shifting sands and silk roads: global energy markets, … · 2019-04-21 · shifting sands and silk...
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Shifting Sands and Silk Roads: Global Energy Markets, Geopolitical Risk and Insurance in the Middle and Far East
Robert P. Hartwig, Ph.D., CPCUClinical Associate Professor of Finance, Risk Management & Insurance
Darla Moore School of Business ¨ University of South [email protected] ¨ +1 803.777.6782
Onshore Energy ConferenceDubai, UAE
17 April 2019
2
Overviewn The Global Economy, Energy and Insurance
w Growth, Emerging market challenges
n Populism, Trade Wars and Energyw Recent issues and developments in the energy producing worldw Consequences for insurers
n Energy Nationalismw The combustible mixture of energy, influence and politics
n Energy and Insurance Market Overview and Outlookw Energy market supply, demand, investment opportunities and threats
n China’s Ambitious Belt and Road Initiativew Energy investment and insurer opportunities
n Q&A
THE GLOBAL ECONOMY, ENERGY AND INSURANCE
3
The Strength of the Global Economy Will Greatly Influence Insurance
Industry GrowthThe Global Energy Sector Is Vulnerable
to Many Risks—So Too Are Their Insurers
3
4
Global Growth Concerns: Energy and Insurance Market Impactsn 2019 began with significant concerns about the strength
of the global economy
n Major indices related to manufacturing, international trade, consumer and business confidence and financial market volatility turned adverse in late 2018/early 2019
n Consider the following:w 70% of the global economy is expected to decelerate in 2019w Global real GDP growth will fall to 3.3% in 2019 from 3.6%
last year and 3.9% in 2017w US-China trade tensions are running high and trade
volumes are fallingw Industrial production and investment are weak globallyw Geopolitical uncertainty remains high throughout much of
the MENA region, in the US (Trump policies) and UK (Brexit) and parts of Latin America (Venezuela)
5
Global Growth Concerns: Energy and Insurance Market ImpactsnThere are major implications for Energy and
Insurance markets alikewSupply
wDemandwPrice
w Investment (Upstream and Downstream)
wRegulatory Environment
wGeopolitical Implications
nBut to understand the many implications, we need to understand the underlying drivers and the associated geopolitical environment
(4.0)
(2.0)
0.0
2.0
4.0
6.0
8.0
10.0
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19F
20F
21F
22F
23F
24F
Advanced economies Emerging and developing economies World
Source: International Monetary Fund, World Economic Outlook, Apr. 2019; Univ. of South Carolina, Risk and Uncertainty Management Center.
Emerging economies (led by China and India) are
expected to grow by 4.4% to 4.9% through 2024
GDP Growth: Advanced & Emerging Economies vs. World, 1970-2024F
Advanced economies are expected to slow to 1.8% in 2019 (down from 2.2% in 2018),
remaining close to that level through 2024
World output is forecast to fall to 3.3% in 2019 from
3.8% in 2018, before accelerating to 3.6% in 2020
GDP Growth (%)
7
Global Growth Concerns: Where Are the Weaknesses and Why?n Weaknesses are widespread but are focused on “Advanced Economies”
Five Major Sources of Weakness
1. US – China Trade Tensions and Protectionism in General
2. Disruptions in German Auto Sector
3. Tightening of Credit Standards in China
4. Normalization of Monetary Policy in Larger Advanced Economies
5. Macroeconomic Distress in Turkey and Argentina
Notably: Rising energy prices, particularly for crude oil, are not (yet) among the top factors holding back growth—but this could change.
5.6%
3.9%3.3%
3.9%
7.4%
2.8%3.4%
3.0%2.2% 2.1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
2011 2012 2013 2014 2015 2016 2017 2018 2019F 2020F
Growth in Global Merchandise (Goods)Trade : 2011 – 2019F
Source: IMF, World Economic Outlook, April 2019.
Global trade volume is falling rapidly but partial recovery is possible if the US and China can resolve their disputes
(Annual Change)
8
REGIONAL ECONOMIC REVIEW AND OUTLOOK
9
Focus on MENA, Emerging and Developing Asia, Sub-Saharan Africa
Contrasts to Major “Advanced” Economies
9
10
Real GDP Growth Forecasts: Major Regions: 2018 – 2020F2.
2%
6.4%
2.8%
1.8% 2.
2%
3.5%
1.7%
3.2%
6.3%
2.3%
3.7%
2.8%
2.4%
1.0%1.4%
3.0% 3.
6%
0.8%
1.4%
1.3%
6.3%
0%1%2%3%4%5%6%7%
AdvancedEcononomies
Middle East &North Africa
Emerging &Developing
Asia
Commonwealthof Independent
States
Sub-SaharanAfrica
Emerging &Developing
Europe
Latin America &Caribbean
2018 2019F 2020F
Global Growth Prospects Vary Widely by Region but by 2020 Are Universally Stronger Outside the “Advanced Economies”
China, India drive growth in
AsiaAdvanced economy growth
decelerates
Economic strength in Africa
Source: International Monetary Fund, World Economic Outlook, Apr. 2019, Table A1; Univ. of South Carolina, Risk and Uncertainty Management Center.
