India: A False Dawn For Foreign OSV Owners

India's ambitious drive to reduce dependence on foreign hydrocarbon imports is expected to spur almost US$30 billion of exploration and production investments including in the offshore sector. An increase in offshore exploration activities usually results in increased work opportunities for offshore support vessels (OSVs). However, the cabotage policy in India means that the odds are stacked against foreign OSV owners winning tenders. To improve their odds in the tender process, foreign OSV owners have to take certain measures including setting up an Indian entity to assume ownership of the relevant vessel and fly the Indian flag.

Introduction While demand for hydrocarbons in the world's biggest economies is generally weak, India, fueled by relatively robust economic growth, is set for a rapid, sustained trajectory in energy demand.1 In 2015, India consumed an average of 4.1 million barrels per day (mb/d) of crude oil, overtaking Japan as the world's third largest consumer of crude oil. It is anticipated that by 2040 not only will India's energy use more than double to reach 1,900 million tonnes of oil equivalent (mtoe), but the demand for oil in India will also increase by 6 mb/d to reach 9.8 mb/d.2 At present, India imports about 75 per cent of its crude oil and around 40 per cent of its natural gas requirements.3

HELPing the Indian oil and gas sector However, in a bid to reduce India's dependence on foreign oil and gas, Prime Minister Narendra Modi announced in February 2016 an ambitious plan to cut fuel imports by 10 per cent over the next six years and sought investments close to US$27 billion in domestic hydrocarbon exploration projects to achieve this objective.4 To this end, the Minister for Petroleum and Natural Gas, Dharmendra Pradhan announced the new Hydrocarbon Exploration Licensing Policy (HELP) on 10 March 2016, replacing the oft-criticised National Exploration Licensing Policy (NELP).

One of the major features of HELP was to prospectively replace the cost-recovery (or profit-sharing) arrangements with a revenue-sharing mechanism. Previously, production-sharing contracts were based on the principle of 'profit sharing' and until a profit was made, no share was given to the government, other than royalties. To enable the government to monitor a contractor's costs, government approval had to be obtained at various stages and activities could not be commenced without such approval. Many projects were delayed due to disagreements as to what constituted a valid cost item and the amount to be apportioned for the item.

The revenue-sharing mechanism is intended to minimise such disputes as it operates on a 'pay-as-you-go' model where the operator sets aside an agreed percentage of the gross revenue generated for payment to the government. The government is not concerned with the cost incurred and receives a share of the gross revenue from the sale of oil and gas.5

Second, HELP also allows exploration and production companies to submit an expression of interest indicating the area in which they wish to operate. In contrast, under NELP, the exploration was confined to blocks that had been put on tender by the government. The other major reform was to free the pricing of gas extracted from new blocks and existing discoveries that were yet to commence production, especially in deep water and complex geological areas such as deep and ultra-deep water fields.

Major oil companies welcomed these reforms. In the first significant statement following the announcement of HELP, ONGC revealed its plans to invest as much as US$5 billion over the next three years to develop new oil and gas discoveries especially in the Krishna Godavari basin, off the eastern coast of India.6 BP, whose 30 per cent stake in Reliance Industries' 21 offshore oil and gas blocks (amounting to US$7.2 billion) has been hit by production and a pricing dispute, welcomed the latest reforms as a "step change".7

Indians first An increase in offshore exploration projects usually means there will be increased work opportunities for OSVs – music to the ears of OSV owners given that recent demand for OSVs has been parched at best. The reality, unfortunately, is somewhat different, at least in the case of foreign OSV owners. A major obstacle for foreign OSV owners wishing to participate in these projects is the Indian cabotage regulations. Cabotage refers to the restriction on the operation of vessels between sea ports within a particular country. In India, these regulations offer preferential treatment or right of first refusal to Indian flagged vessels; foreign flagged and/or foreign owned vessels are allowed only when no suitable Indian flagged vessel is available.8

Right of first refusal accrues to a technically qualified bidder in a tendering process. Therefore, where an Indian flagged vessel is available for charter and a foreign flagged vessel offers the lowest charter rate, the Indian flagged vessel would be given an opportunity to match the foreign flagged vessel's charter rate and if it does so, would win the tender. The Indian Directorate General of Shipping has recently announced an intended further tightening of the right of first refusal rules and the following hierarchy of categories would have to be observed when contracts are awarded:9

i. Indian flagged vessels owned by Indian entities

ii. Indian flagged vessels chartered by Indian entities

iii. Indian flagged vessels chartered by foreign entities

iv. Foreign flagged vessels owned by Indian entities

v. Foreign flagged vessels chartered by Indian entities

vi. Foreign flagged vessels that are under construction at the time of a tender and are owned by Indian entities with a commitment to convert to the Indian flag at the start of the contract

vii. Foreign flagged vessels that are chartered by Indian entities with a commitment to convert to the Indian flag at the start of the contract

viii. Foreign flagged vessels that are under construction at the time of the tender and are chartered by Indian entities with a commitment to convert to the Indian flag at the start of the contract

ix. Bareboat charter-cum-demise vessels chartered by Indian entities

x. Foreign flagged vessels that are built in Indian shipyards and owned or chartered by Indian or foreign entities

xi. Foreign flagged vessels that are built in foreign shipyards and owned or chartered by Indian entities

If a preceding category is not available or the right of first refusal is not exercised by a qualified bidder in the preceding category, then the right of first refusal is given to a qualified bidder in the next category.

