Marsh InsIghts:

lng FSRUS – A gUide to RiSk And inSURAnce

deceMBeR 2012

Marsh is a leading broker and risk adviser for FSRU projects.

the energy industry is evolving. As the costs of traditional energy sources increase, so too will the demand for alternative sources. Many nations are reluctant to use nuclear energy, so a significant proportion of surplus demand will need to be met through new sources of cheap, clean-burning natural gas. Some sources suggest that global gas demand will grow by 50% before 2030. if this proves to be the case the supply will have to be provided, at least in part, by imported liquefied natural gas (lng).

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

revaporization 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 can not do,

enabling them to relocate from one

region to another as demand shifts,

while retaining the ability to trade as

an lng carrier.

the length of time required for the

construction of FSRUs has resulted

in a necessary shift away from

building onshore lng terminals, as

many countries forecast increasing

lng demand over the next two

years. FSRU’s are becoming the

terminal of choice in the 2-4 MtPA

(million tons per annum) lng

import range, making them a cost-

effective, flexible alternative to meet

increased regas demand. With

a capex of roughly US$100-300

million depending on location, there

is also a sizeable business advantage

when compared to an onshore lng

terminal, which typically has a capex

of about US$1 billion.

FSRU pRoject hoRizon

2 • Floating storage regasification units (FSRU) – A guide to risk and insurance

REGASIFICATION TRAINS TRANSFORMING LNGAT -160 CELSIUS TO GAS AT HIGH PRESSURE

STORAGE TANKSLOADING ARMS FOR RECEIVING LNG

EXPORT MANIFOLD

SEAWATER PUMPS FOR PUMPING SEAWATER TOREGAS TRAINS IN ORDER TOHEAT UP THE LNG

there are currently 11 FSRUs in operation and an additional 33 in various stages of construction. in Asia alone, we

may soon see as many as 20 new FSRU projects. the region’s regas demand is expected to grow by 7.5 billion cubic

feet per day over the next five years, while an FSRU has an average regas capacity of 350 million cubic feet per day.

there are four types of construction that fall under the FSRU category:

• Jetty based ship-to-ship transfer where vaporizers are installed onboard one ship, is perhaps the most

conventional.

• Buoy import systems involving subsea gas pipelines and lng vaporization ships.

• island jetty based ship-to-ship transfer systems.

• converted lng carriers with turret, subsea pipeline and vaporizer systems.

A varied selection of insurance and risk solutions exist to meet the requirements that such a combination of

regasification systems present.

Marsh • 3

inSURance pRogRaM deSignthe diagram below shows a typical project and operational insurance program design between a company terminal operator and an FSRU lessee.

tyPicAl PRoJect And oPeRAtionAl inSURAnce PRogRAM deSign

companies’ terminal operators’ insurances should focus on their assets under construction (e.g. jetty, gas pipework, loading arms and

tie ins to the gas grid) and protecting their terminaling revenue and their third party liabilities.

CONSTRUCTION OPERATIONAL FULLY OPERATIONAL

SUMMER 2014 SUMMER 2015

JETTY & PIPING (REGAS)

CAR & (DSU OPTION) & DTEP MAINTENANCE (24M)

PROJECT CARGO (& DSU OPTION)

PROJECT TPL

OPERATIONAL TPL INC MTOL

OPERATIONAL PD & BI & (LEASE FEE)

CONTINGENT BI - FSRU & FSU

HULL REFIT

HULL & P&I

LNG CARGO

TERRORISM / DSU TERRORISM OPERATIONAL (OPTION)

COMPANYINSURANCE

FSRU LEASE

KEYCAR: Construction All RisksDSU: Delay in Start-UP DTEP: Damage To Existing PropertyTPL: Third Party LiabilityMTOL: Marine Terminal Operator’s Liability PD: Property Damage BI: Business InterruptionP&I: Protection and Indemnity

FSRU leaseholders’ insurance will focus on the FSRU’s hull insurances, including Protection and indemnity (P&i), and any lng cargo

under their care and control. lng cargo, including that purchased from a lng producer, may need to be insured by the company,

although this will depend upon delivery terms (for example, whether Free on Board insurance or cost, insurance and Freight insurance).

