Poised for explosive growth

The product itself may be invisible but natural gas is big business in Australia.

The continent has vast reserves of the valuable energy resource and projects aimed at tapping and exporting it now account for one in every three investment dollars spent.

In fact, there are currently $200 billion in infrastructure under construction.

By 2018, this country’s LNG output is set to increase by 250%.

It’s a boom time for gas but the sector faces special risks and many underwriters are choosy about exactly what – and who – they will insure.

Currently, Western Australia is by far the biggest producer of gas in the country.

Victoria is also a large player, although Queensland is rapidly catching up thanks to its investments in coal seam gas.

Karen Dobie, who is the Australian General Manager for research company IBISWorld, says that capital investment in the oil and gas extraction industry has been driven by escalating global demand and higher world prices for gas.

“IBISWorld expects the number of export- oriented LNG projects to rise from two this year to nine by 2018, with construction of export facilities on the east coast tipped to prompt a dramatic boost in performance over the next five years,” she says.

According to IBISWorld, revenue for the oil and gas extraction industry will total $48.2 billion in 2013-14, growing 16% to total $101 billion in 2018-19, with exports accounting for around 60% of that. Of course, with that growth comes much opportunity for brokers.

Liability arising from CSG is serious concern given that the Chemicals (even in small quantities) are injected below the surface.

Cooking with gas

Natural gas is mostly methane and is found in a range of different types of deposits, including sandstone, shale, coal seam and tight reservoirs, each calling for different gas extraction methods.

Drilling rigs extract gas which is piped to a refinery and processed by super- chilling the gas to liquefy it so that it can be transported and exported via purpose-built gas tankers.

With large deposits also being held in undersea basins, offshore gas is increasingly being processed in floating facilities, which are large ships that process the gas at the site of extraction.

Chris Dardaneliotis from Sterling Insurance says that, with Australia holding sufficient natural gas reserves to last at least the rest of this century, the industry is expected to be around for a long time.

“Broadly speaking, the traditional mining processes of natural gas are understood and accepted,” he says.

“However, the commercialisation of coal seam gas (CSG) mining is relatively recent and this is an area of concern for the population, environment and the natural gas industry.”

CSG miners extract natural gas found in coal deposits by drilling a well to allow the gas to flow to the surface.

A prominent extraction method is hydraulic fracturing (or fracking), which involves the injection of water, sand and chemicals into a well, creating fissures in the coal to speed up gas extraction.

“Environmental liability arising from CSG is a serious concern given that the chemicals (even in small quantities) are injected below the surface,” Dardaneliotis says.

“There are a number of cases both in Australia and in the US where underground aquifers have been contaminated by these chemicals, or where an evaporation pond has overflowed contaminating surrounding land.”

While the industry attracts smaller contractors, Dardaneliotis says that a general liability policy typically will provide very limited cover for environmental liability.

“That’s because the write-back is limited to a sudden or accidental or unforseen happening at a specific time and place,” he says.

An environmental impairment liability (EIL) policy is significantly broader, he says, offering cover for both sudden or accidental and gradual pollution and with markets offering a “claims-made” and some offering an “occurrence” trigger.

“However, there is very, very limited appetite for CSG risks under an EIL policy because of the exposure to both loss frequency and loss severity,” he says.

While Sterling targets the mining and resources sector and can assist brokers with general liability, professional indemnity, directors and officers and management liability for all mining risks (including CSG risks), Dardaneliotis says that they don’t extend to EIL for CSG.

Laying groundwork

David Clarke is a Perth-based authorised representative for Elliot Insurance Brokers and specialises in the oil and gas industry, which he says is in a period of ‘explosive growth,’ particularly in Western Australia.

He says the fast-moving sector has been in a period of high activity for several years, and is now moving from exploration (which focused on large gas deposits off Australia’s north-west in the Browse Basin area) into extraction, refining and processing.

Clarke has developed policy ‘packages’ for key groups of specialist sub-contractors in the offshore gas industry, including hydrographic surveyors, sub-sea engineers, owners and operators of remote-operated vehicles, fabricators, environmental consultants and vessel operators.

He says that the fast-growing sector is highly specialised, very technical and that it’s difficult to get expertise.

“It’s complex,” he says. “There’s a lot of risk and we’ve had to develop our own specific policies to cater for the market.”

Clarke says his own industry experience has been critical. He worked for around seven years in marine insurance with OAMPS where he specialised in oil and gas and sub-floor engineering.

Leaks in prosperity

A report by the Investor Group on Climate Change notes that oil and gas companies face long-term risks that need strategic management.

It cites a changing regulatory landscape internationally which is increasing cost pressures and leaving oil and gas companies open to cost recovery.

For example, the report states: “Oil and gas companies currently rarely report fugitive methane emission levels, leaving investors vulnerable to exposure to higher costs under a carbon price.”

The report cites research estimating that the Australian coal seam gas industry could face “hitherto largely ignored future carbon liabilities of up to $2.4 billion a year if fugitive emissions of methane from unconventional gas production turn out to be around 2.4% in Australia”.

Another threat is rising levels of anti-gas sentiment in the community, particularly over CSG projects in NSW and Queensland.

There’s a lot of risk and we’ve had to develop our own specific policies to cater for the market

Energy company Santos was recently identified as responsible for contamination of an aquifer in the Pilliga in north-western NSW, near the company’s CSG operations in Narrabri, with water recording uranium levels 20 times the recommended safe drinking levels.

The company was fined just $1500 but ongoing pressure from farmers and community groups suggests that there may be further ramifications.

The NSW Government last year announced a moratorium on coal seam gas extraction in land designated as critical to Sydney’s drinking water catchment but has lately come under increasing pressure to restrict coal seam gas operations throughout the rest of the state.

While the gas extraction and export sector promises incredible opportunities, there are also significant complexities and risks.

Brokers wanting to take advantage of the boom will need more than just enthusiasm – they’ll need expertise too.

Complex risks

For an example of just how complicated the risks in this sector can be, Elliott Insurance Brokers AR David Clarke gives the example of hydrographic surveyors.

They use specialist equipment to collect spatial and geophysical data from the sea floor for energy company principals and government authorities. The survey data is used for map creation and drill planning activities.

Professional indemnity is a key risk, and hydrographic surveyors need cover for breach of professional duty and potential error in reports, Clarke says.

There’s also significant equipment insurance with many items needing cover at sea, at depth and sub-sea, as well as needing coverage in storage, transit and in use.

There is also the matter of marine insurance to cover chartering a vessel and workers compensation for any staff that have been hired.

Public and product liability is also important, covering hydrographers for legal liability from business activities – in particular, remotely operated underwater vehicles (ROVs).

These submersible vehicles are unoccupied and tethered by cable to the ship occupied by an operating crew.

The cable carries power and data signals back and forth between the operator and ROV, and allows control of on-board equipment.

“They can range in price between $50,000 and $5 million,” Clarke says.

Risks include losing an ROV at sea, recovery of a sunken ROV, being sued for alleged errors, damage to pipelines and other underwater or above water assets, a range of potential statutory breaches and loss or theft of equipment.