DSME Cancels Sovcomflot Order but Will Proceed with the Construction

Arctic LNG carriers
DSME plans to build the three Arctic LNG gas carriers for its own account after notifying Sovcomflot of its intent to terminate the contract (Sovcomflot file photo)

Published Nov 28, 2022 1:35 PM by The Maritime Executive

South Korean shipbuilder Daewoo Shipbuilding & Marine Engineering (DSME) reported in a stock exchange filing that it has terminated the third and final vessel in a contract to build three LNG carriers for Russia’s Sovcomflot. The shipyard however reports that it plans to build the vessels for its own account seeking a new buyer for the ships which were due for delivery in 2023.

Unlike the prior cancelations linked to the order from Sovcomflot, DSME is citing the inability to build the vessels due to constraints on the supply of materials. The first two vessels involved in the order were canceled in May and June 2022 with DSME reporting that the unnamed shipping company had failed to make installment payments on the first two hulls.

“As it was impossible to build the vessel due to delays and interruptions in the supply of major equipment and materials due to export control to Russia, we notified the ship owner of the final contract termination of this contract,” DSME wrote in the filing.  The last of the three vessels was valued at approximately $252 million.

DSME reported the order for three Arc7 LNG gas carriers in October 2020. It was valued at approximately $757 million based on current conversion rates. The three tankers were part of Sovcomflot’s plans to expand its capabilities to service Novatek oil and gas fields in the Arctic Circle. The vessels, which were large icebreaking LNG carriers, were considered among the best vessels in the Sovcomflot fleet.

“Currently, we notified the client of the termination of the contracts, but whether the contract is actually terminated or not will be determined by the client,” a DSME official told Business Korea. “Apart from the contract cancellation notification, we will build the ships as scheduled and look for ways to handle them.”

DSME’s decision to proceed with the construction is likely based in part on the strong overall demand for LNG carriers including three other Arc 7 carriers ordered by Japan’s Mitsui O.S.K. Lines also as part of the Russian project. This year DSME reports it has set a new record for the number of LNG carriers ordered.

An official from Daewoo Shipbuilding & Marine Engineering announcing the most recent order received at the beginning of November said, “We have won orders for 38 LNG carriers this year, surpassing 37 in 2014, setting a record for receiving the most orders for LNG carriers in a year since the founding of the company.” 

As of early November, DSME had received $10.4 billion in orders in 2022 for a total of 46 vessels, including the 38 LNG carriers. Orders received in the first 11 months of the year have reached 117 percent of the shipyard’s target of $8.9 billion for 2022. DSME notes it is the first time since 2014 that it has received more than $10 billion in orders. The shipyard previously achieved $10 billion in annual orders for three consecutive years from 2006 to 2008 and five consecutive years from 2010 to 2014.

The cancelation of the contract for the three Sovcomfloat vessels is not expected to have a material financial effect on DSME. The shipyard notes the contract for the third vessel canceled on November 25 accounted for less than four percent of confirmed recent sales.