Insurance Post

The call of nature

Although there are risks involved with transporting liquefied natural gas, the market has a good safety record that makes it an attractive proposition for insurers, finds Richard Cohen

The liquefied natural gas market is in the midst of a boom, which is presenting lots of opportunities for insurers to exploit. LNG is processed to remove impurities by cooling it to approximately -163 degC, this makes it about 1/600th the volume of natural gas and its compression is like condensing a cathedral into the size of a cardboard box.

LNG is considered less environmentally harmful than many other energy sources and has a good safety record that makes it attractive to the insurance market. There are warnings, however, that if firms do not follow the correct risk management procedures then the potential for catastrophic damage is high - but that is not putting insurers off just yet.

Stephen Crabb, a solicitor in law firm CMS Cameron McKenna's insurance and reinsurance group, explains: "There are big opportunities for energy underwriters as a result of the recent LNG boom. More countries are exporting LNG to various parts of the world - exports used to be dominated by Indonesia, Algeria and Australia but new capacity is in the pipelines in Malaysia, Qatar, Trinidad and Tobago, Russia, Iran, Yemen and Equatorial Guinea."

Track record

Paul Nicholson, Marsh's managing director of marine and energy, adds: "LNG has a great track record because the loss record has been excellent, although there have been a few minor scrapes in construction and delivery."

There are three aspects of the LNG process that require insurance cover: its liquefaction and compression, transportation and storage. Most experts agree that the liquefaction of the gas presents the greatest risk to insurers.

David Way, director of broker Alexander Forbes' international division, explains: "Liquefaction has several risks, such as the technology relating to the equipment involved. Compressors compress the gas to a fraction of what it was and that has risk. Risks in transportation are small, as are the risks in storage, as LNG is contained in deeply refrigerated double compartments so it does not escape easily."

However, that does not mean companies are becoming complacent about the risks involved. The one major incident involving LNG since it became prevalent in the 1970s, happened in 2004 in Algeria when an explosion at a liquefaction facility saw 27 killed, 80 injured and three LNG trains (conveyer belts used in production) destroyed. It was initially feared that a suicide bomber caused the blast but it was later discovered that a cold hydrocarbon leak created an explosion, which triggered a larger explosion of vapours.

Allianz Cornhill Engineering's chief engineer, Phil Wright, insists: "Explosions are not the greatest risk but they can happen when you get leakage of gas that catches fire, and that can be destructive."

David Warman, Willis' LNG expert, adds: "You have the potential for real damage from a vapour cloud as it is flammable and high-value losses are possible."

While doomsday scenarios are rare, another concern is the threat of terrorism given the damage that could be done if there was an attack on an LNG plant, ship or pipeline. This risk is forcing more firms to take out terrorism cover.

Mr Wright comments: "One of the issues for transported gases and the storage of them is terrorism. There is little protection on most sites other than barbed wire fences and that is a concern for those underwriting it." He adds that it is not just a case of firms protecting plants but also the ships used to transport the gas.

Steve Allum, chairman of Aon's global marine practice, supports this: "Many people believe a ship would not explode if hit by a terrorist attack but the liquid can escape and it could ignite if it vaporises, which would create huge environmental problems and would cause the vessel to fracture."

Transportation risks

Mr Allum says that the risk during transportation grows as the market grows due to the law of averages, as there are more ships on the sea. Mr Nicholson adds that the vessels transporting LNG are probably the most valuable in the world when bearing in mind the cargo being moved.

Another important type of cover is business interruption. Mr Nicholson explains: "There is a lot of contingent risk in the chain of production and transportation - if one element goes down it affects the whole chain so contingent business interruption cover is required. What the insurance market has failed to do is provide a product for the whole value chain to include production, storage and shipping but that is not easy because of the high capacity involved."

To emphasise the sheer scale of capacity in the market, Mr Warman estimates that one plant alone can require up to $6bn (£3.16bn) of capacity. He says that these huge values are limiting self-insurance to all but the global energy giants, and even they are not taking on any large chunks of risk on their balance sheet.

Despite the risks highlighted, the sector's excellent safety record means that many are predicting a bright future for those involved in insuring LNG, which could yet tempt new players into the arena.

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