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Can India afford to miss the LNG shipbuilding bus?

India’s bid to build locally three of the nine liquefied natural gas (LNG) carriers required by state-run natural gas firm GAIL (India) Ltd to haul gas from the US beginning September 2017 is in danger of running aground. Experienced LNG shipbuilders in Japan and South Korea are unwilling to share technology to build the three ships locally as part of the larger ‘make in India’ plan of Prime Minister Narendra Modi and help local yards get started in this business.

India’s foreign minister Sushma Swaraj met her South Korean counterpart in the last week of December to lobby for Indian yards to get technology from private shipbuilders in the world’s biggest shipbuilding nation. This hasn’t yielded any results so far and GAIL had to push back the tender timeline to hire the nine LNG carriers to 17 February. To be sure, GAIL will not order the nine ships directly at shipyards—both overseas and Indian.

It plans to time-charter or hire the carriers for 20 years from fleet owners who will have to construct three of the nine ships in India, according to the 1 August tender issued by GAIL. Experts point to critical tender conditions that are discouraging Japanese and South Koreans to assist the Indian shipyards. For instance, the tender stipulates the validity of technical collaboration and technology transfer agreement between overseas shipyards and the Indian shipyard should be maintained till five years after the delivery of vessel. Globally, such agreements are typically valid for a year.

A practical solution, experts say, could be to seek support on design-based collaboration for ships to be built as there is no reward for the collaboration such as commitment to gain order for the six vessels in the collaborator’s shipyard. Another stumbling block is that Indian shipyards have to be provided with training of personnel on all aspects such as basic and constructional drawings, development, construction and testing of the vessel. This implies that full knowledge has to be imparted for building the ship.

Generally, naval architects are able to read the available designs themselves and develop the concepts on their own. The qualified overseas shipyard is also required to provide complete supervision of the ship construction. The overseas yards are so much automated that they will never be able to spare a large number of engineers in overseas facilities for a one-off project. Such critical conditions are holding overseas yards from helping Indian yards for a small order of six vessels when their LNG order books are already overflowing with direct orders from established and high-level shipowners.

In fact, they won’t lose anything by forgoing the six LNG ship order; but will stand to lose more by sharing technology with India and creating competition for themselves. A nominal technical collaboration fee alone will not satisfy the overseas design providing technical collaborator. The tender is something like providing the Indian Space Research Organisation’s (Isro’s) complete Polar Satellite Launch Vehicle design system to a competing country for a cost.

The LNG and offshore building technologies is core for any overseas yard. India’s diplomatic lobbying to secure LNG shipbuilding technology is akin to a foreign nation pushing the Indian government for an Indian private company to release certain technologies. The Korean and Japanese yards are completely private shipyards and have no government relations. India has to take a cue from the Chinese yards that have built LNG ships without the help of the Japanese and South Koreans.

China designed LNG ships with the help of General Electric Co., the US multi-national conglomerate, which does not own a shipyard. In China, the state fully funded the cost of constructing the initial set of LNG carriers, which helped Chinese yards gain experience and competency in this niche sector. In India, the GAIL tender is extremely demanding for Indian-built vessels.

But, over and above this, the tender is asking for foreign knowhow and foreign owners to invest without the government putting money on the table. This is not really encouraging for technical collaborators. India must invest in design, construction and ownership of a first few LNG carriers, even if it means spending more than the prevailing market price for such ships. An LNG ship of the specification required by GAIL would cost about $205 million to build in South Korea, according to industry estimates.

But, in India, the same ship would cost close to $290 million as most of the gears and parts have to be imported. The initial costs will be higher, especially if yards assume that these are one-off orders which would require them to defray capital costs over a fewer number of vessels. The extra costs could be considered as an investment in the future of LNG shipbuilding sector.

India would stand to benefit from the many takeaways from such an exercise. After all, India would require about 40 LNG carriers by 2025 to transport the fuel. In the long run, though, LNG ships built locally are expected to become competitively priced as it is a profitable sector for yards. There is design expertise within the country that can be tapped. LNG containment systems and propulsion systems are available off the shelf globally. Firms that verify ships for their sea-worthiness are willing to support local yards. For a country that sent a mission to Mars last year, India just cannot afford to miss the LNG bus. If that happens, it would be a national shame.
Source: LiveMint

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