Coping with Risks in LNG Market
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Coping with Risks in LNG Market


The market for the seaborne carriage of liquefied natural gas is on the verge of considerable change through new operators and new modes of organisation as world demand for the fuel expands inexorably. In terms of safety and efficiency, LNG transportation has been remarkably successful over the past 40 years. Now, the single company production-to-wholesale chain which has typified the industry, is under challenge and exposure to risk will probably increase. However, Karl Lumbers, Loss Prevention Director for the UK P&I Club, believes that the quality standards steadily maintained by the operators "indicate that they are well prepared to deal with changes and developments in the industry as a whole and product transportation in particular."

The transportation of liquefied natural gas is a highly coordinated, technically advanced operation. Cargoes are maintained under positive pressure so that flammable atmosphere cannot exist while the closed loading system reduces the chance of cargo escaping. In effect, there is a virtual "pipeline" between production source and wholesale distribution. This reflects large scale capital projects undertaken by the world's major energy companies. The result of high quality design and construction is evidenced by the excellent record of LNG operations to date.

The UK P&I Club has had more than 40 years' experience of providing protection & indemnity cover, with just under half the world fleet of liquefied natural gas (LNG) carriers currently on its books. This had provided considerable insight into the risks and exposures of a booming shipping sector. Mr. Lumbers said that only 32 of the UK P&I Club's major claims (over $100,000) between 1987 and 2004 originated from LNG carriers. This was equivalent to just 0.41% by number and only 0.46% by value of all Club claims in the last 18 years. By contrast, bulk carriers, with 1,596 such claims, represented 21 per cent by number and, at $554 million, 16 per cent by value.

By far the largest source of LNG claims by value had been personal injury. Very few of these were peculiar to the LNG sector, except being overcome by fumes or steam burns. Most other injuries were similar to those on merchant ships in general, particularly slips and falls and accidents on deck and in the engine room. Claims arising from collisions with fixed and floating objects often involve berth damage or contact with terminal equipment. Such claims are predominantly caused by the errors of deck officers, pilots and shore staff. Pollution claims, which typically arose from groundings, collisions, bunkering operations and valve failures, frequently stemmed from poor supervision or communication.

However, the UK P&I Club's ship inspectors have found that good quality standards have been consistently maintained by LNG operators in terms of cargoworthiness, manning, safety standards, operational performance and pollution control. As ships and terminals are designed integrally and often owned by the same company, there is less scope for "built-in" error. Since the ships are on regular runs to the same destinations, a great deal of operational knowledge and experience has been built up. This has allowed a structured approach to safety and the development of a transport system, rather than a set of separate activities variously coordinated.Long term contracts had provided both stability and sufficient money to invest in the operation to provide above average manning levels and high quality training.

The structured organisation of shippers and shipowners from the same corporate parent could be challenged by a chain of voyage and sub-voyage charters. The potential for disputes over quality, quantity, loss of hire, gassing up time, cooling down time and "boil off", i.e. the amount of LNG cargo used as fuel during a voyage, would be considerably increased. Damage to sophisticated terminal equipment not owned by the producer-transporter-wholesaler chain would be a third party liability. If repairs could not be made quickly, consequential damages might be sought. There could also be problems in sustaining adequate crew numbers and skills if LNG trade expanded particularly quickly.

Liquefied Natural Gas carriers have a potential lifespan of 40 years. The very high capital costs of building a modern LNG ship would encourage the growth of a second hand market. The performance of boilers, ballast tanks, pipework and cabling in ships under greater commercial pressure and tighter budgets would need to be carefully watched, as would the capacity and quality of repair facilities and the prices charged.

"The biggest danger of all is probably complacency," concluded Mr. Lumbers. "Over the past forty 40 years, operations have been conducted to high standards with no major vapour release or major incident. Now, we have to take the approach that a spot market brings new risks. Operators need to work closely with their insurers, especially their P&I clubs, to minimise and manage those risks."


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