Article

Mitigating risks and strengthening resilience in the LNG industry

The geopolitical conflicts of recent years have reinforced the important role that natural gas plays in both alleviating energy security concerns and meeting growing global energy demand.

Gas is a strategic pillar of almost every country’s energy policy, and liquefied natural gas (LNG) may offer a more sustainable and flexible energy solution to meet seasonal demand spikes or a backup to intermittent power generation from renewables.

LNG operators are investing strategically in long-term partnerships and infrastructure to enhance storage, processing, and purification methods. This includes the development of floating LNG (FLNG) facilities, the introduction of small-scale LNG catering to niche markets and remote locations, the use of renewable energy in LNG production and transportation, as well as the development of carbon capture and storage technologies.

With technological advances and innovations, the cost of delivering LNG is decreasing and the diversity of supply sources is growing. For example, the number of floating storage regasification unit (FSRU) projects increased by 30% in 2022, in response to the energy crisis caused by the Russia-Ukraine war and also because the units could be brought online more quickly.

But the complexity of LNG processing facilities, together with high asset values, complicated contractual arrangements, and exposure to sometimes volatile commodity markets, means it’s critical for owners and operators to have a robust approach to risk management and a comprehensive understanding of the insurance solutions that may help to protect their balance sheet.

Understanding delay in start-up and business interruption insurance for LNG facilities

While both delay in start-up (DSU) and business interruption (BI) insurance can help safeguard the balance sheet of LNG facility owners, operators, and financiers, it is important to be aware of the defining characteristics of each coverage and the types of risks they typically insure.

DSU covers financial losses arising from a delay in project completion, as a result of an insured event. This coverage is typically added to a construction all risks (CAR), erection all risks (EAR), or marine cargo policy.
BI protects a company from financial losses resulting from interruptions during commercial operation. The cover is triggered by an insured event, usually property damage, on a commercial property policy and typically addresses the associated loss of revenue or turnover.

Various factors can influence the extent of DSU and BI coverage a LNG facility owner or operator may require. These factors may include the organization’s risk appetite, lenders’ requirements, and contractual obligations in the event of a delay or business interruption.

Approaches to DSU and BI coverage can range from a more minimal approach covering debt interest to a robust approach seeking to cover 100% of expected gross profit or gross earnings.

Debt interest (DI) coverage provides financial protection for interest on loans. Debt servicing (DS) goes a step further by also including capital repayments on the loan. Either coverage may be a condition of finance imposed by lenders.
Fixed cost (FC) coverage provides financial protection for declared fixed costs. These costs must be demonstrated to continue in the event of a delay or business interruption. FC coverage is often combined with DI and DS coverage.
Gross profit (GP) or gross earnings (GE) coverage provides greater financial protection than DI, DS, and FC covers. It requires the insured to declare its forecasted gross profits (or gross earnings) to insurers, and claims are adjusted to aim to put the insured in the profit or earnings position it would have held if the loss had not occurred.

DSU and BI coverages begin to provide indemnification after the application of a self-insured waiting period (or equivalent deductible) and can continue to respond to losses until the expiration of the maximum indemnity period specified in the policy.

It may be possible to purchase contingent DSU or BI coverage extensions that are triggered by an insured event occurring at third-party facilities.

Insurers may seek to apply limitations when offering DSU and BI coverages. For DSU, this may take the form of a proposed monthly indemnity or commodity price cap. For BI, the limitation may be a proposed volatility or margin clause.

Monitoring and reviewing DSU and BI exposures is critical

DSU and BI coverages are most effective where they are aligned to and appropriately reflect the evolving risks of your LNG facility at different points in time. Marsh’s team of risk engineers and specialists have in-depth knowledge and experience in advising on DSU and BI exposures across your operations and throughout the lifecycle of a project.

Some common DSU and BI considerations for LNG operations include:

Damage to high-value equipment, including items with long lead times to replace, such as refrigerant compressors and cryogenic pumps, may result in significant production delays with prolonged financial impacts.
LNG facility inventories contain highly volatile liquefied flammable gases, which can create significant vapor cloud explosion (VCE) risks in the event of a leak. Damage from a VCE typically represents a worst-case DSU and BI loss scenario for an LNG facility.
Operating at cryogenic temperatures exaggerates thermal expansion risks, necessitating strict operational protocols such as plant warm-up and cool-down procedures. This can prolong plant maintenance and reinstatement periods.
Most LNG installations contain single points of failure with the potential to shut down the entire operation. These are referred to as critical nodes and might include a single supply or export route or an unspared supply of power to the facility.
LNG facilities can be exposed to highly volatile and geopolitically driven margin exposures. This makes financial forecasting particularly difficult when declaring DSU and BI values for the placement of gross profit or gross earnings coverages.

Marsh engineers and advisors work with LNG owners, operators, and financiers to identify DSU and BI risks, assess risk transfer options, and develop resilience strategies from the initial project feasibility phase through to commercial operation.

Typical project schedule

Early design stage: Our engineers and property risk consultants help to inform key design decisions and provide input on contractual arrangements to allow you to mitigate future DSU and BI exposures.

Detailed design phase: We help you to establish key insurance parameters, such as your desired maximum indemnity period, taking into consideration any project contingencies.

Procurement: We review logistics plans, delivery dates, and procurement mitigations to establish procurement DSU exposures. This can include marine transits.

Near completion phase: Our pre-operational BI review aims to confirm and quantify your operational BI risk profile, enabling the pursuit of an appropriate BI coverage program ahead of commercial operation.

Operational phase: Periodic reviews promote continued alignment of your BI coverage with your evolving risks and corporate objectives.

Please contact your Marsh advisor for information and support in understanding, managing, and mitigating risks to your LNG operations.

Download our guide on the risk considerations and solutions for LNG operations.

Article

Mitigating risks and strengthening resilience in the LNG industry

The geopolitical conflicts of recent years have reinforced the important role that natural gas plays in both alleviating energy security concerns and meeting growing global energy demand.

Understanding delay in start-up and business interruption insurance for LNG facilities

Monitoring and reviewing DSU and BI exposures is critical

Typical project schedule

Download our guide on the risk considerations and solutions for LNG operations.

Meet our authors

Ali Rizvi

Harry Glover

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Mitigating risks and strengthening resilience in the LNG industry

The geopolitical conflicts of recent years have reinforced the important role that natural gas plays in both alleviating energy security concerns and meeting growing global energy demand.

Understanding delay in start-up and business interruption insurance for LNG facilities

Monitoring and reviewing DSU and BI exposures is critical

Typical project schedule

Download our guide on the risk considerations and solutions for LNG operations.

Liquefied natural gas (LNG)

Meet our authors

Ali Rizvi

Harry Glover

Related insights

Brazil could be the world’s most promising region for offshore wind

Delivering on hydrogen: Transport and storage solutions

Offshore wind: Resourcing for growth

Tested and proven: The role of nuclear power in the future energy mix