The Petronet Paradox
Students of analytic philosophy will be aware of Russell's famous paradox about the class of all classes that are not members of themselves. Is this class a member of itself? If it is the proposition asserts it is not, and if it is not, it is. To understand the problem, consider the story of the village barber who shaves all and only the people who do not shave themselves. The question then is who shaves the barber? If he shaves himself he violates the second condition that he shaves only people who do not shave themselves, but if does not shave himself he violates the first part that he shaves all who do not shave themselves.
Such delightful conundrums tease the mind of university students; but tired old businessmen hope not to encounter them in their daily life. Yet Petronet LNG has provided Indian shipowners just such a problem in their recent tender for ships to transport liquefied natural gas from Qatar to Dahej and Cochin for the next 25 years. A pre-condition of the tender is that the shipowner quoting must have operated LNG vessels. But Indians owners have not operated such ships because there has been no demand. In any case, the newcomer is prevented from qualifying; for he can only tender if he is prequalified but the only way he can prequalify is if he is qualified. The Good Lord must have learnt a thing or two from Petronet when he qualified Adam as the first member of the human race.
No one knows whether such tender conditions are legal under the Restrictive Trade Practice legislation. It has, at any rate, led to a howl of protest from the Indian shipping community. Hopefully when Petronet reflects on the problem they will suitably amend the terms of the tender, but it is a useful occasion to consider some of the issues that LNG will raise for India.
Liquefied Natural Gas is primarily Methane, a petroleum gas that normally vaporises, into the atmosphere. To use it, either it has to be pumped as a gas or it has to be liquefied by cooling it. Since it has a very low boiling point, of minus 164 degrees Celsius, it is transported in special pipelines or ships, which can maintain cryogenic, as low temperatures are called, properties.
Thus after liquefaction LNG is pumped into ships through insulated pipelines. On board, low temperatures are maintained along the same principles as a thermos flask. There is an outer membrane made of ordinary steel and an inner membrane made of special steel. Between the two are various insulating materials ranging from wood to polyurethane. The outer membrane, the hull of a ship, is obviously exposed to the atmosphere; but the inner membrane is immunised from ambient temperatures. At the discharging port the liquid is pumped out through insulated pipelines and gasified for use as fuel in power and other industrial plants.
Although the technology is now well established, the investments required are substantial. The initial capital investment for processing 2.5 million cubic metres of LNG is estimated at $4.0 billion. After that economies of scale come into play. For example, doubling capacity requires only 10 per cent to 20 per cent additional investment. The optimal size of a single facility is considered to be 5.0 million cubic metres.
For every 2.5 million cubic metres transported between West Asia and India one ship is needed on a continuous basis. These ships are expensive, and cost about as much as a Boeing 747, that is about $180 million. The comparison with a 747 is appropriate for no one would claim that an airline would have to prequalify before it owns or operates a 747. Boeing would have had very few sales under such terms.
747s were a great technological advance; but it illustrates the fact that it is perfectly possible, indeed quite common, to upgrade pilots to fly technologically superior aircraft. This is the common or garden variety of the transport business. You train manpower, have systems for testing their competence, certify them and ensure that they go through refresher courses. Many of the ideas that have been perfected by the airline business were borrowed from the older shipping business, which has required certification from 1870.
It is always necessary to learn new technology. But the odd feature of LNG ships is that they are not technically complicated. Perils of the sea are common to all vessels but considerably greater for small craft with amateur sailors than for large ships operated by a certified crew. Skills and procedures in handling cargoes have to be learnt, but apart from the cryogenic factor there is nothing new in handling liquid petroleum products. Indian operators have been doing so for at least the last 50 years.
Indeed the cryogenic characteristic makes LNG an easier cargo to handle than ordinary petroleum products. For there are two dangers of handling petroleum products. First, when petroleum gases mix with oxygen in certain proportions they become inflammable; a single spark can then light it off and if that happens in a confined space like an oil tank then the ship blows up. This is what happened to the tanker `Betelgeuse' in Bantry Bay Ireland. The second danger is when a tanker runs aground and spills oil. It pollutes the shoreline as happened in Alaska with the tanker `Exxon Valdez'.
However, with cryogenic liquids, nature prevents these circumstances. For, if the cooled liquid is at all affected by ambient temperatures it immediately boils off and vaporises into thin air. It can still ignite but it will escape out of confined spaces. The much vaunted safety record of LNG ships has as much to do with ease of handling LNG as with high technology in operation.
Of course, the performance of the ship and the operator has to be reliable. This is because LNG transport is part of a continuous chain which, if disrupted, can have significant costs for both suppliers and users. Whether reliability can be discovered through a tender process must be doubtful. It is consoling to the bureaucratic mind to contract with parties who have a name like Mitsui or Mitsubishi or perhaps Infosys and Wipro. But there is not much in a name. The world's most expensive oil spill took place under Exxon's ownership and operation.
For India, the most unreliable part of LNG carriage is not technical or commercial but that of secured supply. Once we adopt LNG as a prime source of energy, it is important that supplies should not be disrupted. There are causes and events beyond man's ability to foresee; but there is one eventuality that we should safeguard against. Should this nation find itself embroiled in hostilities, foreign carriers can legally disown contracts to carry goods into recognised war zones. Indian flag vessels could not. It is, of course, well known that patriotism is the last refuge of scoundrels. Nevertheless, I would urge this refuge, since the additional costs of using Indian ships will be zero but the benefit of secured supplies, however intangible, could be immense.
Sudhir Mulji is currently the President of the Indian National Shipowners Association but this article is written in his personal capacity as a regular columnist.