Managing Risk in the LNG Boom: How Pipelines and Insurance Shape Resilient Infrastructure
Pipeline & Gas Journal (PGJ) sat down with ALI RIZVI (AR), North American LNG Leader at Marsh Energy, and discussed the growing role of risk management and insurance in the U.S. liquified natural gas (LNG) industry, particularly as LNG export capacity expands.
PGJ: Can you start by telling us a little bit about Marsh and your role within the company?
AR: Marsh is one of the largest insurance brokers worldwide, with its LNG expertise concentrated in the energy practice. I have been with Marsh for more than 20 yrs, leveraging my marine engineering background to advise LNG clients for more than 15 yrs. It has been particularly exciting to observe North America’s transition from a net importer of LNG to becoming the largest exporter globally.
PGJ: How do you see risk and resilience strategies evolving for midstream infrastructure connected to LNG facilities?
AR: First and foremost, it is an absolutely exciting time for U.S. LNG in particular. From a pipeline reliability perspective, gas pipelines are basically the lifeline of the entire LNG process. Most of these liquefaction facilities are in and around the U.S. Gulf Coast in Texas and Louisiana. This is great but comes with challenges that we must understand as an industry. Most of the gas that is being pulled in comes from two sources: Eagle Ford or the Permian Basin.
The interconnectivity and reliance of the natural gas coming to liquefaction facilities is extremely important for all parties involved in the LNG space. I cannot overemphasize the importance of gas pipelines to the entire LNG infrastructure that we're seeing in North America. The value chains are interconnected, so LNG facilities and pipelines go hand in hand.
As we continue to develop the liquefaction facilities in the Gulf Coast, pipeline integrity and reliability for the gas supply will continue to become more important. So, to your question regarding the risk and resilience strategies, there are several ways you can look at this. Think from a perspective of how the typical gas pipeline operated in the U.S. before all of these liquefaction projects came online—gas pipelines have been operating in the U.S. for more than 75 yrs.
However, when you start talking about exporting LNG outside the country, you suddenly have more stakeholders. You are exposed to more market conditions and the volatility of gas pricing. When you consider these factors, gas pipelines criticality in the LNG industry increases.
PGJ: When we are talking about linking basins with liquefaction terminals, what are the insurance options for delays in star-up (DSU) or business interruption? Are they becoming more relevant to these projects?
AR: You are talking about a particular insurance coverage, DSU and business interruption coverages. Both insurance coverages have been around for many years. DSU insurance is generally used for the construction phase, and business interruption is used for the operational phase. The importance of insurance in the LNG industry is quite different and tied to contractual obligations.
Look at the typical liquefaction facility: on one hand, you have the suppliers; and on the other, you have the offtakers, a lender and an engineering, procurement and construction (EPC) contractor. Those are the four major stakeholders, and you must operate from a contractual framework of these counterparties, each one of them from a liquefaction facility perspective.
You cannot overemphasize the importance of the risk related to disruption or delay in these projects, whether that delay arises at the liquefaction facility or from a supplier’s perspective offtaker. For the value chain to function, these factors must come together.
If a company was comfortable in retaining the business interruption or the delay in startup exposure earlier because they had a sound balance sheet, they would make that strategic decision. However, with the liquefaction phase coming, you certainly start looking at how your counterparties are going to be impacted.
When you are unable to supply or operate, what happens to your counterparties? When you take the contingent business interruption into account or the contingent DSU exposure that comes into it, the quantum and exposure related to DSU and business interruptions cannot be overemphasized.
PGJ: You said these types of coverage have been around for decades. Do we need more updated coverage to reflect what is going on in the industry?
AR: The coverage has been there, but the capacity required or the dollar coverage required from an LNG industry perspective is unprecedented. If you look at a typical LNG facility and its DSU exposure, most of the facilities fall between $10B and $20B in capital expenditure (CAPEX), and the DSU exposure based on the risk analysis often lands north of a couple of billion dollars. Then, you add the physical damage exposure, which is another couple of billion dollars. You are suddenly challenging the overall insurance market capacity available for a single placement, and you must be creative in placing your coverage. You also must ensure that your counterparties and clients fully understand commercially available insurance.
PGJ: With these projects worth billions, sometimes tens of billions of dollars, does proactive risk management play a part in securing financing?
AR: Yes, proactive risk management is an important part of risk management practice for our clients. One of our biggest value propositions is ensuring our clients fully understand their exposure from an insurance perspective. Then, we try to explain to them how we can get them to the maximum possible capacity required for specific project requirement. For the underwriters to provide their full capacity, they must be comfortable with the risk. For them to be fully comfortable with the risk, they need to better understand and underwrite the various scenarios that can go wrong. That's where something we call underwriting report risk engineering comes into play.
In essence, we are outlining to the underwriters what can go wrong, and if this goes wrong, what we expect those scenarios to be, from physical damage, business interruption or DSU perspectives. This includes third-party liability, bodily injury and property damage. This process actually helps the underwriters.
Once the underwriters fully understand the risk, they are better prepared in pricing the risk and providing the capacity. In the insurance industry, when we advise our clients, we say things like, you don't want the underwriters to price the unknown because it never goes in our clients favor. If we can explain it and have the confidence of the underwriters that they fully understand, you have the best bet with the underwriters to provide their capacity.
So, going back to your question—the risk framework and active risk management—I cannot overemphasize that part. Regarding LNG, these are multi-year construction projects, and even on the operational side, which is an annual policy, you are dealing with complex risk, significant investment and a lot of volatility in LNG pricing.
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