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April 5th, 2008:

Insurers Push Coverage Against Environmental Damage

Cameron Dueck – Updated on Apr 05, 2008 – SCMP

Insurance companies have begun selling environmental insurance policies on the mainland, marking what could be the start of a trend towards more responsible corporate behaviour and broader government requirements for industrial companies to buy pollution liability coverage.

Environmental insurance forces companies to clean up their act because a company must improve its environmental security before it buys coverage, and thereby a system of requiring such insurance raises pollution standards.

Insurers will not cover a company which is not already showing an attempt to reduce the risk of environmental damage.

“The petrochemical, oil and gas companies clearly have exposure, as well as the manufacturing sector. We’ve also placed policies in the real estate sector in partnership with banks, the high-end commercial or residential projects,” said Jim Finnamore, regional environmental practice leader at insurance broker Marsh. Insurers and brokers declined to provide the names of policy buyers.

Foreign companies such as ACE Group, AIG and Chubb Group are leading the push along with state-owned People’s Insurance Co of China (PICC).

“We have sold a few policies, but I’d say that by the end of the year we expect our business in this area to be much more significant,” said Karl Russek, who heads ACE Group’s international environmental risk business.

ACE is the largest shareholder in Hutai Insurance, which last month became the first local firm to gain approval from the China Insurance Regulatory Commission to offer environmental coverage on the mainland. The company is offering coverage for both first-party clean-up and third-party claims with limits up to US$25 million.

“The early customers have been multinationals that have large consumer brands which are globally sensitive or have financing tied to environmental requirements,” Mr Russek said.

The State Environmental Protection Administration (Sepa) in February introduced a “green insurance system” requiring industrial companies to buy insurance against potential environmental damage. That CIRC-backed plan will try to provide closer monitoring of companies and help victims obtain compensation, particularly if the polluting firm was unable to make amends or if it declared bankruptcy.

Sepa said it would introduce the programme on a test basis in several regions with the goal of having a nationwide system in place by 2015. Insurers predict the pilot will be launched within months in one of the heavily industrialised southeastern provinces.

“The regulators are actively soliciting from the insurance industry for suggestions on how the programme should be structured,” Mr Russek said.

The extra cost of buying yet another form of liability insurance may keep local companies from signing up until they are forced to do so.

“We’ve developed a product for hi-tech companies, which has been approved by CIRC and we’re now discussing that product with some clients,” said Shao Yunzhou, director of liability insurance product development at PICC. “But at the moment a lot of companies can’t afford the high premiums, so we’re now researching other options, like low-limit coverage.”

China’s system of mandatory environmental insurance is expected to be similar to that of countries such the United States and Germany. While mainland industrials may not operate as cleanly as their counterparts in Europe, the key thing that insurers need in order to start underwriting is clear and consistently enforced rules.

“Provided there is a standard, we can underwrite to that standard,” Mr Russek said. “While it’s clear there’s not the same history of regulation in China as there is in some places, one should not doubt the seriousness with which Sepa is approaching this.”

The agency has introduced a green securities policy to force firms to undergo environmental inspections before raising capital and a green credit policy to limit bank lending to energy-intensive and polluting industries.

While the agency has been spinning its wheels in trying to launch these policies its success rate could change after Beijing last month elevated the status of Sepa to ministry level, creating the Ministry of Environmental Protection.

Coal-to-fuel Projects Risk Green Backlash

Eric Ng in Beijing – Updated on Apr 05, 2008 SCMP

Turning coal into liquid fuel and chemicals is a potentially lucrative business on the energy-hungry mainland, but Beijing’s concerns about the environmental impact of such projects means investors risk getting their fingers burned.

Tse Bing, chairman of Hong Kong-listed mainland drugmaker Sino Biopharmaceutical, agreed in 2006 to take a 43 per cent stake in a 5 billion yuan (HK$5.55 billion) joint venture with two Shaanxi government companies to build a coal-to-chemical plant in Yulin city. However, the project in the coal-rich province hit a snag after it was launched in 2003, and it is now in limbo. Producing usable fuel from coal requires large amounts of water and energy, raising the ire of environmentalists.

“The Shaanxi government has failed to deliver a province-wide environmental impact assessment demanded by the State Environmental Protection Administration (Sepa) on coal-to-chemical projects, so the project has been stalled,” he said.

