Risk Management & Insurance
Bauer College/UH
Feb 2012
Agenda
 Risk Management – functions and process
 Anadarko’s Risk Management Presentation
 BP Oil Spill / Deepwater Horizon Incident
 Synthetic Lease – Windstorm Insurance
 Risk Bearing Capacity Study
2
Anadarko Petroleum Corp (APC)
 One of the largest independent oil and gas
exploration and production companies
 $39 B in market cap
 2.5 billion barrel of oil equivalent of proved reserves
 $14B of revenues
 Major areas of operation include:
•
onshore - US & Algeria
• deepwater - Gulf of Mexico, West & East Africa, China &
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
Anadarko’s 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
HOST COUNTRY/
MINERAL OWNER
CONCESSION/LEASE
-
NON
OPERATORS
MSC
JOA
FARM-OUT
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
- EQUIPMENT LEASE
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
• Worker’s Compensation & Employer’s Liability
10
Directors’ & Officers’ Liability Insurance
 $365MM total limits
•$100MM ABC coverages
•$200MM A-side / DIC coverage
•$65MM A-side IDL coverage (Independent Directors’
Liability)
11
Fiduciary Liability & Crime Insurance
 Fiduciary Liability Insurance:
•$100MM ABC coverage
 Crime (Employee Dishonesty, Theft, Wire Transfer
Fraud):
•$50MM coverage
12
Property & Casualty Insurance
 Property – Replacement Cost Value (ded $10MM For Interest)
 Control of Well/Redrill/Pollution – $75MM Onshore / $750MM Offshore
(ded $10MM )
 Third Party Liability – $675MM limits (includes Pollution) (ded $10MM )
 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)
13
Flow of Foreign Insurance
Anadarko Foreign Entity
Locally Admitted
Insurer
KMIIL
London Insurance
(Partner’s Share and/or
(Captive)
APC’s share if mandatory)
Anadarko’s Corporate
Insurance Package
14
Risk Management Process
CONTROL
TRANSFER BY
CONTRACT
MONITOR FOR
CHANGE
IDENTIFY
RISKS
TRANSFER BY
INSURANCE
ASSUME
15
Significant Uninsured Risks
(for which coverage may be available)
 Pre-existing liability (pollution, toxic tort, etc.) in acquisitions
 Gradual pollution
 Business interruption
 Political risks
 Unauthorized trading
 Terrorism – onshore
 Hurricane damage for offshore platforms & blowout
 Tanker Pollution ?
 Consequential Damages ?
 Pollution from a blowout ?
16
BP Oil Spill / Deepwater Horizon Incident
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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
Financial & Strategic:
1. Liquidity and credit / debt capacity (cash + credit facility / “run rate”;
vendors, counterparties collateral requirements, rating agencies).
2. Creditworthiness of JV partners, assignees (rig), PGs, collateral,
insurance requirements.
3. Government-mandated financial responsibility for lessees.
4. Utilize long-term rigs and redeploy capital during moratorium.
5. Whether deepwater GOM should be part of Company’s strategy?
19
BP Oil Spill / Deepwater Horizon Incident
Issues to reconsider
Insurance:
1. Available insurance limits (minimum scaling versus for interest).
2. Timely issuance of policies.
3. Claims handling if Operator
4. “Additional Insured” status (Transocean’s insurance)
5. Coverage issues (non-scaling & multiple occurrences)
Operational:
1. Improve pollution response.
2. How involved should a non-operator be in drilling plans?
20
BP Oil Spill / Deepwater Horizon Incident
Issues to reconsider
Service Contracts & JOAs :
1. “Gross negligence” and “fines & penalties” in JOA and Service
Contracts. Recent court rulings re enforceability.
2. Rights of non-operator under JOA (indemnify Operator, claims-handling,
sharing of information, participating in key decisions, etc.).
3. Force Majeure clause in LT Drilling Contracts.
4. Service Contractors pushing back on pollution.
5. Pollution “originating on or above the surface of water from spills”
versus “originating from owned equipment” or “hole”.
6. Approval process for exceptions.
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BP Oil Spill / Deepwater Horizon Incident
ASSURED DEFINED
Wherever used in the policy the word "Assured" shall include but shall not be limited tomean:
a.
The Named Assured as set out in Item 1 of the General Declarations.
b.
At the option of the Named Assured, Charterers, Lessees, Operators, and/or Managers of
Vessels, Marine Craft, or Aircraft.c.
Any individual, firm, corporation, partnership, joint
venture, or any other entity for whom the Named Assured is, during the term of this policy,
required through contract to provide insurance, but only to the extent that the Named Assured has
contracted to provide such insurance, and in no event, for any greater limits of such as is afforded
by this policy, but it is expressly understood that coverage afforded to any such party under this
Policy:
i) is subject to and limited by any restrictions or limitations on the scope, extent,
terms, and/or amounts of such provision of coverage as are contained in such contract;
ii) shall be no broader than the provision of coverage as required by such contract;
iii) is limited to and shall not serve to increase the overall amount(s) of insurance
required of the Named Assured under such contract to any such party; and
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BP Oil Spill / Deepwater Horizon Incident
iv) subject always to i), ii) and iii),above the foregoing shall in no way serve to increase the limits of
Underwriters’ liability or expand the scope of coverage than isas provided inby this policy to the Named
Assured nor for a greater extent than required by contract.”
CO-VENTURERS
ThisSubject to the terms of condition (Assured Defined), this insurance may be extended by the
Named Assured as they may require to insure the interest of Co-venturers, defined as co-owners, partners
or other party(ies) having a financial and insurable interest in the subject matter of this insurance, all of
whom individually and collectively are non-operators (all hereinafter referred to as "Co-venturers")
provided the agreement to include such interests is entered into prior to any occurrence giving rise to a
claim hereunder.
The coverage granted by this extension shall be limited to the operations in which a
Co-venturer has a common interest with the Named Assured(s) and shall be subject in all respects to the
terms and conditions of this Policy. Such Co-Venturers whose interests are insured hereunder shall be
deemed to be named as Additional Assureds hereunder only in respect of operations insured hereunder
and only for the period(s) of time said operations are insured hereunder.
23
E&P Contracts
HOST COUNTRY/
MINERAL OWNER
CONCESSION/LEASE
-
NON
OPERATORS
MSC
JOA
FARM-OUT
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
- EQUIPMENT LEASE
CONSTRUCTION
- ENGINEERING
- FABRICATION
- CONSTRUCTION
- INSTALLATION
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Synthetic Lease – Windstorm Insurance
25
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.
26
Synthetic Lease – cont’d

