The demand for liquefied natural gas (LNG) continues to increase around the globe and with it the need for floating storage and regasification units (FSRU).
An FSRU unit allows the distribution of LNG in remote, often underdeveloped locations, where large-scale land-based terminals are simply not viable options. The role of an FSRU is cost-effectively to store and regasify LNG, thereby providing access to the global LNG supply for importers.
There are currently 24 active FSRUs globally, with more in development; this number is expected to keep growing in order to keep pace with the predicted 5-6% per annum growth rate of trade in LNG over the next eight years.
FSRUs are complex operations that require a combination of shipping and energy technologies, marine operating experience and commercial skills. However, this complexity also means that FSRU operators are exposed to a wide range of risks, ranging from operational to environmental, geographical to geopolitical and technological to physical.
It is imperative that FSRU operators are able to analyse these risks and are aware of the means available to transfer them to the insurance markets. Here we explore some of the key risks for FSRU owners, which begin at the construction, or conversion, stage of the units.
Although shipyards will provide some insurance cover for risks, it is key that FSRU owners ensure that the limits of these arrangements are suitable.
Where an FSRU owner could face contractual penalties for delays then he shipyard should be able to provide equal or similar compensation for those delays. If not, then purchasing ‘wraparound’ insurance is advisable to ensure that comprehensive coverage is in place.
Once operational, hull & machinery insurance coverage for an FSRU would e arranged in the same manner as any other vessel within the marine market.
With LNG vessels coming alongside the FSRU to discharge their cargoes, clarity in the policy wording regarding how ship-to-ship transfers are handled is an important issue to be addressed. Attention needs to be paid to any contractual obligations to include additional insureds, or to waive rights of subrogation.
FSRUs are also eligible for mutual cover with Protection & Indemnity (P&I) Clubs to protect traditional P&I liabilities.
It is important to ensure that broader coverage requirements are identified, including liabilities under FSRU lease agreements and difference in conditions (DIC) between gas off-take agreements where the FSRU is located within a terminal facility. The definitions used in respect of the vessel also need to be considered; for example, turret, riser, mooring systems and jetty connections can be made the responsibility of the operator.
In certain locations, owners may be required to employ a local crew complement, which will also need to be accommodated within the vessel’s P&I entry.
Most FSRU owners would consider loss of hire (LOH) cover. However, whereas standard loss of hire cover is suitable for the average vessel, it may not be sufficient for an FSRU.
Owners could find themselves facing a range of liabilities, including providing and bearing the cost of a substitute FSRU, paying contractual penalties for non-performance or compensating the charterer for any additional cost and expenses incurred by them under a gas supply contract as a result of that non-performance.
Particular attention should be given to the indemnity period and whether this is sufficient to remove the FSRU from the project site, be repaired and then be repositioned back at the project site.
In common with other projects that tend to be located in developing countries, FSRU operating sites can present challenges for war and terrorism, political risk insurance.
There are some standard exclusions on war (including terrorism, political risks) clauses that would cause concern to FSRU operators. These include the operation of ordinary judicial process; failure to provide security or pay any fine or penalty; or any financial cause.
The majority of charterers of FSRUs are government or quasi-government bodies. It is quite likely that confiscation or expropriation actions taken by charterers will be made legal by the operation of unfamiliar jurisdiction; also such expropriation acts are quite likely to have their origins in disputes over hire payments, which may be considered as financial cause.
In addition, marine war risk policies invariably contain a seven-day notice of cancellation (NOC) clause, which gives insurers the opportunity to amend rates but, perhaps more importantly, to alter coverage, for example, to exclude confiscation/expropriation.
Given the static nature of operating sites, which are often located inland, the swift removal of a vessel from the foreign territory may not be practical in the event of an NOC being given, and to do so would likely be a breach of contract, which would bring its own problems.
Due to these issues, it is beneficial for operators to seek extended war/political risk policies.
These offer broad form expropriation coverage as well as restricting the operation of the NOC clause to actual war risks, as opposed to the confiscation and associated risks contained within war policies. Even if operators are unconcerned by the above coverage deficiencies, it is likely that financiers will be less sanguine.
The majority of FSRU charters will contain a termination clause that will apply primarily as a result of either owner/operator negligence, other vessel related issues or force majeure events.
Most perils associated with owner/ operator negligence, or other vessel related issues, will be covered by LOH cover. However, the operator’s exposure is likely to be much greater than the limits provided by LOH, as the loss of revenue from termination of contract may be a substantial proportion of the anticipated earnings.
This exposure may be insured relatively simply by a policy that covers the difference between the original charter rate and the replacement charter(s) for up to the balance of the original charter period. The policy would be designed to respond in the event of contract termination caused by loss/ damage covered by the owner’s hull & machinery policy.
If termination is caused by a force majeure event it can have a catastrophic impact. However, the majority of events that may cause this can be covered by insurance. Force majeure clauses are far from standard, and the exact details of the particular clause, as well as the location of the contract, will govern the scope and price of available insurance.
Every FSRU project is unique and will have its own individual set of exposures depending on its nature, its location and the contractual demands placed upon the operator.
Whether FSRU units are offshore cross jetty operations, direct ship-to-ship transfer systems or offshore buoy moorings will all present a different risk profile.
Whatever that profile is, the majority of these exposures can be transferred to the insurance market using sophisticated insurance solutions, which are aligned with the various phases of the overall project.
The assessment of the project-specific risks should begin at the outset of the contract along with discussions that enable the identification of exposures and provide costings.
To address all the insurance considerations, it is important to harness experience across multiple disciplines. In order to provide the best service to its clients, JLT Specialty has combined its gas expertise from the energy and marine divisions to provide the breadth of knowledge required to review contracts, identify and analyse exposures, and assist owners assessing the economic viability of transferring these to the insurance market.
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For further information please contact Sean Woollerson, Senior Partner on +44 20 7558 3864 or email firstname.lastname@example.org
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