MENA growth
accelerates in 2020 Modest
growth in CIS
Narrowly avoided
recession in Eastern
Europe
Numerous economic and
political concerns in
Latin America
11
Real GDP Growth Forecasts, Key MENA Countries: 2018 – 2020F1.7% 2.2%
2.2%
-3.9%
2.0%
1.8%
5.3%
2.1%2.8%
1.8%
-6.0%
2.8%
2.5%
2.2%
1.8%
5.5%
2.3%
4.3%
3.3%
2.1%
2.2%
0.2%
8.1%
2.9%
2.4%
2.1%
5.9%
1.8%
1.4%
0.6% 1.7%2.6%
-8%-6%-4%-2%0%2%4%6%8%10%
UAE SaudiArabia
Qatar Iran Iraq Kuwait Jordan Bahrain Egypt Algeria Libya
2018 2019F 2020F
Source: International Monetary Fund, World Economic Outlook, Apr. 2019, Table A4; Univ. of South Carolina, Risk and Uncertainty Management Center.
GDP growth is fairly consistent across the MENA region, with some notable
exceptions, including Iran, Iraq, Libya and Egypt
N/AA
$59.5
$35.1
$32.5
$30.7
$23.9
$20.8
$111.1
$0 $20 $40 $60 $80 $100 $120
Saudi Aramco
Apple
Samsung
JP Morgan Chase
Alphabet (Google)
Royal Dutch Shell
Exxon Mobil
*Net income after taxSources: Bloomberg; University of South Carolina, Risk and Uncertainty Management Center.
Saudi Aramco was recently recognized as the world’s most
profitable company—by far—nearly twice
as profitable as Apple
World’s Most Profitable Companies, 2018Saudi Aramco Leads the Way* ($ Billions USD)
Saudi Aramco’s Profits Exceed those of Many of World’s Largest Companies—Combined!
$106$111
$0
$20
$40
$60
$80
$100
$120
Saudi Aramco Exxon Mobil+Google+Facebook+JPMorgan Chase
Net Income After Tax (USD Billions)
In 2018, Saudi Aramco was more profitable than Exxon
Mobil, Google, Facebook and JP Morgan Chase—combined
13*Net income after taxSources: Bloomberg; University of South Carolina, Risk and Uncertainty Management Center.
Saudi Aramco’s financial were
revealed ahead of its first-ever debt
offering. The $10B offering drew
$30B in demand and an A1 rating
from Moody’s
14
Real GDP Growth Forecasts, Emerging & Developing Asia:2018 – 2020F
6.6% 7.
1%
5.2%
4.1% 4.
7%
7.1% 7.3%
6.3%
7.3%
3.5%
5.2%
3.5%
4.7%
6.5% 6.
8%
6.1%
7.5%
2.8% 3.
5%
5.2%
4.0%
4.8%
6.5% 6.7%
5.2%
3.0%
2.9%
0%1%2%3%4%5%6%7%8%
China India Pakistan Thailand Indonesia Sri Lanka Malaysia Vietnam Cambodia
2018 2019F 2020F
Source: International Monetary Fund, World Economic Outlook, Apr. 2019, Table A4; Univ. of South Carolina, Risk and Uncertainty Management Center.
Emerging and Developing Asia account for most of the world’s GDP growth
15
Real GDP Growth Forecasts, Sub-Saharan Africa & Sudan:2018 – 2020F
3.0% 4.3%
7.7%
6.0%
0.8%
-2.3%
6.6%
3.5%
5.0% 5.8%
2.1%
6.9%
1.2%
-1.3%
4.0%
3.7% 5.0%
7.5%
5.9%
2.5%
7.5%
1.5%
1.5%
4.2%
1.9%
6.2%7.7%
-4%-2%0%2%4%6%8%10%
Angola Chad Ethiopia Kenya Nigeria Senegal SouthAfrica
Sudan Tanzania
2018 2019F 2020F
Source: International Monetary Fund, World Economic Outlook, Apr. 2019, Table A4; Univ. of South Carolina, Risk and Uncertainty Management Center.
GDP growth is fairly strong across much of
sub-Saharan Africa
Nigeria, Angola and Sudan are the region’s
major oil producers, but their growth lags behind
16
Real GDP Growth Forecasts, Central/Western Asia, Turkey & Russia: 2018 – 2020F
1.8%
1.4%
4.7%
4.1% 5.0%
2.3% 2.6%
1.5%
3.4%
3.2%
5.0%
2.7%
5.0%
1.6%
-2.5%
3.2%
3.1%
5.0%
3.2%
4.5%
3.0%
5.5%
1.7% 2.5%
7.0%
3.3%
4.6%
-4%
-2%
0%
2%
4%
6%
8%
Afghanistan Azerbaijan Georgia Kazakhstan Tajikistan Ukraine Uzbekistan Russia Turkey
2018 2019F 2020F
Source: International Monetary Fund, World Economic Outlook, Apr. 2019, Table A4; Univ. of South Carolina, Risk and Uncertainty Management Center.
GDP growth varies widely across
Central/Western Asia, Turkey and Russia
Georgia and Tajikistan and Uzbekistan are the regional growth leaders
17
Real GDP Growth Forecasts, OPEC States: 2018 – 2020F
2.3%
-1.7%
3.9%
1.1%
-3.9%
0.6% 1.7%
1.9% 2.2%
1.7%
-18.0%
3.0%
0.4%
-0.5%
-4.0%
3.1%
-6.0%
2.8%
2.5% 4.3%
2.1% 2.8%
2.8%
-25.0%
3.5%
2.9% 4.4%
0.2%
-4.7%
3.9%
0.2%
8.1%
2.9%
1.4% 2.5%
2.1% 3.3%
-10.0%
-5.7%
1.2%4.3%
-30%-25%-20%-15%-10%-5%0%5%10%
Algeria Angola Congo EcuadorEquatorialGuinea
Gabon Iran Iraq Kuwait Libya Nigeria SaudiArabia
UAE Venezuela
2018 2019F 2020F
Source: International Monetary Fund, World Economic Outlook, Apr. 2019, Table A4; Univ. of South Carolina, Risk and Uncertainty Management Center.
GDP across OPEC states is modest with some
material adverse deviations
Failure to recover from oil price collapse of
2014; Numerous domestic issue
Sanctions
Regime change; Socioeconomic crisis;
SanctionsCivil War
18
Real GDP Growth Forecasts: “Advanced Economies”: 2018 – 2020F
2.2%
1.4% 1.
8%
1.5%1.
8%
1.2%
0.8%
6.3%
1.0%
1.7%
1.4% 1.5%
1.4%
6.1%
0.5%
6.6%
0.8%1.
3%
0%
1%2%
3%4%
5%6%
7%
US UK Euro Area Germany China Japan
2018 2019F 2020F
Growth Prospects Among “Advanced Economies” Has Weakened While China Continues to Lead Among “Emerging Economies”
Eurozone and UK growth
remains disappointing but recession
is unlikely
China growth has slowed, but remains
strong relative growth globally
US growth decelerates in 2019/20
Growth in Japan is tepid but remains
recession free
Source: International Monetary Fund, World Economic Outlook, Apr. 2019, Table A4; Univ. of South Carolina, Risk and Uncertainty Management Center.
Germany’s industrial sector has weakened
19
Global Interest Rates Remain Low Except in Emerging Markets Facing Currency Crises and Inflation Threats
Rate on 10-Year Government Bonds as of 31 March 2019
1.7%3.0%
8.4%
17.4%
7.3% 7.1% 8.1%
11.3%
-0.1%
2.5%0.0% 1.1%
-0.3%
3.6%1.8%
-2.0%0.0%2.0%4.0%6.0%8.0%
10.0%12.0%14.0%16.0%18.0%20.0%
US
Euro
Are
a
UK
Switz
erla
nd
Gre
ece
Aust
ralia
Japa
n
Can
ada
Chi
na
Rus
sia
Turk
ey
Indi
a
Braz
il
Mex
ico
Arge
ntin
a
Source: The Economist, 6 Apr. 2019; Univ. of South Carolina Center for Risk and Uncertainty Management.
Interest rates are higher in much of
the emerging world
US 10-yr. yield down 25bp over
past year
GEOPOLITICS, POPULISM AND ECONOMICS IN THE ENERGY
PRODUCING WORLD
20
Geopolitics and Populist Movements Are Impacting Global Energy Hubs Around the WorldInsurers, Energy Industry Will
Be Impacted20
21
Geopolitics and Uncertainty in the Energy Producing World
There is no shortage of geopolitical uncertainty in the energy producing world, impacting global supply and price for oil and gas. Arguably, the most meaningful implications today arise from Iran, Venezuela and Libya.
22
Geopolitics and Uncertainty in the Energy Producing World: Iran
n International sanctions are the primary stressor in Iran, the most important of which restrict the importation of Iranian oil and petrochemicals
n The Iranian economy has suffered as a result:w Real GDP growth was -3.9% in
2018 and -6.0% in 2019 (IMF est.)w Inflation is running 30%+ per yr.w Collapse in the Iranian rial,
reaching record lows
n Oil exports are falling, though waivers to the importation of oil for some countries continue
23
2.147 2.153
1.756
1.200
2.2512.566
1.499
1.136 1.086
1.450
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019F
Iranian Oil Exports, 2010 – 2019F
Source: IMF
Iranian oil exports are expected to fall by 46%
in 2019 compared to 2017’s export levels
(Millions of Barrels per Day)
23
24
Geopolitics and Uncertainty in the Energy Producing World: Libya
n Libya has effectively been a bifurcated state since the collapse of the Gadaffi regime amid the “Arab Spring” uprisings in 2011, with rival factions in the east and westw The current status is often described
as a civil war
n Currently, Tripoli is under siege by the forces of Gen. Khalifa Haftar, who controls much of eastern Libya
n 60% of Libya’s GDP stems from oil production
n The economy collapsed after 2011 as oil production collapsedw Inflation is running at 25%+
0.404 0.385
0.8180.965 1.040
1.650 1.650
0.465
1.367
0.918
0.471
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019*
Libyan Oil Production: 2009 – March 2019
Source: US Energy Information Administration accessed at: https://www.eia.gov/opendata/qb.php?category=1039874
Despite civil war and OPEC caps, Libyan oil production is rising, though
the trend is in jeopardy given the recent intensification of the current
crisis. Any reduction in output would have major negative repercussions for
the Libyan economy
(Millions of Barrels per Day)
25
26
-7.4
64.0
17.94.3 1.4 1.54.1
-66.7
124.7
-36.8-53.0
-13.0
-100
-50
0
50
100
150
2001-10
2011 2012 2013 2014 2015 2016 2017 2018 2019F 2020F 2024F
Libyan Real GDP Growth (% Change): 2011 – 2024F
Source: IMF
Civil war and the resulting impacts on oil production have wreaked havoc on Libya’s economy since 2011, which are only now
subsiding. Concerns are that current strife could cause another economic collapse.
(Percent Change)
26
27
Geopolitics and Uncertainty in the Energy Producing World: Algeria
n Through early 2019, frequent protests against the government erupt
n On 1 April, long-time President Abdelaziz Bouteflika resigns after 20 years in power
n Constitution requires and election within 90 daysw Want to avoid situations such as an
in neighboring Libya or Egypt in 2011
1.1001.048 1.026 1.017 1.000
1.285 1.270 1.270 1.2521.192
1.150
0.8
0.9
1.0
1.1
1.2
1.3
1.4
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019*
Algerian Oil Production: 2009 – March 2019
*As of March 2019.Source: US Energy Information Administration accessed at: https://www.eia.gov/opendata/qb.php?category=1039874
Algerian oil production has been dropping for years
(though current output is consistent with
recent OPEC target
(Millions of Barrels per Day)
28
29
Geopolitics and Uncertainty in the Energy Producing World: Venezuela
n The regime of Nicolas Maduro is being challenged by rival Juan Guaido, each of whom views themselves as the legitimate leader of the country
n Venezuela has been hit with heavy sanctions, largely focused on stifling its oil industry.
n The economy is in freefall:w Real GDP growth was -18% in
2018 and -25% in 2019 (IMF est.)w Hyperinflation has taken hold,
with prices rising at an annual pace of 1 million percent
n Oil exports are nearing 30-year lows
30
Venezuelan Oil Exports and Production, 1989 – 2018
Source: Bloomberg, Venezuela Oil Exports Slump to 28-Year Low, 2 Jan. 2019 accessed at: https://www.bloomberg.com/news/articles/2019-01-02/venezuela-oil-exports-slump-to-28-year-low-on-falling-output
(Millions of Barrels per Day)
30
Amid a domestic political and
humanitarian crisis, mounting sanctions
and decades of neglect of the
nation’s energy infrastructure, Venezuela’s oil production and
exports are falling rapidly, contributing
to higher global prices
31
Venezuela’s Proven Crude Oil Reserves Are the Largest Among OPEC States
Source: OPEC, accessed 10 April 2019 at: https://www.opec.org/opec_web/en/data_graphs/330.htm.
Global Proven Reserves
31
Venezuela’s proven reserves at 302.8
billion barrels (24.9% of OPEC’s
total) are large enough to have a major impact on
global supply (and price) if the country
can overcome its domestic political
and economic challenges
OPEC Proven Reserves
Venezuela: 302.8 bill barrels
32
Geopolitics and Uncertainty in the Energy Producing World: Sudan n Popular uprisings began in December
2018 against Sudanese leader Omar al-Bashirw Bashir seized power in a military coup
in 1989
n On 11 April, Sudan’s military seized power from Bashir, placing him under arrestw Military says it will remain in power for
two yearsw Constitution suspendedw Government and parliament dissolved
n Economy is in poor conditionw Real GDP growth was -2.1% in 2018,
with expected growth of -2.3% and -1/3% in 2019 and 2020, respectively
33
OPEC+ Compliance with Oil Production Cuts Agreement (as of Feb. 2019)
Note: Cuts are to be achieved in first half 2019. Iran, Iraq and Venezuela are exempt from current accord as of 1 Jan. 2019.Source: Bloomberg accesses at: https://www.bloomberg.com/graphics/opec-production-targets/
Many Middle Eastern states have met or
exceeded their agreed upon cuts,
most outside of that region have not. But Saudi Arabia’s cuts have far exceeded
its agreed limit, thereby absorbing
the burden of others
34
OPEC+ Compliance with Oil Production Cuts Agreement (as of Feb. 2019, 1st Half 2019 Target Achievement)
Source: Bloomberg
OPEC Countries Non-OPEC Countries
-3%-3%
-2.7
%-2
%
Total cuts are just under 2 M/BD or 2.7% of OPEC+ output
35
But OPEC+ Efforts Confront US Production Headwinds
Source: Bloomberg-3%-3
%
-2.7
%Total cuts are just under 2 M/BD or 2.7% of OPEC+ output
Brent Crude Oil Price OPEC Total Production (000s B/D) US Total Production (000s B/D)
36
US Crude Oil Exports—One Century of History: 1920 – 2018
Source: US Energy Information Agency accessed 15 April 2019 at: https://www.eia.gov/todayinenergy/detail.php?id=39072
-3%
The US exported 2 million barrels of oil per
day in 2018 to 42 different countries. Volumes and export
destinations will both grow in the years ahead
37
Geopolitics and Uncertainty: Turkey Adds to Uncertaintyn Turkish local elections on 30 March saw
the party of President Tayyip Erdogan, the AKP, lose its hold on several key cities, including Istanbul and the capital, Ankaraw The AKP will appeal the elections in both
cities and is pushing for a recount in Istanbul
n The immediate driver of dissatisfaction is the poor state of the Turkish economyw Economy fell into recession this year,
with GDP growth expected at -2.5%w Unemployment rate > 10%; >30% for
young peoplew Inflation is approaching 20%w Turkish lira collapsed, down 28% in 2018
against USD
11.1
16.317.5
14.1
6.5
8.97.5
8.97.7 7.8
02468101214161820
2011 2012 2013 2014 2015 2016 2017 2018 2019F 2020F
Turkish Inflation Rate: 2011 – 2020F
Source: IMF, World Economic Outlook, April 2019.
Persistently high inflation erodes incomes and standard of living. High unemployment
and rapidly depreciating currency are likewise
contributing to current popular dissatisfaction in Turkey
(Inflation Rate, %)
38
Populist Movements
39 39
Not Limited to Emerging Markets—With Additional
Regional and Global Energy and Insurance Market Implications
40
Populism Spans the Globen There many
differences but also many differences in between the populist movements in the US and UK and elsewhere around the world
n All represent a threat to globalization—the free flow of goods, services and people across borders
n This can only be a negative for global industries such as insurance and energyBrexiteers
Trumpeteers
41
Trump’s Trade War: “America First” Policyn The United States has levied or threatened to levy tariffs against all $262
billion of Chinese imports to the USw Major products impacted include solar panels, steel, aluminum, motor vehicle
parts, electronics, home appliances, clothingw China has strategically matched US tariffs, dollar for dollar; Cut back on oil imports
n Tariffs also been levied against many US trade partners incl. Canada, Mexico, South Korea, Turkey and the EUw Most have retaliated
n The US has dissolved NAFTA in favor of a new agreement known as USMCA—US Mexico Canada Agreement
n The US has threatened to pull out of the WTO
n The US withdrew from the TPP (2017)
n The US withdrew from the Paris Climate Accord
42
Brexit and Energy
n Brexit and the uncertainty it has brought to the UK, EU and world have unquestionably been a net economic negative
n Questionable whether a comprehensive deal can be reached by the new 31 October 2019 deadline
n That said, the consensus is that the impact of Brexit on the UK’s energy markets should be less disruptive than on many other markets
n But concerns remain as the UK is a net importer of energy:w Ensuring ongoing investment (replacing EU investment)w Maintaining stable energy prices
w Adhering to climate goalsw Achieving the appropriate balance of support between climate and energy goals
43
Global Economic Policy Uncertainty Index: Global Economic Uncertainty Has Increased Significantly Since Trump’s Election, Jan. 1997 – March 2019
Source: Economic Policy Uncertainty, PolicyUncertainty.com accessed 12 Apr. 2019 at: http://www.policyuncertainty.com/index.html
Economic policy uncertainty reached its highest level on record in Dec. 2018 on
trade fears, exceeding even the uncertainty associated with Trump’s
election and the Global Financial Crisis
Election of Trump
Brexit Referendum
Fears of US/China trade war
mount
44
US Economic Policy Uncertainty Index: US Has Been Elevated Since the Advent of the Global Financial Crisis, Jan. 1985 – March 2019
Source: Economic Policy Uncertainty, PolicyUncertainty.com accessed 12 Apr. 2019 at: http://www.policyuncertainty.com/index.html
Gulf War, Oil Price Shock
11 Sept. 2001
Attacks Onset of Financial
Crisis
“Black Monday” market crash Election
of Trump
US/China trade war
escalates; US interest rates
spike
45
China Economic Policy Uncertainty Index: Chinese Uncertainty Tied to Escalating Trade War, Jan. 1995 – March 2019
Source: Economic Policy Uncertainty, PolicyUncertainty.com accessed 12 Nov. 2019 at: http://www.policyuncertainty.com/index.html
Chinese economic uncertainty peaked in late 2016 following Trump election but is soaring
again as trade tensions rise and the Chinese economy slows
46
UK Economic Policy Uncertainty Index: UK Uncertainty Tied to Brexit, Jan. 1998 – March 2019
Source: Economic Policy Uncertainty, PolicyUncertainty.com accessed 12 Apr. 2019 at: http://www.policyuncertainty.com/index.html
UK economic uncertainty peaked in mid-2016,
coincident with the June Brexit referendum
ENERGY NATIONALISM
47
The Use of Energy Resources to Exert Political and Economic Influence Is
on the Rise—But Is Not NewNationalism and Energy Are a Volatile
Combination 47
48
Energy Products (Fuels) Account for a Significant Share of Global Trade Volume, 2018
Source: World Trade Organization: https://www.wto.org/english/res_e/statis_e/wts2018_e/wts2018_e.pdf
Fuels and mining products account for 15% of global trade; Insurers
protect all of it—and the associated
infrastructure
49
US Crude Oil Exports by Leading Destination, 2018
Source: US Energy Information Agency accessed 15 April 2019 at: https://www.eia.gov/todayinenergy/detail.php?id=39072
-3%
(Thousands of Barrels per Day)
Trade war hurt exports to China, but
other countries absorbed volume
Natural Gas Consumption Growth: 2017 – 2023 (Billions of Cubic Meters)
-11.4
-6.9
16.5
20.5
25.7
65.1
72.5
80.4
123.9
-25 0 25 50 75 100 125 150
Europe
Eurasia
Latin America
Africa
India
Other Asia-Pacific
North America
Middle East
China
Source: International Energy Agency, accessed 4/12/19 at: https://www.iea.org/topics/naturalgas/ ; University of South Carolina Risk Management and Uncertainty Center.
n China will account for the largest share of gas consumption growth through 2023
n Natural gas is becoming more globalized due to rising availability of shale gas and increasing supplies of LNG
n The globalization of gas, while positive overall, means that supply shocks in one region are more easily transmitted to other regions—as has been the case for oil for many decadesChange in Consumption, Bill. of Cu. Meters
Top 10 Producers of Natural Gas: 2017(Billions of Cubic Meters)
94.8
111.4
113.9
124.2
154.0
163.6
176.3
238.0
691.6
761.1
0 100 200 300 400 500 600 700 800
Algeria
Saudi Arabia
Australia
Norway
China
Qatar
Canada
Iran
Russia
US
The fact that the US, Russia and Iran are the top 3 natural
gas producers in the world is a volatile and combustible
combination
Source: Statista.com accessed 9/15/18 at:; https://www.statista.com/statistics/264771/top-countries-based-on-natural-gas-production/University of South Carolina Risk Management and Uncertainty Center.
52
Energy Nationalism—Back Againn The United States is using is newfound energy riches to
restructure the global energy hierarchyw The rapid transition from a net energy importer to a major exporter has:
– Reduced dependence on volatile sources in the Middle East and greatly weakened the OPEC cartel
– Allowed the US to gain leverage over Iran, Russia, Saudi Arabia and as well as “thorns in the side” such as Venezuela
– Allowed the US to insert itself into Western Europe’s relationship with Russia
n Russia itself seeks to use its energy resources to exert greater influence in European affairsw Nord Stream 2 pipeline
53
Energy Nationalism—Conflict and Climaten Various oil and gas rich states in the Middle East are battling for
influence across the MENA region
n Venezuela’s problems adding to US/Russia and US/Cuba tensions
n Energy nationalism is carbon-focused and could slow the movement toward renewablesw Oil and gas are potent economic weapons. Countries with these
resources have a vested interested in maintaining their hegemony for both economic and political reasons– US: Trump withdrawal from the Paris Climate Accord– Rapid US growth in carbon energy exports– Scaling back of domestic regulation to support this sector– Reduction/elimination of subsidies for renewables– Easing of restrictions on coal sector
54
Energy Nationalism: Insurance Industry Concerns
n Growth: Opportunities and Threatsw Aggressive efforts to expand global energy influence (e.g., as with the US
and Russia) can create growth opportunities as investments in energy infrastructure grow– Pipelines, LNG facilities, tankers, rail networks, new on/offshore capacity and
associated casualty exposures
w Growth can be harmed if insurers are dragged into enforcing sanctions or energy infrastructure is nationalized– Iranian sanctions– US sanctions against shipping of Venezuelan oil
n Financial Market Volatilityw Insurers are among the largest institutional investors in the world;
Uncertainty has historically had an adverse impact on investment returns
55
Energy Nationalism: Insurance Industry Concernsn Energy Insurance Markets of the Future
w Carbon vs. Renewables?w Should insurers play an active role?
n The Weaponization of Energy Infrastructure w Increasing nationalism, coupled with other geopolitical threats,
makes energy infrastructure a vulnerable and high-value targetw Cyber attacks are the major threatw Major attacks on energy infrastructure could produce
catastrophic insured losses for (re)insurers
Percentage of Firms Indicating They Were Victims of Cyber Attacks*
26% 25% 25%22%
15% 14% 14% 13%9%
19% 17% 15%
0%
5%
10%
15%
20%
25%
30%
Ene
rgy
Hea
lth C
are
Ret
ail &
Who
lesa
le
Man
ufac
turin
g
Infra
stru
ctur
e
Finl
. Ins
t.
Aut
omot
ive
Pro
fess
iona
lS
ervi
ces
Pow
er &
Util
ities
Mar
ine
Com
mun
icat
ions
,M
edia
& T
ech.
Avi
atio
n &
Aer
ospa
ce
*Survey conducted in 2017.Source: Marsh Cyber Handbook 2018; USC RUM. 56
The energy sector is a favorite target for cyber
attacks, with more than 1-in4 companies reporting an
attack with a 12-month span
n Russian hackers have penetrated hundreds of US utilities and/or their vendors
n Hackers were effectively “inside the control room” of many utilities and could have caused blackouts
n National Infrastructure Advisory Council: US needs to prepare for a “catastrophic power outage” possibly caused by a cyber attack
57
Global Perspective: We Live in an Energy-
Hungry WorldDemand for Energy Will Increase
Robustly on a Global Scale for the Foreseeable Future
Near and Long-Term Growth Opportunities for (Re)Insurers
57
229
182161
38
129
0
50
100
150
200
250
1990 2000 2010 2020 2030 2040
ProjectionHistory
petroleum and other liquids
coal
natural gas
renewables
nuclear
World Energy Consumption Continues to Increase for Fuels—Other than Coal
*Based on IEO2018 reference case.
Source: EIA, International Energy Outlook 2018
50 78
157200 224
257303
0
100
200
300
400
500
1990 2000 2010 2015 2020 2030 2040
Africa
Asia is Projected to Have the Largest Increase in Energy Use of non-OECD Regions
Non-OECD energy consumption, by regionQuadrillion Btu
Asia
Middle East
AmericasEurope andEurasia
History Projection
356 410
523575
610661
739
*Based on IEO2018 reference case.
Source: EIA, International Energy Outlook 2018
60
Energy Investment Trends
Energy Investment DriveInsurable Exposures
Investment Trends Have Shown Some Weakness in Recent Years, but Longer
Terms Trends Bode Well for Energy Insurers60
61Source: International Energy Agency, World Energy Investment 2018, at: https://www.iea.org/wei2018/
Global Energy Investment, 2017($ Billions)
Electricity generation and supply invested the most in
2017, though investment was down by 6%
Global energy investment fell by 2% in 2017, the 3rd consecutive
year of decline
62Source: International Energy Agency, World Energy Investment 2018, at: https://www.iea.org/wei2018/
Global Energy Investment, 2017($ Billions)
Renewables and networks/grid investments are increasing as
carbon-based investments decline proportionately
Low carbon generation is actually falling largely due to
decommissioning of numerous nuclear facilities
63
0
20
40
60
80
100
120
90 9192 93 9495 9697 9899 00 0102 0304 0506 0708 09 1011 1213 1415 16 1718 19
West Texas Intermediate Brent($USD Per Barrel)
Crude Oil Pricing Remains Volatile—Impacted by US Capacity Additions, OPEC/Russia Supply Agreement, Economic, Political and Geopolitical Issues Among Some Major Producers
Crude Oil Prices: 1990 – 2019*
*2019 figure is the average of monthly figures through March 2019.Source: US Energy Information Administration.
11 September
Weakening global economy, OPEC and Russian output caps, Mideast uncertainty, Iran sanctions, geopolitical
unrest, production bottlenecks
Global Financial
Crisis
Hurricane Ike; Commodities
Bubble
64
Energy Supply: The Transformation Continues
Economics, Technology, Politics and Regulation Will Reshape Energy Supply,
Generation and Transmission for Decades to Come
A Peek into the Industry at Mid-Century64
65
Increasing Wind and Solar Capacity Additions…Necessitates More Storage Investment
0
20
40
60
80
100
120
140
160
180
2020 2030 2040 2050
wind
0
20
40
60
80
100
120
140
160
180
2020 2030 2040 2050
storage
0
20
40
60
80
100
120
140
160
180
2020 2030 2040 2050
solar photovoltaic
Utility-scale wind, solar, and storage operating capacitygigawatts
Storage is one of the greatest new
opportunities for energy insurers over
the next 30 years
Source: Energy Information Administration, Annual Energy Outlook 2018 at www.eia.gov/aeo
66
Renewables and Natural Gas Comprise Most of the Generation Capacity Additions through Mid-Century
Source: Energy Information Administration, Annual Energy Outlook 2018 at www.eia.gov/aeo
Oscillation in renewable capacity driven by phase-out of some subsidies
67
The New Silk Road: China’s Belt Road Initiative
China’s Bold and Global Investment Initiative Has Major Implications for
Energy Markets
67
68
China’s Belt and Road Initiativen China’s Belt and Road
Initiativew Announced in Late 2013w 6 Economic Corridorsw 70+ Countries in Asia,
Africa and Europe
n $1 Trillion+ Total Investment Envisioned by 2027
n Focused on Infrastructure Investmentsw Roads and Railwaysw Ports and Airportsw Pipelines and Power Plants
The Belt and Road Initiative’s Economic Footprint is Enormous
44%40%30%
0%
10%
20%
30%
40%
50%
Share of Global GDP Share of Global GDPGrowth
Share of World'sPopulation
Share (%)
69Sources: Morgan Stanley, Inside China’s Plan to Create a Modern Silk Road, 14 March 2018 at: https://www.morganstanley.com/ideas/china-belt-and-road; University of South Carolina, Risk and Uncertainty Management Center.
Countries participating in
China’s Belt and Road Initiative
account for large shares of global
economic activity, growth and population
Countries involved in China’s Belt Road Initiative Possess…
70
China Foreign Energy Investment:Investment in BRI Countries, 2000 – 2018*
$0.1
$0.1
$0.3
$1.2
$0.3 $1.3
$1.5 $3
.3
$34.
5
$11.
9
$12.
8
$9.6
$17.
5
$12.
8 $17.
4
$30.
8
$22.
3
$8.0
$0.5
64 4 4
6
9
20
24
19
14
26
14101211
18
1 1 1
$0
$5
$10
$15
$20
$25
$30
$35
$40
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Valu
e of
Inve
stm
ents
0
5
10
15
20
25
30
Num
ber of Investments
Value of Deal ($USD)Number of Investments
($USD, Billions)
*Financing through Chinese Development Bank and the Export-Import Bank of China.Source: Boston University, Global Development Policy Center: China’s Global Energy Finance accessed 8 Apr. 2019 at https://www.bu.edu/cgef/#/2018/Country/Global; Risk and Uncertainty Management Center, University of South Carolina.
Energy investment initiatives
accelerated in 2008/2009
n China has targeted foreign energy investment for nearly 20 yearsw Sharp increase in
investment began in 2009, pre-dating 2013 BRI announcement by 4 years
n Belt and Road initiatives reflect continuation and “rebranding” of existing strategies, including: w Securing resources for
domestic Chinese economy
w Expanding economic and political influence
BRI Announced
71
Chinese Energy Investments: BRI Countries vs. Non-BRI Countries, 2000 – 2018*
76.3%
23.7%
*Measured as a share of USD invested.Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC.
BRI Countries, $186.3B
Non-BRI Countries, $57.9B
Since 2000, BRI countries have accounted for more than 75% of China’s energy investments. BRI
largely represented a “rebranding” of existing
strategy.Non-BRI energy
investments are
concentrated in Latin and
South America
72
China Foreign Energy Investment:Number of BRI Countries Involved, 2000 – 2018*
1 1
4
3
1
3
6 6
9
10
17
11
15
10
12
11
12
8
3
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Valu
e of
Inve
stm
ents
($USD, Billions)
*Financing through Chinese Development Bank and the Export-Import Bank of China.Source: Boston University, Global Development Policy Center: China’s Global Energy Finance accessed 8 Apr. 2019 at https://www.bu.edu/cgef/#/2018/Country/Global; Risk and Uncertainty Management Center, University of South Carolina.
