State-run oil refiners in dilemma over ‘go local’ policy for below ₹200-crore shipping deals

P Manoj Mumbai | Updated on June 22, 2020

The go local policy can only be enforced when crude and products are purchased on FOB basis   -  C . Subrahmanyam

Move seen as huge opportunity for local fleet owners but shortage of ships is a problem

India’s state-run oil firms are scrambling to comply with a recent government order to go local while hiring ships to haul crude and petroleum products of value less than ₹200 crore as part of the revised Make in India policy on procuring services.

The government move would be a big bonanza for local fleet owners such as state-run Shipping Corporation of India Ltd (SCI), The Great Eastern Shipping Co Ltd, Seven Islands Shipping Ltd and Essar Shipping Ltd, but its immediate implementation could pose a problem due to shortage of Indian ships to meet the requirements, government officials said.

“The oil PSUs are working out the modalities for implementing the policy. But, we don’t know whether it would be possible to implement this policy immediately in shipping. Because, we would be struggling for vessels; we don’t have that many Indian ships to meet the requirements,” said an executive with one of the state-owned refiners based in Mumbai.

“Given this situation, we are looking at how to go about this,” he added.

Shipping Ministry officials said that the policy would be used when oil PSUs hire ships on spot contracts, which are all less than ₹200 crore. In comparison, long-term time charter contracts are typically valued at more than ₹200 crore.

“For instance, 30 per cent of Indian Oil Corporation Ltd’s oil shipments are on spot basis, and 70 per cent on long-term deals. Within the 30 per cent spot contracts, as much as 97 per cent are deals below ₹200 crore,” a Shipping Ministry official said.

The implementation of this policy will hinge on whether crude oil and products are purchased on free-on-board (FOB) basis or on cost, insurance and freight (CIF) basis.

Under FOB deals, the Indian buyer is responsible for making the shipping arrangements, while in CIF contracts, the shipping part is finalised by the suppliers.

The type of crude and product purchase contracts have always been points of friction between the oil PSUs and the local fleet owners.

The go local policy can only be enforced when crude and products are purchased on FOB basis.

And, with state-run firms barred from floating global tenders to finalise service contracts below ₹200 crore, even the right of first refusal (RoFR) policy will not be applicable.

India fleet owners have a right to match the lowest rate offered by a foreign flag ship in global tenders issued by state-run firms for hiring ships under the chartering guidelines framed by the director general of shipping. If Indian shipping companies decline the business, only then can the foreign flag ship, which had quoted the lowest rate, be awarded the cargo transportation contract.

In 2017, government allowed state-run oil refiners to ship one-third of their annual crude imports on CIF basis, reducing the pie available to Indian shipping companies.

“The oil companies keep arguing that CIF is cheaper, but they will do well to look at what Japan, China and Korea are doing. They only want to buy FOB due to security and strategic considerations and also to build a strong national fleet,” said the managing director of a Mumbai-listed shipping company.

Published on June 22, 2020

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor