Oil & Gas: Avoiding Loss Due to Piracy

Over the past several years, there has been a dramatic increase in piracy on key shipping routes around the globe. The area that has been most affected, the Gulf of Aden connecting the Red Sea to the Indian Ocean, saw more than 100 incidences in the first half of 2010 alone. The continuing aggression has increased concerns for cargo security worldwide, especially for shippers of highly valued cargo like crude oil.

Unfortunately, while the risk of falling victim to pirate activity is more prevalent in certain locations, the cost of avoiding such routes is far too expensive for many shippers. In the case of the Gulf of Aden, the alternate route would require merchants moving oil from Middle Eastern countries to sail around the Cape of Good Hope at the southern tip of the African continent, a detour that could increase annual fuel usage to the tune of $3.5 million.

This leaves shippers in a tough spot. The high cost of using alternate routes makes merchants more likely to play the odds and move their cargo through troubled waters regardless of the dangers. However, there are steps you can take to help avoid pirate attacks and protect yourself from total loss in the event of an incident.

Examine Your Coverage

Pirate attacks most often involve the seizing a vessel and holding it for ransom. Based on the size of the crew and the value of the cargo, ransom demands can amount to several millions of dollars. But, because most of the time the vessel and its crew and cargo are returned relatively unharmed after the ransom is paid, different types of coverages may be required to cover for less tangible losses, like delays in shipment or decrease in cargo value.

Coverage for piracy is decided on a policy-by-policy basis and can vary from one insurer to another. It is important that you check with you provider to see what your existing policy will and will not cover in the event of an attack.

Hull; protection and indemnity; and cargo policies are used to cover damage or loss involving the vessel, crew and cargo, respectively. While useful in the event that a vessel or its cargo is damaged or stolen, these policies fail to cover ransom costs and other losses due to hostage situations that can hold up a vessel and its crew for months at a time.

During these delays, there is also a concern that a vessel's oil cargo could decline in value due to fluctuations in the market. Business interruption policies can be used to cover the loss of potential earnings, decreases in cargo value and other costs incurred due to delays. There is also coverage available for kidnapping and ransom payments that can save you from having to make a costly out-of-pocket payment.

Coverage for piracy is decided on a policy-by-policy basis and can vary from one insurer to another. It is important that you check with you provider to see what your existing policy covers. Explain your individual situation so they can identify any potential gaps that could expose you to a loss. When standard policies will not cover your piracy risks, a war risk policy may be an option. War risk policies are usually determined on a trip-by-trip basis, meaning you may only have to take out a policy when moving goods through dangerous waters. This can give you adequate protection at potentially lower costs.

Deter Attacks

In addition to the right coverage, there are preventative measures that can be taken by the crew to reduce the chance for a pirate incident. Institute a best practice program for operating in piracy-prone waters. Tactics such as traveling in convoys and maintaining high speeds have been shown to deter attacks. Ship design can also increase security and hamper pirate success. While crews should be well trained in tactics to prevent a hostile takeover, they should also be trained in what to do if their vessel is seized. In the event of a hostage situation, a well trained and level headed crew can help prevent unnecessary losses.