Eh&S Monthly Meeting International and Alaska Operations
Risk Management & Insurance Bauer College/UH Feb 2011 Agenda Risk Management functions and process Anadarkos Risk Management Presentation BP Oil Spill / Deepwater Horizon Incident Risk Bearing Capacity Study Synthetic Lease Windstorm Insurance 2 Anadarko Petroleum Corp (APC) One of the largest independent oil and gas exploration and production companies $39 B in market cap 2.4 billion barrel of oil equivalent of proved reserves $11B of revenues, $5B in CFFO Major areas of operation include onshore US, deepwater Gulf of Mexico, Algeria, offshore West Africa & Brazil
3 Risk Management Functions Project RM Marketing RM Enterprise RM Property/Casualty RM What do they all have in common? RM is a Process no right or wrong answers! 4 Risk Management - Mission Statement To assist in the identification, assessment and management of events and contingencies in order to preserve and enhance the assets of the Company. Primary areas of focus include management of corporate property and casualty insurance policies and related claims, and the drafting and negotiating of Company contracts for maximum risk transfer. 5
Risk Management Process CONTROL TRANSFER BY CONTRACT MONITOR FOR CHANGE IDENTIFY RISKS TRANSFER BY INSURANCE ASSUME 6 Anadarkos Contractual Risk Management Philosophy To Create a consistent and effective approach to the allocation of risk in the corporate contracts structure. To Ascertain that those significant risks assumed by Anadarko are insured or knowingly self-insured. To Respond to differences/changes in governing laws
(enforceability issues). 7 E&P Contracts JOA NON OPERATORS MSC ANADARKO AS OPERATOR DRILLING GENERAL SERVICES G&G - CONSULTANTS - SEISMIC
- PROCESSING PHA PRODUCERS (SUB-SEA) CHARTER - OFFSHORE - ONSHORE - VESSELS - AIRCRAFT OTHER - SURFACE USE AGMNTS. - PROFESSIONAL SVRS. - CONSULTANTS - LEASE AGREEMENTS CONSTRUCTION - ENGINEERING
- FABRICATION - CONSTRUCTION - INSTALLATION 8 Risk Management Process CONTROL TRANSFER BY CONTRACT MONITOR FOR CHANGE IDENTIFY RISKS TRANSFER BY INSURANCE ASSUME 9
Insurance Coverages Directors & Officers Insurance Fiduciary & Crime Property & Casualty Control of Well / Redrill Physical Property Loss of Production Income / Business Interruption Third-Party Liability Aviation, Auto Liability Workers Compensation & Employers Liability 10 Anadarko Petroleum Corporation Directors & Officers Liability Insurance August 1, 2010 August 1, 2011 $65MM Coverage A IDL only $365MM Chartis (AIG) Limit: $25mm xs $340mm
Limit: $10mm xs $20mm St. Paul Limit: $10mm xs $10mm AEGIS Limit: $10mm Corporate / Plans Retention - $5mm (each loss)* * Current $50 million program led by AEGIS will expire September 12, 2010. The $50 million excess program led by X.L. will serve as excess until September 12, 2010 and then drop down to primary (subject to a $2.5 million deductible) effective September 12, 2010. 12 $675MM Excess Liability $100MM xs $575MM (Chartis) (5) Excess Liability $75MM xs $500MM Property and Casualty Insurance Program 2010/2011
Owned $100MM Non-Owned $40MM Hangarkeepers $25 MM Per. Injury $5MM SIR Statutory Limits $500MM (100%) Areas III, IV &V Onshore General Liability Foreign
Auto/EL Liability UK EL $4MM SIR $1MM $250,000 (1) ACE Auto Liability $2.8M per day 180 days Max a.o.o. Not to exceed $500MM a.o.o. Energy
Package Agreed Values $3MM SIR USAIG $2MM $250,000 (1) ACE Employers Liability (1) US WC (3) Foreign WC (Voluntary)
Aircraft Hulls Onshore/ Offshore Property OEE LOPI 13 Property & Casualty Insurance Property Replacement Cost Value (ded $10MM For Interest) Control of Well/Redrill/Pollution $75MM Onshore / $500MM Offshore (ded $10MM FI) Third Party Liability $675MM limits (includes Pollution) (ded $5MM FI) Aviation Liability $925MM limits ($250MM primary + $675MM TPL) Terrorism full limits Offshore/Aviation/Woodlands Bldg /$25MM sublimit for all other Onshore
