Energy

LNG Exports Challenge Capacity

Projects in the billions challenge capacity, hindering expansion for natural gas.
By: | September 15, 2013 • 11 min read

In a change that is the stuff of fantasy for anyone who remembers the energy crises of the 1970s, the United States and Canada are on the verge of becoming significant global energy exporting countries.

On the leading edge of that change are massive terminals for exporting liquefied natural gas (LNG), each facility costing as much as $30 billion. Several are being built and many others are planned. A few of the LNG import terminals around the country that are already in operation are being converted to export operations, at the bargain price of about $10 billion.

Underwriters, reinsurers and brokers said that the size and cost of the projects present challenges to capacity from several angles: the exposures inherent in any one project, the fact that many are taking place at the same time and the reality that the natural-gas bonanza is also driving other major capital investments, such as petrochemical plants, which are in effect competing for coverage.

“All the major brokers and the boutique energy shops are already active,” said one senior insurance executive, “but for these big projects, it almost doesn’t matter who the retail broker is in the United States because the business is all being driven in London.”

The coverage is not just standard builder’s risk and property/casualty for a massive construction project, it is also for highly specialized equipment to deal with ultra-low temperatures. At an export facility, natural gas is cooled to minus 260 degrees Fahrenheit, and the LNG is loaded onto tankers that are essentially huge floating insulated bottles.

And just for added excitement, most of the projects are being constructed or planned on the U.S. Gulf Coast or East Coast. As a result, named windstorm capacity is challenged as well.

“The physical risks and the cryogenic process itself drives the capacity requirement for these facilities,” said Louis Gritzo, vice president of research for FM Global. Before joining that underwriter, he was with Sandia National Laboratories and led the government task group examining LNG proposals and operations.

The Sudden Production Boom

The United States has dabbled in LNG for many years. A lone export terminal in Kenai, Alaska, has been operating since 1962, shipping gas from the Cook Inlet to Asia. Separately, a handful of import terminals were built in the late 1990s, when the widespread belief was that the country was running out of natural gas. All that changed when domestic independent oil and gas companies brought together three-dimensional seismic surveys, directional drilling and hydraulic fracturing. That allowed hydrocarbons to be extracted from source rock, usually shale, and the bonanza was on.

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According to the Federal Energy Regulatory Commission, there are more than 110 LNG facilities operating in the country today, performing a variety of services. Some facilities export natural gas from the United States, some provide natural gas to the interstate pipeline system or local distribution companies, while others are used to store natural gas for periods of peak demand. There are also facilities that produce LNG for vehicle fuel or for industrial use. Depending on location and use, an LNG facility may be regulated by several federal agencies and by state utility regulators.

In the early heady days of the unconventional gas rush, thousands of wells were drilled. As a result, overproduction pushed the price of natural gas from a peak near $13 per million Btu (mmBtu) in June 2008, to below $2 per mmBtu briefly in April 2012. Those prices are quoted at the Henry Hub pipeline center in Oklahoma. Another common reference price is the Nymex spot contract, quoted in thousands of cubic feet, but the two numbers are equivalent because U.S. and Canadian pipeline rules specify pipeline gas to be almost pure “lean” methane; 1,000 cubic feet of gas provides 1 million Btu of energy.

For most of 2013, the price has kept in the range of $3 to $4 per mmBtu, while the price of LNG landed at Tokyo is about $16 per thousand cubic feet. That creates an irresistible arbitrage that makes LNG a profitable proposition even at $30 billion for an export terminal.

According to the April 2013 Willis Energy Market Review, the insurance market remains highly competitive, even in light of the challenge to capacity, because of the “diversity of construction risks and relatively low loss ratio compared to other classes.”

“LNG projects continue to constitute the largest element of the onshore energy construction projects requiring cover from the international construction market, most notably from the United States and Australia, where significant development continues unabated,” according to the report.

Since a low point following the hurricanes of 2005, official capacities now total in excess of $5 billion for the first time, Willis reported. When the broker first started compiling the data 20 years ago, the market offered a mere $1.6 billion of capacity to its clients. Willis cautioned, however, that “these stated capacity figures are based on the maximum figure that an insurer is theoretically able to commit to, bearing in mind reinsurance and management restraints; they do not reflect what can realistically be obtained in the market, even for the most attractive business.”

The report explained that “because there have been few new entrants to the market this year — with the exception of the Apollo Syndicate and Ironshore, which have recently recruited Simon Mason and Paul Calnan respectively, both highly experienced upstream underwriters — and because the number of insurers involved in upstream business predominantly remains essentially the same as last year, we have calculated that the maximum that buyers can reasonably expect to purchase in this market has only increased modestly since last year, from circa $4 billion to $4.2 billion.”

As a result, Willis stated, “the market focus for large-scale LNG projects is now very much on London and European carriers, which are able to provide significant capacity on a probable-maximum-loss basis rather than a total insured value basis.” However, the report noted, with significant contract values normally in excess of $5 billion, the potential losses due to material damage means there remains a shortfall of available capacity globally for any resulting delay in start-up risk.

Top Gas Expt Countries“You just need a certain size to be cost-effective,” Gritzo said. “Not just refrigeration, compression and storage, but sensors and controls, all of special steel and other materials. When metals get cold they react very differently.” Beyond the normal perils of a massive construction project in a hurricane zone, leaks and fire are hazards. “Because of the nature of LNG, big explosions are actually not a major risk-management driver,” Gritzo added, “but spills and fire hazards are real, and they definitely figure into siting considerations.”

