MAKING LNG A VIABLE PROPOSITION
PREFACE
It will be appropriate that before we touch base with the topic of Risk Management protocols in LNG for the reader to provide a small preface about Liquefied natural gas (LNG) and its development. LNG is natural gas (predominantly methane, CH4) that has been converted to liquid form for ease of storage or transport. Liquefied natural gas takes up about 1/600th the volume of natural gas in the gaseous state. It is odorless, colorless, non-toxic and non-corrosive. Hazards include flammability after vaporization into a gaseous state, freezing and asphyxia. LNG is principally used for transporting natural gas to markets, where it is re-gasified and distributed as pipeline natural gas. It can be used in natural gas vehicles, although it is more common to design vehicles to use compressed natural gas. Its relatively high cost of production and the need to store it in expensive cryogenic tanks have hindered widespread commercial use. The increase in gas demand has brought about the emergence of Floating Storage Regasification Units (FSRU). One reason for their growing popularity is the significant reduction in construction speed. It takes approximately 40 months to construct a conventional LNG re-vaporization terminal, whereas a FSRU using an LNG carrier can be constructed in just 24 months. FSRUs are also able to move location, something that onshore regasification facilities cannot do, enabling them to relocate from one region to another as demand shifts, while retaining the ability to trade as an LNG carrier.
Commercial Aspects
In the commercial development of an LNG value chain, LNG suppliers first confirm sales to the downstream buyers and then sign long-term contracts (typically 20–25 years) with strict terms and structures for gas pricing. Only when the customers are confirmed and the development of a Greenfield project deemed economically feasible, could the sponsors of an LNG project invest in their development and operation. Thus, the LNG liquefaction business has been limited to players with strong financial and political resources. Major international oil companies (IOCs) such as Exxon-Mobil, Royal Dutch Shell, BP, BG Group, Chevron, and national oil companies (NOCs) such as PERTAMINA and PETRONAS are active players.
Market Trend & Capacity in the Insurance Market
Various State Governments may be opposed to Floating LNG technology due to diminished employment opportunities, but commercial reality is that Floating LNG technology is more cost effective. Insurance Arrangement for Floating LNG is under pressure due to lack of underwriting appetite and Limited Capacity in international market.
Offshore Energy Insurance is usually placed in the international insurance market, such as Lloyd’s or major continental underwriters. Accepted, Specialized policy wordings are utilized in the Offshore Energy Insurance Market with limited number of underwriters participating.
Current capacity of Energy Insurance Market is considered to be around $3.5 billion, which is low compared with the exposures / sums insured of hull and topsides etc. Advent of new and unproven technology has created difficulties for the underwriting markets. Current trend is to support proven and validated technology.
Risks of LNG Carrier due to Perils at Sea
• Accidents during sea voyage:
– Grounding – Navigation error
– Striking a fixed object or a wreck – Navigation error
– Collision (with vessel or object) – Navigation error
– Unloading/Loading
• Sudden pull-away and damage of loading/discharging arms and human injury
• Cracking of ship steel hull due to spill of LNG (super cold shock of -161℃)
– Terrorism – Missile attack, boat based explosive and hijacking.
– Cargo machinery and cargo containment failures
– Natural risks – Lightning, typhoon, hurricanes, and tsunami.
– Other hull/machinery accidents, such as fire in engine room on bridge and in accommodation, boilers, steam turbines, main reduction gears, diesel engine damages, and hull structural failures.
