Facing an exceptionally tight liquefied petroleum gas (LPG) shipping market and logistical disruptions in sourcing cargoes through the Strait of Hormuz amid the Iran conflict, IndianOil LNG Pvt Ltd (IOLPL) has invited bids to secure very large gas carriers (VLGCs) through a long-term joint venture ownership model.
Under the tender, IOLPL, a wholly owned subsidiary of Indian Oil Corporation Ltd (IOCL), plans to form a special purpose vehicle (SPV) in Gujarat International Finance Tec-City (GIFT City), with equal ownership between IOLPL and the successful shipowner. The SPV will own the vessel, while IOLPL will charter it for periods ranging from 13 to 25 years, depending on the vessel’s age.
The tender seeks VLGCs with a cargo capacity of 80,000-93,500 cubic metres and up to 12 years of age, ensuring a maximum trading life of 25 years.
Freight Market at Record Highs
The move comes as global VLGC freight rates have surged sharply following geopolitical tensions in West Asia. Industry sources said spot charter rates have climbed to nearly US$150,000 per day for voyages outside the Arabian Gulf and as much as US$300,000 per day for vessels willing to load cargo within the Gulf.
By comparison, one-year time charter rates are currently around US$65,000 per day, while soaring demand has also driven vessel prices to historic highs.
Shipping industry executives estimate that a 10-year-old VLGC, which would normally cost around US$60 million, is now valued at nearly US$95 million, while 11- and 12-year-old vessels are commanding approximately US$90 million and US$85 million, respectively.
Long-Term Charter to Reduce Freight Exposure
According to industry observers, IOCL is attempting to shield itself from volatile spot freight markets by offering long-term employment to vessel owners, even if it requires paying charter rates above historical averages.
“The company is entering the market at a very expensive point in the shipping cycle. Asset prices are elevated, which means charter rates will also have to remain attractive to support the investment,” a shipping executive said.
JV Structure Raises Concerns
While the proposed structure offers shipowners the security of a long-term charter, several fleet owners believe the joint venture model could present operational and financial challenges.
Under the arrangement, both IOLPL and the selected shipowner will contribute capital towards acquiring the vessel, while the SPV will receive charter hire from IOLPL and distribute profits equally between the partners.
Industry participants noted that although the structure reduces the financial burden on shipowners and provides assurance against charter default, it may complicate debt servicing if charter earnings are insufficient after covering operating expenses and loan repayments.
Financing could also prove challenging, as long-term debt for such acquisitions remains difficult to secure in the current market.
Indian Flag Requirement Adds Cost
Another concern raised by fleet owners is the potential requirement to convert the vessel to the Indian flag.
According to the tender conditions, all taxes and duties associated with the vessel’s first import into India—including Integrated GST (IGST), customs duty, tonnage tax and other statutory levies—will be borne by the successful bidder.
Industry executives estimate that the 5% IGST payable during the vessel’s first import could add several million dollars to acquisition costs, which would eventually be reflected in charter rates.
Japanese Owners Seen as Likely Participants
Shipping executives believe the proposed structure may appeal particularly to Japanese shipowners and to the Shipping Corporation of India, which have prior experience with similar long-term shipping arrangements.
They pointed to the LNG carrier contracts signed more than two decades ago for transporting LNG from Qatar to India under long-term charters for Petronet LNG, where investors were comfortable with relatively modest but stable long-term returns.
With LPG imports expected to remain critical for India’s energy security and freight markets continuing to experience unprecedented volatility, IOLPL’s innovative ownership-cum-charter model is being closely watched by both domestic and international shipowners.
