Policy in the works to assure crude oil business for local shipowners

Coming to the rescue of domestic shipowners hit by a dip in business, the Centre is likely to ask public sector oil refiners to extend long-term crude shipment contracts to them.

Multiple sources told BusinessLine a policy is being worked out at the behest of the Prime Ministers’ Office, which will enable domestic shipping companies to have a larger say in acquiring committed business from PSU refiners Indian Oil Corporation, Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation.

The volume of business involved can be assessed from the fact that almost 80 per cent of India’s crude requirements are met through imports. According to the Petroleum Planning and Analysis Cell snapshot of Indian oil and gas data for June 2017, the crude oil import bill is estimated to increase 23 per cent from $70 billion in FY17 to $86 billion in FY18, taking the price at which Indian refiners buy crude at $55 a barrel, and the rupee at 65 versus the dollar.

Though PSU refiners have been allowed to source crude oil from the spot market, the ratio is still tilted towards long-term purchases. For example, IndianOil still buys close to 70 per cent of its crude through long-term contracts.

Sources said IndianOil and BPCL are likely to hire an oil supertanker and a Suezmax carrier respectively on a long-term charter of as many as five years from Indian fleet owners. This would mark the first such policy designed to provide cargo support to local shipowners and help boost Indian tonnage in the carriage of crude oil.

IndianOil and BPCL will issue tenders to hire an Indian-flagged very large crude carrier (VLCC) and a Suezmax tanker, wherein the rates will be benchmarked to the Clarkson index, two officials briefed on the plan said on conditions of anonymity. London-based Clarkson Plc is the world’s biggest ship broker.

The bidder offering the highest discount on the Clarkson rate will win the deal, which may also have a floor and a ceiling rate — a minimum rate (floor) at which the shipowner will not suffer a loss and a maximum rate (ceiling) at which the charterers will not incur a loss.

The tender will be open to shipowners who already have VLCC and Suezmax tankers on their fleet, as well as new entities that don’t. Newcomers, though, will have to show MoUs to purchase such foreign-flagged tankers which should be converted into Indian flags within six months of winning the contract.

These tenders for long-term hiring of Indian flag ships is a pilot project before the policy can be implemented on a full scale, said an official.

Interestingly, the Shipping Ministry has granted a so-called no objection certificate (NOC) to the PSU refiners to buy crude from the US on a cost, insurance and freight (CIF) basis, wherein the responsibility of shipping the cargo rests with the seller. The NOC was necessary because it deviated from a government policy that mandates all government-owned/controlled cargo to be purchased on a freight-on-board (FoB) basis, in which the Indian buyer will have to finalise the shipping arrangements.

The PSU refiners, anyway, have to extend right of first refusal to Indian shipowners — if domestic firms are not the lowest bidders, they are offered an opportunity to match the lowest rate quoted by a foreign shipowner and take the contract.

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