Lloyds List: Opportunity knocks as Chinese energy demand soars: An LNG deal has shown how the wider insurance market can contribute to improved risk management in China, writes Thomas Cheung: “The contract to transport the gas was awarded to a joint venture company whose shareholders include China Ocean Shipping, Shell, China Merchant Group and the China National Offshore Oil Corp.”: Thursday December 08, 2005
CHINA'S blossoming economy is not only fuelled by consumer demand but by the emerging liquefied natural gas market.
As of July, imports from China into the US stood at $130bn for the year and there is every expectation that those levels will rise as the Chinese manufacturing machine moves through the gears. Already China, Korea and Japan account for 13% of the world's trade.
China's government has sought to build its manufacturing base on LNG with the prediction that annual consumption will hit 160bn cu m - 210bn cu m by 2020. It is estimated that domestic LNG demand will rise 12% annually for the next 15 years.
Against this backdrop, Fu Chengyu, general manager of the China National Offshore Oil Corp, said last year that China's supply of natural gas cannot meet the demand for clean energy in the country over the next 15-20 years. Historically, coal has played a dominant role in the Chinese energy market close to 75% of total energy consumption while natural gas represents only 2% of the total. Indeed it is predicted that 10% of China's energy will be provided via the cleaner LNG by 2010.
As such the Chinese government has embarked on a major programme to build the infrastructure and vessels to meet the country's LNG importation needs.
In 2003, China signed its first LNG deal which will see LNG supplied from Australia's Withnell gas fields to Shekou in Southern China over the next 25 years, in a project valued at GBP10.8bn ($18.7bn). The contract to transport the gas was awarded to a joint venture company whose shareholders include China Ocean Shipping, Shell, China Merchant Group and the China National Offshore Oil Corp.
Subsequently, Hudong-Zhonghua Shipbuilding Group won the contract to build the two new LNG vessels the first in China. One of the largest operations within China State Shipbuilding Corp, the company has extensive experience of container, bulk and LNG construction. The LNG order has a 38-month delivery deadline and the insured value of each vessel is $174m.
Due to the scale of the project, HZS was sought strategic and long-term relationships with the international insurance market to cover the manufacturing risks and raise their profile amongst the global business community. Traditionally the Chinese shipbuilding industry has sought insurance cover from the domestic market, where low prices and few deductibles have been the major buying factors.
In the past, it was commonplace for the shipbuilding fraternity to deal directly with the Chinese insurers, so it was a breakthrough in the market when HZS appointed global insurance broker Aon China. It presented a golden opportunity for brokers with ready access to specialist underwriters.
The HZS-Aon partnership represented a sea change in the outlook of the shipbuilding industry in China the third biggest in the world, with every expectation that it will challenge the US for global supremacy in the future.
The emphasis on risk management as a tool to manage the insurance programme, rather than a price-based decision, can be seen as a further sign that HZS and the wider industry is keen to utilise the international capacity with an emphasis on improved risk management in the yards.
As the construction was the first of its kind in China, the broker brought in advice from Aon Marine's shipyard focus groups in Norway and London with specialist LNG expertise. The team identified risks such as business interruption if imported made-to-order parts did not arrive on time, and highlighted the need for health and safety training for staff and sub-contractors who would be working on new, unfamiliar equipment. Furthermore, the loss record for the overall shipbuilder's risk market was poor in September 2004 and underwriters were taking a cautious approach to new risks. In response, HZS implemented a risk management programme to show their commitment to controlling these risks.
To bring the shipbuilder and international insurers together, Aon sought to highlight to the shipyard the benefits provided by the international insurers, and explain to the domestic and global underwriters about the Chinese shipbuilding market, the leading role of HZS in the sector and its ability to control the risks.
Further LNG projects are in the pipeline and with China's continued desire for greater amounts of LNG, the shipbuilding industry and the global insurance market alike should keep an eye out for the mutual benefits of working together in this emerging sector.
Thomas Cheung is executive director for Aon Marine, Greater China
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