LNG insurance rates jump on lawless waters, piracy

The cost of insuring liquefied natural gas (LNG) tankers has risen as naval containment of piracy fails and surging global demand spurs traffic through high-risk waterways, increasing the risk of hijack and armed attack.

The annual pace of growth in insurance costs over the last decade was 7.5 percent, much more rapid than the 4.2 percent annual increase in LNG tanker operating costs, figures from shipping consultancy Drewry show.

Standard-sized vessels will fetch an estimated $1,572/day in insurance costs this year, according to senior Drewry LNG analyst Pranay Shukla, reflecting the heightened risk of hijack and pirate attack for the transit of the super-cooled gas.

As a result, more shipowners have confirmed using private armed guards in the last year as they struggle to stem costs and protect trade as piracy escalates, they told Reuters.

"The threat of piracy has fundamentally increased (for LNG carriers), particularly in the Gulf of Aden, where underwriters have sought to charge additional premiums due to the increased risk," according to one insurer.

Additional premiums on war risk policies have risen as LNG tanker traffic through the Gulf of Aden reached record levels last year, owing to more supply from Qatar and Yemen as trade with Europe and South America rises.

Over 885 LNG carriers sailed through the Suez Canal last year, up from 525 in 2009 and 429 in 2008, figures from the Suez Canal Authority show, while other tanker trade never fully recovered from the 2008/2009 slump, increasing the likelihood that LNG ships will start to draw unwanted attention from pirates.

Owners are not only turning to private security companies to protect LNG carriers transiting Suez but also to cut insurance costs.

"With embarked security the insurance premiums are also reduced, mitigating costs even further," said Dom Mee, president of Protection Vessels International, a provider of armed maritime security.

The risk of a catastrophic fire or explosion from small arms fire or rocket propelled grenade (RPG) strikes could motivate ship masters to allow hijacks to take place, according to another maritime security expert.

Others say that LNG owners will meet ransom demands more readily to avoid seeing their LNG cargo degrade, which has a limited lifespan in its frozen state.

"It is possible that savvier pirate leaders or negotiators might appreciate the perishability of an LNG cargo, and that pirates in general are likely to view such vessels as valuable," reckons Jonathan Wood, energy security analyst at Control Risks.

A spot cargo at today's price will fetch about $48 million, trade sources said.

INSURERS PRICE IN RISING WAR RISKS

The rise of heavily armed gangs hustling shipowners for ransom has lifted insurance costs specific to war risks, including ransoms, hijack and armed attack.

If the insurance costs are broadly categorised into hull and machinery (H&M) and P&I, then the share of P&I insurance in total insurance will make up a rising share of overall fees imposed by underwriters in the same period, up from 23 percent in 2007 to 35 percent this year, Drewry's Shukla said.

Protection and indemnity, known as P&I cover, responds to shipowners operational liabilities, and may extend to liabilities stemming from piracy incidents.

"For owners/managers there have been headline cost reductions over the last year, primarily owing to falling vessel values and the resultant decrease in H&M premiums," Shukla said.

"Since 2008, P&I rates on the other hand have been rising primarily due to rising threats of vessel hijacking and piracy. P&I costs have increased at a compound annual growth rate of 9.4 percent during the period 2000-10, while H&M costs have increased at a much slower pace of 6.6 percent" he added.

Soaring insurance costs relative to general LNG tanker operating costs, and other insurance fees, show the increasing burden levied by piracy on shipping margins.