This document discusses risks associated with transporting liquefied natural gas (LNG) and strategies for mitigating those risks. It outlines several risks of operating LNG carriers including accidents at sea from navigation errors, cargo machinery failures, and natural disasters. It also discusses commercial and insurance aspects of the LNG industry. Major players in the LNG industry are international oil companies and national oil companies that can take on significant financial and political risks. The document recommends several strategies for reducing risks, such as improved safety and firefighting systems on LNG carriers, crew training, and security measures.

1. Making LNG
a viable proposition
Storage and transport of natural gas is indeed a risky, yet cost-effective venture.
Aftab Hasan outlines the risks associated with LNG and mitigating them.
Before considering the risk management protocols in
Liquified Natural Gas (LNG), it is important to provide
a small preface about LNG and its development. LNG
is natural gas (predominantly methane, CH4) that has
been converted to liquid form for ease of storage or transport.
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 has hindered widespread commercial use.
The increase in gas demand has brought about the emergence
of Floating Storage Re-gasification 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-vaporisation terminal, whereas an FSRU using an LNG
carrier can be constructed in just 24 months. FSRUs are also able
to move location, something that onshore re-gasification 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, 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
is deemed economically feasible, can 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 ExxonMobil, Royal Dutch
Shell, BP, BG Group, Chevron, and national
oil companies (NOCs) such as PERTAMINA
and PETRONAS are active players.
Market trend and capacity
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 the international market.
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2. Offshore energy insurance is usually placed
in the international insurance market, such
as Lloyd’s or major continental underwriters.
Accepted, specialised policy wordings are
utilised in the offshore energy insurance
market with limited number of underwriters
participating.
Current capacity of the energy insurance
market is considered to be around USD3.5
billion, which is low compared with the
exposures or sums insured of hull and
topsides. Advent of new and unproven
technology has created difficulties for the
underwriting markets. The current trend is
to support proven and validated technology.
Risks of LNG carrier
» 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 degrees Celsius)
› 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
a 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
Reducing risk and loss prevention
Since risk is quite prevalent in such large scale projects, it pays
to take measures to reduce risk and prevent losses, especially on
LNG carriers in operation, under repair or under construction.
Safety in such an operation is key and it goes without saying that
reduction of spillage, sloshing, overpressure, vacuum and accidental
leaks is crucial. A regular inspection or audit by the crew or ship
managers should be practiced daily, yearly or at every arrival. There
should also be a safety, security, operational and management
inspection or audit carried out every 2.5 years by external surveyors
during scheduled dry-docking and maintenance in a shipyard.
Of course, it is also imperative to have improved cargo containment
systems. In addition, having a competitive fire fighting and gas
detection systems is crucial in reducing risk. Gas detection, safety
and firefighting equipment for manual and automatic gas detections
such as foam, powder, water curtains and fire hydrants should be
readily available.
More importantly, a Home Doctor (Designated Shipyard) concept,
standard specification and pricing, crew preventive maintenance
plan and master maintenance plan on all vital machineries and
systems should be handy.
As a practice, longevity studies for LNG carriers should be
undertaken at 20 years for ones that are 25 years’ time chartered.
Manufacturer’s service engineers should be used for all vital
machineries and systems. Water ballast tanks should be re-coated
after 15 to 20 years. With regard to the crew, there should be adequate
pre-employment security screening, medical tests rendered and
training as well as licensing taken care of; in fact training for crew
and ship managers should be continuous.
Proper exclusion and buffer zones (remote area) should be set
out between public areas, ships and LNG terminals. In order to
prevent terrorist risk, there should be regular security checks at
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From an underwriter’s perspective
Category Responsible party Insurance
Oil Pollution Liability from wells Oil Company Operator's Extra Expense
1. Clean up cost 1. Cost of Control
2. Liability 2. Redrilling Expense
3. Cost of Control 3. Seepage & Pollution
Oil Pollution Liability from Rig's fuel Rig Contractor Protection & Indemnity (Third Party Liability)
Damage to the Rig Rig Contractor Hull & Machinery
1. Rig itself
2. Sue & Labour
3. Wreck of Removal
Death/Injury of workers on board Employer Worker's Compensation
Injury free offshore evacuation of all
69 personnel onboard the drilling rig
Fines/Penalties/Punitive Damage Oil Company Contractor No Insurance
Source: http://www.hopsema.gov.au
The Definitive Middle East Insurance Magazine

3. Maintenance Period
the main gate, berth and on the ship. Entry and routine condition
surveys should be taken on behalf of P&I Clubs such as:
› 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 and
› JH143 risk assessment and loss prevention surveys on construction/
conversion.
Risks to underwriters include:
› 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.
› The 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:
› 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.
› 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.
Insurance products for floating LNG
DEVELOPMENT STAGE OPERATION STAGE
Construction all risk
1. F-LNG 2. Subsea
Marine Cargo
Business Interruption
Third Party Liability
for drilling activity
(
(
)
)
Third party liability
for site operation
Physical Damage
1. F-LNG 2. Subsea
Third Party Liability
Delay in Start-up
Physical Damage
Contractor
Operator's Extra Expense (Cost of Control)
Third party Liability/
Protection & Indemnity
Aftab Hasan, CEO, Arya
Insurance Brokerage
Co. (LLC)
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. There are plenty
of options open for LNG operators which
should be taken w ith a comprehensive
understanding of the long-term implications
covering the risk.
An intelligent insurance broker can
help identify and quantify risks and bring
them under control. They can create and
implement customised solutions employing
the most effective blend of risk mitigation,
risk transfer, and advanced risk financing.
These solutions go beyond traditional
property/ casualty insurance programmes to
encompass strategies that can help increase
a firm's revenue growth, enhance its net
income, and strengthen its balance sheet.
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