Business Interruption I-Hub only $500MM limit (180 days waiting period) (excludes named-windstorm) 14 Flow of Foreign Insurance Anadarko Foreign Entity Locally Admitted Insurer KMILL London Insurance (Partners Share and/or (Captive) APCs share if mandatory) Anadarkos Corporate Insurance Package 15
Risk Management Process CONTROL TRANSFER BY CONTRACT MONITOR FOR CHANGE IDENTIFY RISKS TRANSFER BY INSURANCE ASSUME 16 Significant Uninsured Risks (for which coverage may be available) Pre-existing liability (pollution, toxic tort, etc.) in acquisitions Gradual pollution Business interruption (except I-Hub)
Political risks Unauthorized trading Terrorism onshore Hurricane damage for offshore platforms Tanker Pollution ? Consequential Damages ? Pollution from a blowout ? 17 BP Oil Spill / Deepwater Horizon Incident Everybody has a plan to fight me until they get hit. Mike Tyson 18 BP Oil Spill / Deepwater Horizon Incident Issues to reconsider
Short term: 1. Available insurance limits. 2. Liquidity and credit / debt capacity. 3. Utilize long-term rigs and redeploy capital during moratorium. 4. Rights under JOA (indemnify Operator, claims-handling, etc.) Longer term: 1. Creditworthiness of JV partners, assignees (rig), etc. 2. Gross negligence in JOA and Service Contracts. 3. How involved should a non-operator be in drilling plans? 4. Whether deepwater GOM should be part of Companys strategy? 5. Improve pollution response. 6. Government-mandated financial responsibility for lessees. 19 E&P Contracts JOA NON OPERATORS MSC ANADARKO
AS OPERATOR DRILLING GENERAL SERVICES G&G - CONSULTANTS - SEISMIC - PROCESSING PHA PRODUCERS (SUB-SEA) CHARTER - OFFSHORE - ONSHORE - VESSELS
- AIRCRAFT OTHER - SURFACE USE AGMNTS. - PROFESSIONAL SVRS. - CONSULTANTS - LEASE AGREEMENTS CONSTRUCTION - ENGINEERING - FABRICATION - CONSTRUCTION - INSTALLATION 20 Anadarko Risk Bearing Capacity Study 21 21 Background APCs acquisition in 2006 of both Kerr-McGee
and Western Gas Resources in an all-cash deal APC issued $24 billion in debt Rating agencies downgraded APC two levels to the lowest level of investment grade APC wanted to revisit previous decisions not to buy business interruption, named windstorm, & political risk in light of maintaining investment grade status 22 22 Risk Assessment Objectives Establish APC risk appetite (Risk Bearing Capacity) in relation to key financial measures Investigate the impact of various, key risks on financial key financial measures and thresholds Commodity price risk Political risk profile in Algeria Specific catastrophic scenarios for energy specific insurance risks Develop a portfolio perspective for APCs major risks Develop what if scenarios for catastrophic exposures
Develop a framework to analyze the benefits of alternative risk management strategies 23 23 Determining Risk Appetite Financials Used APC Budgets & Forecasts Retained Cash Flow (RCF) is CFFO before working capital changes less dividends
Production Oil and natural gas pricing (at multiple locations) Key Metrics Debt / Proven Developed Reserves (PDR) (Retained Cash Flow Sustaining Capex) / Debt Thresholds Volatility Funding Assumptions Credit Facility at current annual interest rate Hedging Strategy Incorporated current oil and
natural gas hedging strategies Investment grade levels for each key metric 24 24 Impact of Pricing/Production Variation on Debt/Proven Developed Reserves Debt/PDR 2008 Breach Point 2008 Threshold 2008 Forecast Confidence Level (%) 25
25 (RCF-Sustaining Capex)/Debt Impact of Pricing/Production Variation (RCF-Sustaining Capex)/Debt 2008 Forecast 2008 Breach Point 2008 Threshold Confidence Level (%) 26 26 Algerian Risk Perils and APC Confiscation, Expropriation, Nationalization, Forced Abandonment, and Selective Discrimination Creeping Expropriation (Windfall Profits Tax - WPT) Legal, Regulatory, and Licensing Risks
Strike, Riot, Civil Commotion War Terrorism & Sabotage 27 27 Algerian Risk Model Begin with qualitative analysis Use qualitative information to build model assumptions Vet model assumptions with APC risk management professionals Generate portfolio model for Algerian sub-risks 28 28 Energy Package Risk Model Risks Modeled Control of well, named windstorm in Gulf of Mexico, pollution events, and fire events Data Sources GOM projected production for APC and well information by region, public information regarding pollution events, property schedule,
