9 minute read
The US LNG boom
Insurers to benefit from US LNG boom
The US has been a consistent net exporter of natural gas since September 2017. This supply growth is having significant impacts for offshore energy, shoreside terminals, shipbuilding, and vessel operation. Michael Venturella, (left) Practice Leader-Marine Group, and Guillermo Ramirez, (below left) Principal Engineer-Major Loss, of Envista Forensics provide analysis of the potential risks and benefits for the insurer to consider with this growth
According to the US Energy Information Administration (EIA), the US first saw a few months as a net exporter of natural gas in April 2017 and has made the transition to consistent net exporter since September 2017.
While production of natural gas offshore has significantly declined over the last 20 years, forecasts from the EIA indicate production offshore has leveled and will not decline in future years.
United States domestic consumption of natural gas has increased by about 30%, but, the additional shale gas production had the US exporting 5,280 billion cubic feet in 2020, which is more than double the imported volume from the same year.
PRODUCTION STORAGE AND DELIVERY
2000, this growth has been due to shale gas obtained by fracking, which has seen a 400% growth during the same timeframe.
The basic process to produce natural gas offshore is typically partnered with oil production. Exploration and production have evolved from stationary rigs in shorelines to rigid platforms in shallow water and now new ventures in deep (more than 20,000 ft.) and arctic waters that have resulted in new technologies and challenges not seen before by the industry.
The basic process of offshore gas extraction starts at the well where oil and gas are extracted and transported by pipeline to a platform of vessel (ie FSO or FPSO). The gas is separated from the oil (gas and liquid phases) and further separated, or cleaned, for commercial use. The natural gas is then locally stored for offloading to a transportation vessel or directly delivered onshore via pipeline.
RISKS AND BENEFITS
Drilling and production technologies are improving for increasingly difficult operating environments through collaboration between industry and research bodies.
Exploration in deep and Arctic waters result in new challenges and bring risks for the industry. Some of the deepest Gulf of Mexico wells are in waters more than a mile in depth, with some wells extending past 20,000 feet below the seafloor. Plans to explore in deeper and more hazardous regions in the US and around the globe are in development and their success will depend on continuing technological advances.
Regulatory entities, such as the US Bureau of Ocean Energy Management (BOEM) and the US Bureau of Safety and Environmental Enforcement (BSEE), assign leases and regulate energy activities on the Outer Continental Shelf (OCS).
Other federal agencies contribute biologic, geologic, environmental, and security expertise and regulatory authority. In addition to the rules and regulations introduced for the Gulf of Mexico, in 2016 BSEE issued revised rules that included updated regulations for production facilities and equipment for Arctic drilling.
All rules are developed with public input, including public comment sessions. However, neither BSEE nor BOEM currently have extensive experience with the new environments that will come into play.
With these new variables in place, insurers must also consider the typical risks of operating offshore facilities, not only at the structure level but also in the production systems contained in them. New extraction conditions might result in product variations not before seen by operators and may have a detrimental effect on the production infrastructure.
However, along with the risks described, there is also the opportunity for significant benefits to the industry. The new areas of production will result in new and more complex infrastructure that will require a whole new set of policies and coverages. With the proper inclusion of risk safeguards, the increase in offshore natural gas production will open a lucrative market for energy policy carriers.
The cost of LNG is typically 33% to 50% lower than oil-based fuels and maintenance frequency is reduced compared to typical oil-fuel ships.
LNG PRODUCTION, STORAGE, AND CARRIAGE
While about 61% of natural gas exports are by pipeline to Mexico and Canada, around 27% is exported as liquified natural gas (LNG) onboard ships.
LNG is produced by cooling natural gas to a liquid state at about -160oC (-260oF), often at shoreside liquefaction capable facilities. This liquefaction reduces the volume of natural gas by six hundred times, increasing its large volume transportability via LNG carrier ships with cryogenic tanks. The LNG can be regasified at the destination terminal for consumption or delivery via natural gas pipelines.
LNG closely matches the characteristics of the largest portion of its composition, methane. LNG will burn if the percentage of methane in air is between about 5% and 15% and exposed to an ignition source. Although, no combustion can take place if the oxygen content in the atmosphere remains below 12%. If LNG is heated and becomes a gas, it is not explosive unless confined. A confined methane and air mixture in the explosive range can create explosive overpressures.
