Risk floods the pipeline; America needs more natural gas. Other countries want to sell it to us. It's getting it here and into the pipelines that presents the risk, some of it physical but much of it political

Risk & Insurance, August, 2005 by Michael Fitzpatrick

For proponents, imported liquefied natural gas represents a significant part of America's energy future. Opponents see the terminals and tankers that would be needed to handle those natural gas imports as giant bombs waiting to be set off by terrorists.

In between, insurers are taking a more muted approach that balances the risks against a long track record of safe shipments and significant market opportunities. "There is a lot of hype in the press about LNG facilities on ships being floating bombs, but there's no objective support for that," says Colm Kelly, managing director of corporate risk underwriting for Swiss Re.

The energy side of the equation is straightforward: United States natural gas demand has been climbing, while production remains flat. That means the country needs to find new sources of gas to heat homes, run factories and fuel power plants.

"You look around at the energy sources that are available, and you see the advantages that natural gas has in terms of the environment and in terms of its cost," says J. Mark Robinson, director of the Office of Energy Projects for the Federal Energy Regulatory Commission. "You really come up with one answer to meet the growing demand for power and energy in this country, and that's natural gas; but since we don't have enough here, it has to be in the form of liquefied natural gas."

Around the world, LNG is widely used in Europe as well as in Asian countries including Japan, where it accounts for about 99 percent of gas consumption. The United States has been importing LNG for many years from Algeria and, more recently, Trinidad.

The gas is liquefied by supercooling it to minus 260 degrees Fahrenheit, reducing its volume by a factor of 600, and loaded into specially built tankers. When it arrives at a U.S. terminal, it is typically pumped from the ships, regasified by warming, and put into pipelines or storage.

Since 2001, imports of LNG have risen fifteenfold from about 0.2 percent of U.S. natural gas demand to about 3 percent of the 63 billion cubic feet a day the United States now uses.

"Our estimate is that it could make up as much as 22 percent by the year 2020. For that to happen, the number of terminals in the United States will need to expand," says Peggy Laramie, spokeswoman for the Washington-based American Gas Association, which represents utilities.

Currently, there are four LNG terminals on land in the United States and another in the Gulf of Mexico off Louisiana. Seven more have been approved, and another two dozen proposals are being assessed by FERC and the Coast Guard.

FIGHTING OVER JURISDICTION

The Bush administration is pushing hard for more LNG terminals, but state and local politicians have raised objections about safety and the environment. Added to that is the political fight over who has final say on the terminals--the federal government or the states. Current laws give the final approval to FERC on land and the Coast Guard at sea.

Citing fears of terrorism and environmental damage, politicians and environmental groups have been mounting opposition in energy-importing states such as California, Delaware, Massachusetts, New Jersey, New York and Rhode Island.

"We think that LNG terminals are the wrong direction for America," says John Coequyt, energy-policy specialist for Greenpeace in Washington. While the group's opposition to increased LNG imports is based primarily on fears of global warming, terrorism is also an issue.

"When you take a hard look at the opposition, it's people who are generally concerned about terrorism issues, security issues," says Tom Mueller, LNG external affairs director for British Petroleum, which has proposed a $500 million LNG terminal in southern New Jersey along the Delaware River. That project has met opposition from Delaware, whose jurisdiction extends across the river to the low-tide line on the New Jersey side.

Mueller says that facilities being built today include much stricter security measures. "We are looking at very specific security-related equipment for the facilities. We're looking at things likes barriers at the gates, small-boat barriers around the ship when it's at berth. The security consideration today is certainly much more intense than it was even five years ago," he says. Other than terrorism, the main risks from LNG involve the liquefaction plants, the tankers or the import terminals.

"You've got three different kinds of risks," says Donald Vanseoy, vice president of engineering services at Willis. "You've got the liquefaction plant--it's got a lot of mechanical equipment designed to get that gas very cold. You have the shipping industry ... the cryogenic tankers. At the other end, you've got the regasification. There's a difference in the risk in each of these."

Because liquefaction plants rely on heavier hydrocarbons such as propane or propylene, there is the danger of a flammable vapor cloud forming near the ground. A gas leak at a liquefaction plant in Algeria last year led to an explosion that killed 30 workers.