APC wind vulnerability assessment, Aon database Assumptions Downtime, recovery costs, lost production, re-drill, reserve reclassification, and damage assumptions generated through collaborative effort This information was used to generate exposure based parameters for frequency and severity 29 29 Total Cost of Risk Comparison Total Cost of Risk The current insurance program provides significant financial protection against catastrophic event scenarios No Insurance Insurance Tail protection provided by
current program Confidence Level (%) 30 30 (RCF-Sustaining Capex)/Debt Portfolio Impact of Risks Commodity Only All Risk 2008 Threshold All Risk includes insurance programs Confidence Level (%) 31 31
Framework Observations and Actions The likelihood that production and commodity price fluctuations was determined Action: subsequent decision to lock in cash flows and reduce downside volatility was supported Algerian political risk is significant to APC Action: insurance solution was considered, but not deemed best suited due to cost/benefit trade off 32 32 Framework Observations and Actions Control of well and property exposure is low frequency/high severity in nature, and potential losses are dampened due production profile diversification and asset resiliency Current energy package program Action: additional CAT insurance potentially considered in the future, but only if cost/benefit for
CAT insurance becomes more favorable (current program is effective for CAT protection) 33 33 Synthetic Lease Windstorm Insurance Synthetic own for tax but not for GAAP purposes 3 deepwater GOM platforms Lease requires windstorm insurance unless commercially unreasonable (defined as excessive costs or other unreasonable terms which are not justified in terms of the risk to be insured and is generally not being carried by others for similar operations) Market quotes ~ $20MM in premium for a $200MM aggregate limit (10% rate on line) w/ $10MM ded. Limited capacity at minimum rate-on-line. 34 Synthetic Lease contd
Commissioned Willis to prepare a report to review past offshore GOM losses from hurricanes (utilizing its database) Findings: 1. Since 1994, offshore GOM structures have incurred $12B in losses 2. Only $1B related to deepwater structures a) $0.4B relates to collapse of drilling packages b) $0.3B relates to design flaw c) $0.2B relates to different design than our 3 structures d) net losses = $0.1B 3. Estimated value of GOM structures ~ $21B 4. Plotted past hurricane paths to show that Anadarkos deepwater GOM structures have been directly exposed to Ivan, Katrina, Rita, Gustav & Ike with minimal damage (< $1MM) 35 Synthetic Lease contd Conclusions to Willis Report: 1. Burn cost = 0.06% per annum (net) or 0.50% per annum
(gross) 2. Market rate (10%) represents 160 times (net) and 20 times (gross) greater than burn cost 3. Insurance market is not offering hurricane coverage for deepwater structures based on any sound technical rate approach 36 Synthetic Lease contd Commissioned ABSG Consulting / EQECAT to model expected damage to these 3 specific platforms from Cat 1 5 hurricanes Findings = No expected damage until wind speeds exceed 170mph (strong Cat 5) Surveyed 7 peer group companies who own similar deepwater GOM platforms and who are investment
grade Findings = none purchased commercial insurance 37 Synthetic Lease contd Other considerations: 1. Anadarko is investment grade (S&P BBB-) and can easily selfinsure $200MM. 2. Arbitrator (Nationally-recognized Insurance Expert) was an insurance broker 3. Arbitrators decision was not sealed 38 Other RM Issues Impact of Ike, Katrina/Rita Impact of Commodity Prices (crude/gas) Impact of Financial/Banking Crisis ERM (Enterprise Risk Management)
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