4 • Floating storage regasification units (FSRU) – A guide to risk and insurance

conStRUction all RiSkS (caR) coveRage

iSSUe onShoRe cAR WelcAR oFFShoRe cAR

Premium cost lower cost optionUp to 2-3 times the price of

onshore cAR

Faulty Part coveragecoverage included to full value on piping and

onshore lng facilities

coverage sublimited for all jetty work

including trestles

Stand-by charge coverage Sublimited for offshore fabrication vessels

normal Action of the Sea coverageexcludes risk up to 1/20 year storm

conditionsincluded

dSU coverage Available dSU is limited and expensive

When tasked with insuring the construction of a jetty based gas import system, it should initially be established whether the jetty is linked to the

mainland or island based. For island based jetties, the WelcAR construction form will be required rather than the onshore cAR insurance form,

increasing the costs of project phase insurances. if the surrounding waters are known to be relatively benign and the jetty is linked to land, the

onshore cAR form would be recommended. Such choices raise many questions which Marsh, with extensive experience in this relatively new area,

is uniquely positioned to answer.

onShoRe cAR veRSUS oFFShoRe WelcAR FoRM FoR Jetty conStRUction

Marsh • 5

FSRUs employ tried and tested technology. however, risk management of FSRUs, both for construction and operation phases, presents a complex

web of insurance and contractual responsibilities. With so many different entities interacting, new risks and contingencies have arisen.

likely eventS inSURAnce PRotection contRActUAl RiSk MitigAtion

• Weather-related issues

– Windstorm with related tide/

swell forces.

– vessels moored to jetty systems.

– interruption of entire process for

repairs/replacement.

• Property damage insurances:

– Pre-operational:

- FSRU – marine risks conversion/

cAR policies.

- Jetty cAR/dSU policy.

– operational:

- Ships/FSRU – marine hull risks

policies.

- Bi and FSRU contingent Bi.

– liability insurances:

- Pre-operational.

- P&I risks – ships/FSRU.

- Jetty/pipelines.

• extent of force majeure clauses in FSRU

lease agreements.

• Responsibility for safe mooring.

• Risk of loss provisions arising out of FSRU

lease agreements.

• inter alia treatment of respective liability

risk from FSRU.

• Responsibilities defined for safe

operation and weather related shutdown

and emergency procedures.

• Ship Collision

– damaging FSRU or jetty, with

lng/gas escape and fire

potential.

– liquefied natural gas carriers

(lngcs) moored to jetties

similarly at risk.

– interruption of entire process for

repairs etc.

• Property damage insurances:

– Ships/FSRU – marine risks policies.

– Jetty/pipelines – “all risks”.

• Liability insurances:

– lng ships/FSRU.

– Jetty/pipelines.

– Marine terminal operator’s liability.

– charterers’ liability.

• Review insurance requirements of lng

shippers.

• examine mutual inter alia liability caps

between and third party lng shippers

and FSRU owners.

• ensure wide form Bi wording includes

vessel collision coverage.

• Review tug services contract for safe

berthing procedures.

FSRU process issue – Mechanical breakdown with fire.

– interruption for repairs etc.

• Property damage/hull insurances:

– FSRU - marine risks policies.

– LNG/gas – “all risks” cargo.

– Bi.

– terminal property damage.

– contingent Bi insurance for FSRU.

• negotiate for continuing costs in the

event of FSRU non-performance.

key

cAR: construction All Risks

P&i: Protection and indemnity

dSU: delay in Start-up

Bi: Business interruption

inSURance and contRact RiSk Mitigation

6 • Floating storage regasification units (FSRU) – A guide to risk and insurance

conclUSion

An FSRU project needs a sound risk management approach, whereby contract risk issues are

taken and assessed alongside the insurance strategy.

Risk and insurance issues will vary according to the:

• location and gas supply systems in place.

• type of FSRU jetty interface solution envisaged.

• Proposed FSRU lease agreement.

• gas off-take agreement and the back to back gas supply agreement in place.

• nature of port terminaling arrangements envisaged.

Risks should be assessed and mitigated using the support of risk engineers, contract managers

and marine safety specialists.

Sophisticated insurance solutions should be built for both project and operational phases to

protect the balance sheets of both parties to FSRU agreements.

the information contained herein is based on sources we believe reliable and should be understood to be general risk management and insurance information only. the information is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such.

in the United kingdom, Marsh ltd. is authorised and regulated by the Financial Services Authority for insurance mediation activities only.

© copyright 2012 Marsh ltd All rights reserved

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