The number of countries receiving energy investments began to increase in
2007 – 2010, well before the BRI announcement
n China began to increase energy investments more than a decade agow Sharp increase in
investment began in 2009, pre-dating 2013 BRI announcement by 4 years
w Since 2000, an average of 7.5 countries per year received Chinese energy investments
w Since 2009, 11.5 countries per year receive energy investments (actual number is higher if non-BRI countries included)
BRI Announced
90.0%
71.4%74.0%
77.7%80.3%
83.5%87.1%
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
1990 1995 2000 2005 2010 2015 2020F
Access to Electricity: Percent of World Population,1990 – 2020F
Source: World Bank (1990-2016); 2020F (est.) Risk and Uncertainty Management Center, University of South Carolina.
The share of the world’s population with access to electricity will reach
90% for the first time in 2020, up from barely 70% in 1990, due recently in
part due to BRI initiatives
(Share of World Population)
73
By 2020, an estimated 6.9 billion of the 7.7
billion people on earth will have at least some
access to electricity
2,384.22,653.5
2,954.83,172.1
3,357.4
1,199.4 1,354.71,585.0 1,716.8
2,124.8 2,197.8
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015E 2020F
Global Electric Power Consumption per Capita,1970 – 2020F
Source: World Bank (1990-2014); 2015E and 2020F Risk and Uncertainty Management Center, University of South Carolina.
Consumption of electricity has nearly tripled over the
past half century even as the world population has nearly
doubled over the same period
(kWh/Capita per Year)
74
By 2045, nearly 100% of the earth’s population should have
access to electricity, but demand per capita will rise indefinitely
$42.4
$29.5
$22.0
$0.8
$91.8
$0 $20 $40 $60 $80 $100
Power Generation
Exploration &Extraction
Transmission &Distribution
Multipurpose
Energy Efficiency
Coal investments are primarily electrical
generation, but Oil/Gas/LNG include
extraction, exploration, pipelines, refineries,
export infrastructure, etc.
China BRI Initiatives by Energy Sub-Sectors:Power Generation Leads the Way ($ Billions USD)
Source: Boston University, Global Development Policy Center: China’s Global Energy Finance accessed 9 Apr. 2019 at https://www.bu.edu/cgef/#/2018/Country/Global; Risk and Uncertainty Management Center, University of South Carolina.
147
16
29
9
2
Number of Projects
$50.5
$38.4
$30.4
$6.7
$5.1
$2.7
$0.9
$0.5
$51.0
$0 $10 $20 $30 $40 $50 $60
Coal
Oil
Gas/LNG
Hydropower
Nuclear
Unspecified
Solar
Wind
Geothermal
Coal investments are primarily electrical
generation, but Oil/Gas/LNG include
extraction, exploration, pipelines, refineries,
export infrastructure, etc.
China BRI Initiatives by Fuel Type:Coal Remains King ($ Billions USD)
Source: Boston University, Global Development Policy Center: China’s Global Energy Finance accessed 9 Apr. 2019 at https://www.bu.edu/cgef/#/2018/Country/Global; Risk and Uncertainty Management Center, University of South Carolina.
69
19
23
62
3
16
4
5
2
Number of Projects
34.3
33.7
33.6
34.3 37
.0 39.9 41.1 44
.3 47.6 50.1 53
.9 57.1 60
.0 62.7 65.1
303540455055606570
09 10 11 12 13 14 15 16 17 18 19F 20F 21F 22F 23F
Is the BRI sustainable given China’s rapidly
rising debt?
Debt-to-GDP Ratio: China, 2009-2023F
Source: IMF, data accessed 4/4/10 at: https://www.imf.org/external/datamapper/GGXWDG_NGDP@WEO/OEMDC/ADVEC/WEOWORLD/CHN ; University of South Carolina Risk Management and Uncertainty Center.
China’s Debt-to-GDP ratio is increasing rapidly, raising
concerns of a future debt crisis
Percent of GDP (%)
78
Debt-to-GDP Ratio by Key Region, 2009 vs 2019F
30.5% 35.4% 35.4%
73.8%
38.5%53.9%
79.7%86.9%
107.8%
31.3%
0%
20%
40%
60%
80%
100%
120%
Middle East China Central Asia W. Europe US
2009 2019F
China’s Debt-to-GDP ratio has risen rapidly.
Sustainability of such growth is
being questioned.
Source: IMF, data accessed 4/4/10 at: https://www.imf.org/external/datamapper/GGXWDG_NGDP@WEO/OEMDC/ADVEC/WEOWORLD/CHN ; University of South Carolina Risk Management and Uncertainty Center.
Debt-to-GDP ratios in the Middle East
remain modest
The Debt-to-GDP ratio in the US
has risen to historically high
levels
79
Summary
nThe Long-Run Growth Outlook for the Global Energy Sector is Favorable
nSuggests that (Re)Insurers Will Benefit as the Property and Casualty Exposures Base Expands
nGeopolitical Risks Are Elevated but this Is Unavoidable in the Energy Sector
nNationalism, Populism, Protectionism Threats Are Elevated Too, but Remain Manageable
nChina’s BRI includes long-term opportunities for (re)insurers
Thank you for your timeand your attention!
Twitter: twitter.com/bob_hartwigFor a copy of this presentation, email me at [email protected]
80