Mr Tse, vice-president of the Thai-Chinese run conglomerate Chia Tai Group and the parent of Sino Biopharmaceutical, said Sepa wanted to know whether the project would emit more carbon dioxide and consume more water than the parched province could support.

With worsening air and water pollution rising to the top of Beijing’s political agenda, projects such as coal-to-liquid fuel are being closely scrutinised by increasingly powerful regulators. Sepa was elevated to full ministry status at the National People’s Congress last month.

“When we first discussed co-operation with the provincial government, Beijing had not stipulated water resource and environment protection regulations over such projects,” he said. “The provincial government told us both issues should not be a problem, but now it has not passed the central government’s scrutiny.”

The National Development and Reform Commission stopped approving new coal-to-liquid fuel and chemical projects in mid-2006, citing environmental concerns and pending a comprehensive industry development plan. That plan has still not been released.

The commission has also banned coal-to-liquid fuel projects of less than 3 million tonnes of annual capacity, coal-to-methanol projects of less than 1 million tonnes and coal-to-olefin projects of less than 600,000 tonnes in capacity.

Methanol is a fuel and industrial solvent, while olefins are key chemical building blocks for plastics and man-made fibres.

Producing such products from coal, instead of crude oil, is part of Beijing’s strategy to cut reliance on crude imports.

Fuel and chemicals produced from coal are largely free of sulphuric gases which cause acid rain. But they produce large amounts of greenhouse effect-causing carbon dioxide, unless plants are fitted with expensive carbon capture and storage (CCS) facilities that are still in an early development stage.

With oil prices surging to record highs, these projects appear hugely profitable if environmental costs are excluded. Industry executives saying they are profitable as long as crude oil stays above US$30 a barrel.

Peter de Wit, executive vice-president of energy giant Royal Dutch/Shell’s clean coal energy division, said it was too early too tell when the mainland would install CCS facilities, although they were expected to be introduced gradually in Europe in the next five to 10 years in coal-burning energy and chemical projects.

“By 2050, for our atmosphere to cope with carbon dioxide emissions, we expect 90 per cent of Organisation for Economic Co-operation and Development nations and at least 50 per cent of non-OECD countries will have to install CCS,” he said.

Chia Tai had invested some 400 million yuan towards the development of a coal-to-chemical technology at the Dalian Institute of Chemical Physics under the Chinese Academy of Sciences, and held rights to its licensing, Mr Tse said.

Previously, project developers could start construction after getting support from local governments, which are more eager to see projects go ahead to drive employment and industrial output.

Mr Tse’s project, originally scheduled to come on stream late last year, had received approval from the local government but failed to meet the NDRC’s scale requirements, he said. Chia Tai had therefore decided not to proceed with building.

“We didn’t dare move ahead because we were worried these projects may have a similar fate to the infamous Tieben steel project,” he said. “We don’t want our project to become a white elephant.”

Tieben Iron and Steel was ordered by Beijing in 2004 to cease building of its planned 10.6 billion yuan steel plant in Changzhou, Jiangsu province, after government officials were found to have assisted in the misappropriation of land for the project, which was approved by the local government but was out of line with Beijing’s industry policy.

Despite the regulatory problems facing private operators, several state-backed firms including China Shenhua Group, Datang Power International Generation and Yanzhou Coal Mining, have moved ahead with construction of their coal-to-chemical projects and are expected to come on stream this year or next.

Shenhua and Yanzhou claim they have obtained all necessary approvals, although Datang admitted its project is still subject to final approval from the NDRC.

In addition to failing to clear environmental hurdles, Mr Tse said Chia Tai also ran into problems with the local government on its investment in a coal mine in Yushuwan, Yulin, which would have supplied the coal-to-chemical project.

Chia Tai has a 40 per cent stake in the mining project, while listed Yanzhou Coal Mining has 41 per cent and a local government firm 19 per cent.

He said the local government had demanded that it pay more than 2 billion yuan in additional investment after it had already invested some 266 million yuan into the project.

The joint venture agreement has still not been sanctioned by the local government.

Mr Tse said Chia Tai still wanted to settle the dispute through negotiations, adding it has been looking at investing in other coal-to-chemical projects in Xinjiang to hedge its bets.