Turning off the taps

A backlash against the so-called “tar sands” could make insurance more expensive for a big part of Canada’s oil and gas sector.

“There is a big drive generally from insurers to put pressure on industries that they believe are responsible for the potential increase in carbon emissions around the globe,” says Gary Hirst, CEO of CHES Special Risk Inc.

Axis Capital Holdings Ltd. will stop writing new insurance and facultative reinsurance for oil sands extraction and pipeline projects as of Jan 1., 2020, the Bermuda-based insurer announced this past October. And a memo obtained by Canadian Underwriter in October, while its authenticity cannot be confirmed, suggests that Munich Re also plans to stop underwriting both primary insurance and facultative reinsurance for the construction of new oil sand sites.

Canada’s oil sands account for about one-tenth of 1% of global greenhouse gas emissions, according to Natural Resources Canada (NRC). Canada was the world’s sixth-largest crude oil producer in 2017, the Canadian Association of Petroleum Producers reports. Last year, the oil sands accounted for 64% of Canada’s oil production, says NRC.

“We have seen a lot of insurance companies over the past four or five years adopt coal policies and get out of insuring coal mines,” said Sven Biggs, Vancouver-based climate and energy campaigner for Stand.earth. “Tar sands is kind of the next front in that.”

Stand.earth is one of 32 groups that sent letters this past August to several insurers urging them to stop underwriting the Trans Mountain pipeline, which takes product from Edmonton to a tanker terminal on the Burrard Inlet near Vancouver. Reuters reports the letter was sent to 27 companies registered to insure the pipeline.

The existing Trans Mountain, now owned by the federal government, was built in 1953 and the federal government has approved a twinning project. If completed, the expansion would essentially triple the capacity from 300,000 to nearly 900,000 barrels a day. Construction was about to begin at press time.

Munich Re is one insurer that received a letter about Trans Mountain this past August, Biggs says.

Canadian Underwriter obtained a memo in October purporting to be an internal Munich Re “Crossline Alert.” That memo says Munich Re plans to stop underwriting both primary insurance and facultative reinsurance for the construction of new oil sand sites. Munich Re did not confirm or deny the document’s authenticity. The document pertains to oil sands sites and their infrastructure, but not to the oil produced at those sites. It defines a site as a place where oil sands are exploited through open pit mining, steam-assisted technology, or extracted from the oil sands.

Publicly, Munich Re supports the goal of the United Nations Framework Convention on Climate Change, also known as the Paris Agreement. The Canadian government has ratified the Paris Agreement, which aims to limit the global average temperature rise to +2 C, relative to pre-industrial levels.

Insurers should help to mitigate climate risk and transition to a low-carbon economy, Albert Benchimol, CEO of Axis Capital, stated in October when Axis announced its plans to stop insuring some oil sands sites.

Zurich plans to speak to customers with exposures of more than 30% to thermal coal, oil shales and oil sands, the company announced in June.

Depending on the outcomes of those conversations, Zurich “pledged” at the time to stop underwriting companies that generate at least 30% of their revenue directly from the extraction of oil from oil sands.

“It’s interesting that international insurers are taking this decision, whereas Canadian domestic insurers are probably not,” Hirst says.

“So, it then becomes a question of whether it is economical to pay the insurance, or perhaps now those producers will actually move away from buying insurance from commercial providers and just self-insure the risk.”