Capacity is Pinched

Several U.S. and Canadian underwriters said they are only just exploring the LNG business, but some carriers have experience in the sector internationally, especially in Australia, a major exporter already and growing bigger. Allianz is involved with several LNG export operations, as well as others planned. One is a floating platform, “like building a refinery on a boat,” said Carlos Carillo, head of energy for the Americas at Allianz.

He ticked off the many elements of coverage necessary, the builder’s risks, P&C and marine, including Project Cargo. “Large, heavy and expensive components for these plants are built in the Philippines or Indonesia, and brought to the site in special vessels.” That protection is augmented by coverage for delay in start-up if a component was damaged or defective.

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“The brokers find a lead market for each project,” Carillo said, “and then put out terms to find other markets, either layered in a fixed ratio or non-proportional. There are a lot of negotiations, and for financed projects, the lenders have a lot to say about how much the owner will have to place.

“The global demand is there for LNG, and the financing is available. The challenge is capacity. There are some options for non-traditional risk transfer, including what’s offered via the Allianz Risk Transfer unit, but that is something that we will have to watch.”

Andrew Seeley, underwriting manager for energy for Allianz in Australia, added that “capacity also depends a lot on the project sponsor. Many but not all of the global majors and national oil companies tend to self-insure. They don’t really buy cover; that goes to their captive.”

For the exposures they do transfer, he said, “the owners like to buy on the global market. We have a fair amount of capacity down here, but they would have to find more globally.”

Looking ahead, Seeley said, “North America and East Africa are the next LNG export hot spots. Demand for LNG is set to double in the next 10 years, and by 2020, Australia is expected to overtake Qatar as the top exporter. There are currently seven plants under construction down here, at about $27.3 billion [U.S.] each.”

David Fox, area senior vice president for A. J. Gallagher, said the “projects are huge, but it’s not just because there is a lot of steel and concrete and many workers. Several of these plants are being built on the Gulf Coast, and the various insurance markets are just not deep enough.”

There are also variables outside the project, especially regulatory and financial uncertainties, Fox said. “Energy policy in the U.S. is not clear, and there are costs and complications in that. Also, some of the projects are in master limited partnerships, or other specialized financial structures. Those tend to need more belt and suspenders coverage to make them acceptable to investors. So commercial contracts have to be structured to close the gap in insurance.”

There are important second and third dimensions to the capacity challenge, said Chaman Aggarwal, national energy construction practice leader for Marsh. “This market does not have $20 billion capacity for natural catastrophe coverage on the Gulf Coast [the price of one terminal] and there are several projects under way or planned. Also, there are other huge capital projects — fertilizers, petrochemicals, methanol, fuels — all downstream from this shale gas boom, and all of them competing for capacity.”

Aggarwal suggested that beyond traditional insurance markets, “the capital markets have been fairly eager to provide some capacity, often in the form of Cat bonds or insurance-linked securities. There is also some self insurance, but most owners do not do that straight. The major oil companies will take large retentions, but they do go to the market.”

His position is proof of that. “I was hired to focus on new business,” said Aggarwal. “As these projects come about, the challenge for the owners will be to find solutions, not just capacity. We just completed a placement of Cat bonds for the Metropolitan Transportation Authority in New York to protect them from storm surge. That is not LNG, but they are a multi-billion-dollar investment in a coastal region. The big issue for them or for an LNG terminal is the sheer magnitude of the value to be protected, and the complexity of the operation.”

For all the challenges presented to the insurance market by this gas bonanza, the underlying business case seems to be sound. According to a recent Deloitte analysis, Exporting the American Renaissance: Global Impacts of LNG Exports From the United States, the highest natural gas prices are currently in Asia where major LNG importers, such as Japan, South Korea and Taiwan, pay a premium to ensure peak month deliverability.

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The report stated “prices for spot LNG cargos sometimes shoot up in the winter months primarily because these Asian countries, with almost no other natural-gas alternatives, vie against each other for the scarce available LNG cargos and bid up prices. For much of 2012, the landed price of LNG in Japan hovered around $15 per mmBtu, or about five times higher than Henry Hub prices in the United States. With growth in global LNG supplies, the highest priced markets will not be setting the price, since their demand will be the first to be satisfied and other, lower price markets will likely provide the marginal demand and set the price. Hence, the world gas model projects a sharp decline in Japan prices coinciding with growth in Australian LNG exports.”

Vocal Opponents Remain

It should be noted that several industrial interests in the United States have been vociferous in their opposition to LNG exports, notably the chemical industry, and Dow Chemical in particular. They believe that exports will raise domestic gas prices and stifle the nascent U.S. industrial renaissance that is based on gas being cheap and plentiful. Similar concerns have been voiced in Congress.

Domestic oil and gas companies dispute those fears. At the recent summer meeting of the Texas Independent Producers and Royalty Owners Association in San Antonio, senior executives at several major gas producers noted that after several years of rock-bottom prices, a significant portion of gas wells are shut in. They stressed that it would take more than just one or two LNG terminals to “move the needle” on gas prices, and added that if prices were to rise significantly, fields that are currently uneconomical would be brought back online and drilling accelerated.

In short, gas producers say if you build it, the molecules will come.

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]