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 CarolinaRobert.Hartwig@moore.sc.edu ¨ +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 robert.hartwig@moore.sc.edu

80