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Santanu Sanyal

MANY analysts are predicting a radical change in the deployment pattern of LNG ships, worldwide, in the next few years. In sharp contrast to the trend so far, more and more ships will be offered for spot and short-term trading. This will be caused by overcapacity in tonnage, fuelled by jump in demand. The demand projections and the probable development of supply sources will lead to newbuildings.

For example, LNG imports to the US alone will double by 2005 to five trillion cu.ft, according to one estimate. The new supply sources, targeted to meet the projected demand, will include Norway with 5.4 mtpa by 2006; Algeria 2.1 mtpa (2008); Egypt 3.6 mtpa (2006); Indonesia 12-16 mtpa (2008); Trinidad 9.4 mtpa (2006); Qatar 22.9 mtpa (2009-10); Nigeria 8.4 mtpa (2006); Australia two mtpa (2008); and Oman 6.6 mtpa (2008). Peru, Bolivia and Brazil too are likely to emerge as new sources. Over 55 mtpa of new production is under construction and a total of 200 mtpa in various stages of planning to meet the projected world demand.

All these have led to a scramble for additional shipping tonnage. Till end-2002, the world LNG fleet consisted of 140 vessels; 55 vessels are on order for delivery between 2004 and 2006.

Part of the ordering surge is attributed to the highly competitive prices offered by the Korean yards. The devaluation of the Korean currency, following the Asian financial crisis of the late 1990s, led to a drop in the Korean labour costs. The Korean yards, known for quality, were thus able to offer very competitive rates when bidding for international buyers.

Capping it all, there was intense competition from the Japanese yards. No wonder, the price of an LNG tanker dropped from $250 million to $170-180 million. Also, the LNG buyers have been successful in wangling competitive rates from the sellers.

As a cumulative effect of all this, the ship deployment pattern is set to undergo a change.

In many cases, either the LNG buyer or the seller for a particular ship's trade is unspecified or, may be, the vessels have been ordered entirely for speculation. Many of the ships on order are scheduled for delivery with no associated trade whatsoever. Some vessels are dedicated to suppliers with no committed destinations. Again, in some other cases, the buyer is identified but not the seller.

Nearly half the vessels due for delivery between 2004 and 2006 are to be operated by LNG buyers themselves. Some of the newbuildings ordered by oil majors may be used to meet the transportation needs of multiple projects. In other words, the undesignated trade pattern could become more common as buyers seek to diversify their supply portfolio.

Some of the uncommitted tonnage will be used to meet the requirement of the spot and short-term market. Till recently, spot and short-term sales in LNG were negligible but, now, account for nearly 10 per cent. The figure is likely to rise further as more export projects are brought on-line and spare production capacity increases.

Also, as new receiving terminals are built, the number of outlets increases. Plus the entry of new players into the market enhances the value of having shipping flexibility.

All these developments are likely to impact the debate currently raging in the country over the need for a suitable policy to ensure larger participation of the national shipping in the LNG transportation, a lucrative business. Right now, only SCI is participating in it in a limited way but wishes to increase it. Some other Indian lines may also venture into it, more so because the LNG import to India is set for a big jump.

According to one estimate, LNG imports are expected to touch 20 million tonnes by 2010. This would require more than 16 vessels, making it the single largest growth area for the shipping industry.

If Indian shipping companies are left out of the picture right now because of the lack of appropriate government policies to support them, it is possible that they may not be able to participate at all, as has happened in container shipping. Also, from the point of view of energy security, it is crucial that national carriers participate in LNG transportation in a big way.

One way of ensuring participation of the Indian lines in the LNG import, it is felt, will be to prevail upon the importers to enter into long-term import contracts on f.o.b basis. In the case of f.o.b contracts, the importer will not only nominate the vessel but will also be required to secure an approval of the Director-General of Shipping.

However, such an approval will be difficult to obtain unless the importer concerned, while nominating the vessel, also opts for one registered under the Indian flag and is owned by an Indian entity either wholly or partly, that is, an Indian partner holds not less than 26 per cent stake in the joint venture owning and operating the LNG tanker.

No wonder, Petronet LNG, which imports LNG from Qatar to its terminal at Dahej, has entered into a 25-year deal with a shipping consortium in which SCI has 29 per cent stake. Under ex-ship (c.i.f) contract, the exporter nominates the vessel and, therefore, the need for DG Shipping's approval does not arise.

Shell, which is to commission its terminal shortly at Hazira, is believed to have expressed its reservations about the government's insistence on import contracts on f.o.b basis. On other hand, it favours ex-ship (c.i.f) contracts pointing out that, unlike Petronet LNG, it might not go for long-term purchase contracts; instead, it will opt for spot purchases, more so because the probable users of the gas to be imported through Hazira are reportedly reluctant to enter into long-term purchase contracts with Shell.

If the sale of the gas is on short-term contracts (may be for three-five years), how can there be purchases and, therefore, transportation contracts on long-term basis, it is asked. Worldwide also, it is pointed out, the undesignated trade pattern is becoming common.

In other words, more and more ships are arriving on the market with no committed trade destinations.

This, perhaps, also explains why SCI has initiated the move to make Shell agree to a consortium for acquiring an LNG vessel for free deployment, not tied to Hazira.

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