• Gas cloud
• Collision events
• Fire in engine room, accommodation and Navigation Bridge
• Release of bunker oil
• Collisions, groundings of any kind
• Man overboard, or piracy
• Contact with Quay/cargo tank releases of LNG
Measures to Reduce Risk and Loss Prevention on LNG Carriers in Operation, Under Repair and Construction:
• Safe Operations: To reduce spill, sloshing, over pressure, vacuum and accidental leaks
• Improved Cargo Containment Systems
• Fighting Firing and Gas Detection Systems: Gas detection, safety and firefighting equipment’s: Manual and automatic gas detection, foam, powder, water curtain and fire hydrants
• Safety and Operational Inspection/Audit by crew/ship managers: Daily/Every arrival
• Safety and Operational Inspection/Audit: Yearly by ship managers
• Safety, Security, Operational and Management Inspection/Audit: Every 2 ½ years by external surveyors during scheduled dry docking and maintenance in a shipyard
• Home Doctor (Designated Shipyard) Concept, Standard Specification and Pricing, Crew Preventive Maintenance Plan and Master Maintenance Plan on all Vital Machinery and Systems
• Longevity Studies for LNG Carriers at 20 years for 25 years’ Time Chartered
•Use of Manufacturer’s Service Engineers for All Vital Machinery and Systems
• Water Ballast Tank Re-Coating (after 15 to 20 years)
•Pre-employment crew security screening, medical tests, training and licensing
•Continuous Crew and ship managers training
•Proper exclusion and buffer zones (Remote area) between public areas, ships and LNG terminals.
•Terrorist Risk Prevention, ISPS (International Ship Port Security): Security checks at main gate, berth and on ship
•Entry and Routine Condition Surveys on behalf of P&I Clubs
•JH115A/JH 722 general condition/structural survey on behalf of Hull Insurers
•JH2006/010 A, B,C, Engine room and office management and condition surveys on behalf of Hull Insurers
•JH143 Risk Assessment and Loss Prevention Surveys construction/conversion
Risks to Underwriters
• Untested Technologies
• More shipyards are building of LNG Carriers.
• Shortage of skill and trained workers
• Use of Sub-contractors
• Poorly targeted Risk Assessment and Unrealistic Emergency Response.
• Ship Owner and Shipyard Project Teams Skill Base make a Big Difference in the Risk Profile and Quality during construction of LNG Carriers
Risk in the LNG Supply Chain
With the dramatic growth of the liquefied natural gas (LNG) trade worldwide and increased dependence on LNG as the gas fuel of the future, gas-utility companies at the end of the chain need to question whether the LNG chains are still safe, reliable, and well managed. But before diving in to some of the risks, it should be pointed out that historically LNG chains have been safe.
Since its start up in 1964, the LNG industry has proven itself to be well managed. This is because of many factors, including the following:
• A large proportion of the world’s LNG projects have been managed in association with the major global oil and gas companies which have applied rigorous standards to safety design and management of plant operations through the chain.
• The major contractors have played their part in building quality facilities with significant risk quality.
• LNG is a clean fuel and as such is considered safer to produce than other fuels. Although there are areas of potential corrosion in gas treatment process upstream of the liquefaction process, the industry has shown itself to have a far better record of reliability and safety than other sectors of the energy industry. Insurance ratings bear this out.
• The LNG shipping industry, which consists of approximately 174 tankers, has accumulated a safety record featuring well in excess of 40,000 cargoes delivered without mishap or major accident.
• Long-term gas supply contracts have provided the framework of successful risk allocation and sharing in the LNG value chain with the bulk of LNG being sold to Japan and Korea.
Conclusion
The current market conditions are now causing insurers to think again about long term policies as this industry is growing with the demand of LNG. Since plenty of options are open for LNG operators which should be taken with a comprehensive understanding of the long-term implications covering the risk. Intelligent ‘INSURANCE BROKER’ can help identify and quantify risks and bring them under control. They can create and implement customized solutions employing the most effective blend of risk mitigation, risk transfer, and advanced risk financing. These solutions go beyond traditional property / casualty insurance programs to encompass strategies that can help increase a firm’s revenue growth, enhance its net income, and strengthen its balance sheet.
Disclaimer: The views expressed by me in this article are personal & professional and not those of my employer, clients, or any other organization. The opinions expressed do not constitute any legal advice, or risk management advice. The views discussed are for educational purposes only.