The extremely low temperatures involved in LNG are particularly dangerous to hull structural mild steel. Mild steel is susceptible to brittle fracture at cryogenic temperatures and can easily crack if contacted by LNG.
For this reason, cryogenic tanks are made of special alloys with temperature ranges safe for cryogenic use, but the hulls remain mild steel.
Hull insurance may be impacted by the risk involved with the potential for contact between the LNG and mild steel hull and flammability or explosivity concerns for confined spaces where vapors could be trapped.
Personnel risks include accidental contact with LNG or its vapor through physical contact or inhalation. In addition to the obvious cryogenic temperature concerns to ship’s crew, the LNG vapor can displace oxygen causing asphyxiation, headache, dizziness, or drowsiness. Protection and Indemnity (P&I) insurance will cover liability for bodily injury caused by cryogenic accidents.
However, there are advantages in using LNG as a fuel including environmental protection. This is because LNG has no sulfur emissions, no particulate matter, no visible smoke plumes, and reduced CO2 emissions. LNG carriers and LNG fueled vessels present a lesser risk profile for pollution liability coverage as it relates to spills or vapour releases due to the environmentally friendly emissions.
Additionally, the cost of LNG is typically 33% to 50% lower than oil-based fuels and maintenance frequency is reduced compared to typical oil-fuel ships.
Machinery insurance risk may be increased because of the complex and fairly novel systems required to store cryogenic liquid onboard and burn it as fuel. The potential decrease in required preventative maintenance reduces and balances out this risk.
“House of Representatives Bill 1819 was referred to the House Committee on Energy and Commerce on March 11 with 14 co-sponsors, ten Democratic and four Republican.The proposed House bill requires a certain percentage of natural gas exports be transported on US built and US flag vessels.’’
LNG EXPORTS
According to Federal Energy Regulatory Commission (FERC) data, there are currently seven active LNG export terminals in the US. This includes two on the east coast, four on the Gulf coast, and one in Alaska. There are an additional 21 export terminals approved by FERC, five of which are already under construction. Six more export terminals have been proposed but have yet to be approved.
The US marine industry has begun to invest in construction and operation of some vessels designed to carry LNG. There is currently one LNG bunker barge and one offshore LNG articulated tug/barge (ATB) in operation that were delivered between 2018 and 2019. At least two more LNG carrying ATBs are under construction in US shipyards, but this number is steadily growing.
Additionally, the US has started building and operating cargo vessels and offshore supply vessels (OSV) capable of burning LNG as fuel. There are at least five US flag OSVs and four Container/RO-RO ships already capable of burning LNG for propulsion fuel.
There are, however, zero larger LNG carriers operating under the US flag. Based on congressional proposals to require exports of LNG on US ships, it is estimated that the US would need to build one hundred or more LNG carriers to be able to export solely on US ships.
While this type of legislation would be clearly beneficial to employment of US shipbuilders and mariners, there is also a risk of reducing the demand for US LNG because of increased cost to support the American marine industry.
BIPARTISAN PUSH IN CONGRESS
House of Representatives Bill 1819 was referred to the House Committee on Energy and Commerce on March 11 with 14 co-sponsors, ten Democratic and four Republican.
The proposed House bill requires a certain percentage of natural gas exports be transported on US built and US flag vessels. It uses a ladder approach to gradually increase from two percent during the first seven years to 15% in year 22 and beyond.
This ladder approach would strike a balance to try to keep demands for US LNG high, while facilitating time for the US to build the LNG carriers and domestic maritime expertise to crew the vessels. While this bill has only been introduced to the House Committee, it is evidence of a potential trend in the US marine industry that cannot be ignored.
Overall, the US status as an exporter of natural gas is driving construction of new exploration and production facilities, export terminals, bunker barges, LNG ATBs, and brings the potential for construction of a fleet of US flag LNG carriers.
This growth in the marine industry brings environmental, fuel cost, and American employment benefits while creating additional risks related to exploration and production with new variables, such as high pressure, high temperature, cryogenic temperatures and flammability/explosivity. Insurers can benefit from an understanding of these basic risks and benefits when underwriting marine and energy insurance policies.
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