Reducing the odds for foreign OSV owners Given the above order of priorities, unless a foreign flagged vessel offers an exceptionally low rate, realistically, it has very little or zero chance of succeeding in any open tender. In fact, given the current state of the OSV market, most current tenders are filled up with category (i) vessels. It is also difficult to compete on rates, at least in the case of certain tenders, as the age restriction for the vessels is 21 years. This has meant stiff competition from older vessels, which can afford to offer much lower rates than newer and more advanced vessels.

In order to improve its chances, the foreign OSV owner has to take certain measures to leapfrog up the categories.

First, the foreign OSV owner may register its vessel under the Indian flag. For a vessel to be Indian flagged, it has to be owned by an Indian citizen, company or co-operative,10 which means that the foreign OSV owner has to set up an Indian company to assume ownership of the vessel. The current Indian foreign direct investment policy allows for 100 per cent foreign ownership of Indian companies in the oil and gas sector.

However, there are several important considerations that a foreign OSV owner should take into account when setting up an Indian company. These include: (i) registration of a mortgage under Indian law may not be acceptable to its lenders; (ii) the Reserve Bank of India does not allow a negative pledge of the shares in a single purpose vehicle, which is commonly set up to assume ownership of the vessel; (iii) the Indian company will be exposed to Indian tonnage tax; (iv) remitting profits out of India could be a challenge as dividends out of India are subject to a withholding tax of 23 per cent; and (v) managing currency fluctuations. Even if the contract is awarded in U.S. Dollars, the Indian banking system only allows the holding of U.S. Dollar amounts for one month, after which they are automatically converted into Indian Rupees.

Second, a foreign OSV owner may enter into an agreement with an Indian entity to charter its vessel to the Indian entity. The tender would be submitted by the Indian entity. If successful, the Indian entity would contract with the oil company and charter the vessel from the foreign OSV owner.

From experience, the foreign OSV owner in that situation should take certain measures to protect its interest. These include requiring payment of the charter hire to be remitted into a bank account nominated by the foreign OSV owner.

Alternatively, the foreign OSV owner could instead ask for a banker's guarantee for up to three-month charter hire from the Indian entity. Being able to call on the banker's guarantee would be useful where the Indian entity/charterer had been paid by the oil company but that payment was not passed through to the foreign OSV owner. The other advantage of this latter measure is that the foreign OSV owner has the flexibility to call on the banker's guarantee even if the delay in charter hire payment arose as a result of the oil company's delay in making payment: a common incident in this type of contract.

To prevent the Indian entity from 'foreign owner shopping', the foreign OSV owner should also stipulate in the pre-charter agreement that the Indian entity must only put forward the foreign OSV owner's vessel in the tender. This prevents the Indian entity from picking and choosing a vessel which would provide it with the highest charter hire margin and minimises the risk of any future sharp negotiating practice by the Indian entity. In addition, it eliminates the risk of leaked commercial information being put forward for the tender.

There is hope yet... Therefore, while at first blush India appears promising, the odds, unfortunately, are stacked against foreign OSV owners given the prevailing right of first refusal rule.

To take full advantage of the opportunities India presents, foreign OSV owners have to take certain measures to give them a realistic chance of succeeding in these tenders. These measures, however, come with attendant risks and should be properly considered before taken.

Footnotes

1 "International Energy Outlook 2016", U.S. Energy Information Administration (EIA, 2016). Available at: http://www.eia.gov/forecasts/ieo/world.cfm (accessed on 25 July 2016).

2 "India Energy Outlook – World Energy Outlook 2015", International Energy Agency (IEA). Available at: www.worldenergyoutlook.org/media/.../2015/IndiaEnergyOutlook_WEO2015.pdf (accessed on 25 July 2016).

3 Based on IEA, 2010a; "Global Energy Assessment: Toward a Sustainable Future", GEA Writing Team (Cambridge University Press, 2012), at p.341.

4 "India's $27b oil quest gives services firms a lifeline", Saket Sundria, Dhwani Pandya and Debjit Chakraborty, The Jakarta Post (29 June 2016). Available at: http://www.pressreader.com/indonesia/the-jakarta-post/20160629/282127815784720 (accessed on 25 July 2016).

5 "India approves HELP plan to spur investment, production", Oil and Gas Journal (10 March 2016).

6 "ONGC to Invest US$5 Billion in Two Krishna Godavari Basin Fields", Gireesh Chandra Prasad, Livemint (24 July 2016).

7 "India Targets $40bn of Untapped Oil and Gas", Victor Mallet, Financial Times (15 March 2016).

8 Part XIV of the Merchant Shipping Act 1958, sections 406 and 407.

9 "Foreign Ships Could Lose Out on Indian Coastal Work", Manoj Venunath, IHS Fairplay (10 May 2016).

10 Section 21 of the Merchant Shipping Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions