The Hindu Business Line : Making LNG imports on f.o.b. mandatory

According to the Directorate-General of Shipping, importing LNG on free-on-board (f.o.b) basis would lead to competitive cost of transportation, flexibility in imports, uninterrupted supplies in case of emergencies and integration with project promoters.

LNG project promoters such as Royal Dutch Shell, Dakshin Bharat Energy Consortium and IOC-Petronas will have to import liquefied natural gas on free-on-board (f.o.b) basis to comply with a plan of the Shipping Ministry to help Indian companies enter this highly capital-intensive, specialised and lucrative area.

Fearing that its July 5 guidelines for chartering of LNG tankers would force importers to opt for cost-insurance-freight (c.i.f) contracts to circumvent the "restrictions", the Directorate-General of Shipping (DGS), the statutory maritime authority, has now requested the Directorate-General of Foreign Trade (DGFT) to issue an order making mandatory LNG imports only on f.o.b basis.

DGFT to take action

Confirming the development, a senior Commerce Ministry official said the DGFT would take action in this regard soon. Shipping Ministry officials said the DGFT has been asked to issue guidelines for making LNG imports only on f.o.b basis till such time the Union Cabinet took a policy decision on this. "In fact, the Shipping Ministry has prepared a draft LNG shipping policy note for the consideration of the Cabinet Committee on Economic Affairs. The draft policy states that LNG should be imported only on f.o.b basis. The norms issued by the DGS on chartering of LNG tankers and the subsequent request to the DGFT were necessitated as the CCEA would take some time to approve the policy given the tortuous decision-making process within the Government," official sources said.

Shipping Ministry officials were "agitated" when it was brought to their notice that the DGS' LNG tanker chartering norms would pave the way for importers to buy their cargo on c.i.f basis in the absence of a policy on buying LNG only on f.o.b basis. In the case of f.o.b deals, the responsibility of transporting the cargo rests with the buyer/importer, whereas under c.i.f contracts, the seller/supplier undertakes to ship the cargo.Domestic ship-owners have forcefully demanded LNG import on f.o.b terms, wiser from their experience with LPG imports from the Persian Gulf. "Whenever suppliers are given an option to sell either f.o.b or c.i.f, there is a tendency for the suppliers to manipulate the commodity price in a manner that puts the Indian ship-owner at a disadvantage. This is done primarily to control the transportation or alternatively to obtain the freight rate that makes f.o.b imports virtually impossible," a leading ship owner told Business Line.

Since the stated objective of the LNG tanker chartering norms is to promote Indian tonnage, in general, and LNG tonnage, in particular, any move by LNG importers to go for c.i.f deals can prove detrimental to Indian shipping as sellers/suppliers prefer to move the LNG cargo on foreign flag carriers, the Ministry felt.

This fear has strengthened as the chartering norms for LNG tankers can only be implemented when the LNG is imported on f.o.b basis wherein permission for in-chartering the tankers would have to be taken from the DGS. Whereas, for c.i.f deals, this permission is not required as they fall outside the jurisdiction of the regulator. The DGS has concurred with this view by stating that its July 5 norms would cover only f.o.b contracts, though the guidelines do not specifically mention this. "However, if the contract is concluded on c.i.f basis, there may not be any requirement for chartering permission from the DGS. In case, this practice is resorted to by the LNG importers, the whole purpose and intention of our guidelines for LNG shipping would get defeated," the regulator said in a letter to the DGFT on July 16.

Listing the benefits of f.o.b deals over c.i.f contracts for import of LNG, the DGS says that the former would lead to competitive cost of transportation, flexibility in imports, uninterrupted supplies in case of emergencies and suitable integration with project promoters. "In view of this, it would be of utmost importance to issue suitable instructions permitting import of LNG only on f.o.b basis. Since, the import of LNG per se falls within the purview of the DGFT/Commerce Ministry, you are requested to consider taking necessary action of issuing guidelines/order/notification on making import of LNG only on f.o.b basis," the DGS submitted in the letter.

As per the July 5 guidelines, no licence shall be granted for chartering an LNG vessel unless registered under the Indian flag and is owned by an Indian entity either wholly or an Indian partner holds not less than 26 per cent stake in the joint venture LNG tanker owning/operating company.

Further, the LNG tanker thus hired must employ a minimum of two Indian officers and two trainee officers/cadets — one each on the engineering side and the deck side. And, within five years of registering the vessel, the LNG carrier should be managed, maintained and operated by the Indian partner with Indian crew/personnel as per a transfer of technology clause agreed upon by all the partners of the LNG tanker owning company.

Japan, Korea too

Calling for measures to support Indian shipping companies enter the LNG transportation sector, the industry has cited instances of Japan and Korea that have framed specific policies for LNG movement that encourages their domestic ship owners.

"If Indian shipping companies are left out of the picture at this stage, it is possible that in future also they will not be in a position to participate in the LNG transportation business which is marked by long-term time charter deals spread over 20-25 years for specific projects. It is also vital to have security of transportation lines in terms of involvement of Indian shipping companies," an industry official said.

Among the domestic shipping companies, only the state-owned Shipping Corporation of India has so far managed to get a foothold in the LNG shipping business, being part of a Japanese shipping consortium that was awarded a 25-year deal by Petronet LNG Limited to haul LNG from Qatar to Dahej in Gujarat.