Project Nord Stream - Insurance cover from a single source
In order to link Europe directly with the gas fields in Russia, the Nord Stream consortium has laid a pipeline through the Baltic Sea at a total investment cost of €7.4bn. The two parallel pipelines run from Vyborg in Russia to Greifswald in north-eastern Germany.
Each pipeline is 1,224 kilometres long; together, they will transport 55 billion cubic metres of natural gas per year, sufficient to supply some 26 million European households with electricity and heat. This will be one of the largest offshore projects ever to have been realised. The first pipeline is scheduled to start operations in the fourth quarter of 2011.
Such a technically complex project harbours numerous risks. The challenge for Munich Re was to develop a viable insurance concept from start to finish of this highly complex project. In doing so, all the different interests of risk managers, banks and insurers, as well as the know-how of brokers and experts, had to be reconciled. In addition to a large measure of flexibility, this also required a willingness to actively communicate with the partners.
Largest facultative single risk for Munich Re
Munich Re first offered facultative insurance of offshore construction projects on a large scale a little more than ten years ago. Following the successful conclusion of several reference projects, including Blue Stream (in the Black Sea), Greenstream (Mediterranean), and Dolphin (Persian Gulf), the Facultative Energy unit succeeded in achieving the lead position with a substantial share in the Nord Stream project in the summer of 2008. It is the most comprehensive underwriting project undertaken by the offshore risks department to date and the largest facultative single risk ever to be found on the books of Munich Re.
The most important point for Nord Stream was to ensure comprehensive insurance cover commensurate with the risk throughout the different phases of the five-and-a-half year project. Transit risk was a central concern in the initial phase. Cover was needed for the pipes' transportation from their various production locations to the two coating plants, one situated in Finland, the other in Germany. In view of the phases still to come, an integrated insurance solution was preferred over a classic marine cover. The risk was therefore written in the offshore energy market from the outset.
Old mines and ordnance pose a threat to the project
Phase 2 involved processing in the coating works. Here the pipe segments were coated with concrete to increase their resistance to mechanical damage. Everything had to be planned with military precision to ensure that the over 200,000 individual segments were always delivered at exactly the right time. Munich Re was also selected to cover this risk after various combinations of limits and retentions had been negotiated. The third phase encompassed the most complex risk: the actual laying of the pipelines at a depth of up to 200 m. If problems are encountered here, they give rise to high costs as the repair work can only be undertaken by special-purpose ships with special equipment. In addition, the pipeline runs through the economic zones of several Baltic countries. Should pipe repairs make it necessary to leave the designated lay corridor, extensive negotiations could disrupt the schedule. Additional hazards to take into account involve mines and other ordnance from the last two World Wars, including old grenades containing chemical warfare agents. The residual risk – which continues to exist despite all the precautions taken – is also covered by the policy.
Ongoing operations during construction
In addition, the pipe-laying work itself also entails a considerable risk. In statistical terms, a loss must be expected roughly every 1,000 kilometres when laying the pipeline. In the worst case, the pipeline could rupture and let in seawater. Repair work on the seabed is possible only using pressure chambers. So far, however, the method has only been employed on pipes with smaller diameters than those used by Nord Stream. Correctly assessing the risks not only called for technical now-how but also required a holistic view of the risk to be taken.
Phase 4 involves making sure the first pipeline is in service and operating properly while laying the second line directly alongside. The policy must therefore be worded so that it also covers potential damage to the first pipeline, for instance by an anchor from a pipelay vessel. The Nord Stream project is due for completion in the fourth quarter of 2012, when the second line will be taken into service. However, we are already looking further ahead. Several other projects in need of insurance cover are planned for the coming years, including the South Stream line through the Black Sea.