement before it can be tried out by local fleet owners.

For instance, the scheme is of no use for new entrants to the sector—their first ship should be registered in India, then only can they buy and register matching tonnage overseas. But registering a ship in India is considered tricky and entails a variety of issues. As a result, an Indian-flag ship is not an acceptable flag for many of the global ship lenders. If India wants the Tata group and Reliance, which have big money and massive cargo interests, to help boost India’s tonnage or build their ships in India, the government has to create a conducive climate. The Tata group already has a joint venture shipping company based in Singapore with another Japanese fleet owner, NYK Line Ltd. Otherwise, the targets and schemes will remain only on paper.
Source: Livemint