Insurers have a role in Canadian natural gas exports

Liquified natural gas (LNG) and infrastructure connectivity across Europe will be critical to ensuring a long-term energy supply for the continent, noted a Fitch Ratings report.

The ratings agency said strong supplies of LNG, along with a relatively mild winter, have helped Europe avoid rationing and other severe consequences from an energy crisis spurred nearly a year ago by Russia’s invasion of Ukraine.

Canada has been exploring ways to export more of its LNG output to Europe as the western half of the continent looks to wean off Russian energy imports for the foreseeable future. But, so far, Canada’s insufficient export infrastructure means those goals remain on the drawing board despite the country  being the world’s fifth-largest natural gas producer.

Beyond logistical challenges, Canada’s oil and gas producers are contending with insurers announcing intentions to exit from oil sands coverage due in part to pressure from consumers and governments to address climate change.

Going forward, oil and gas firms will have to apply a combination of three strategies to cover their risk: convincing, creating capacity and self-insuring, said Javier Pardo, senior vice president for the complex risk solutions group at NFP in Canada in an interview last fall.

The first strategy, convincing, centres around the industry telling its sustainability story. “They’ve taken baseline measurements on their C02 emissions year-after-year. And every single one of those companies would support the net-zero target by 2050,” Pardo said.

Option 2 is capacity creation, possibly via mutual operations. Pardo noted this approach essentially returns to the foundations of insurance, whereby the premiums of the many indemnify the losses of the few. Other industries facing difficulty finding adequate coverage have adopted the strategy in the past, he added.

Self-insurance, meanwhile, uses captives so that companies can effectively self-insure. Plus, recently passed laws in Alberta encourage commercial, third-party reinsurance entities to write new business in the province that can be structured as reinsurance behind a captive.

“We’ve been encouraging investment in reinsurance capacity. A lot of that just means that you’re fundamentally self-insuring the risk,” Pardo said.

Canada may yet have time to get both export infrastructure and insurance capacity online before global demand wanes.

Beyond mild weather, Fitch’s report said high prices helped shave 10% off EU natural gas demand during 2022. “We assume demand to drop further in 2023, taking the total decline to 15% from 2021,” it said. “The extent of price-driven demand erosion has varied by country.”

Going forward, Fitch added, LNG will remain key to replacing Russian energy.

“Our analysis still assumes zero Russian gas flows to the EU from January 2023. Global LNG markets will remain tight this year, amplified by increased demand from China after lifting its zero-COVID policy,” said the report.

“We expect European gas prices to be very volatile and still high compared with pre-war levels, and [will not normalize until after 2025] when the required LNG facilities and interconnectors are put in place in Europe.”

 

Feature image by iStock.com/Tom-Kichi