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 Anadarko’s deepwater
GOM structures have been directly exposed to Ivan, Katrina,
Rita, Gustav & Ike with minimal damage (< $1MM)
27
Synthetic Lease – cont’d

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
28
Synthetic Lease – cont’d

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
29
Synthetic Lease – cont’d

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. Arbitrator’s decision was not sealed
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Anadarko Risk Bearing Capacity Study
31
Background
• APC’s 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
32
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 APC’s major risks
• Develop “what if” scenarios for catastrophic exposures
• Develop a framework to analyze the benefits of
alternative risk management strategies
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Determining Risk Appetite
• Financials Used
– APC Budgets & Forecasts
• Key Metrics
– Debt / Proven Developed
Reserves (PDR)
– (Retained Cash Flow Sustaining Capex) / Debt
Retained Cash Flow (RCF) is
CFFO before working capital
changes less dividends
• Thresholds
• Volatility
– Production
– Oil and natural gas pricing (at
multiple locations)
• 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
34
Impact of Pricing/Production Variation
on Debt/Proven Developed Reserves
Debt/PDR
2008 Breach Point
2008 Threshold
2008 Forecast
Confidence Level (%)
35
(RCF-Sustaining Capex)/Debt
Impact of Pricing/Production Variation
(RCF-Sustaining Capex)/Debt
2008 Forecast
2008 Breach Point
2008 Threshold
Confidence Level (%)
36
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
37
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
38
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
39
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 (%)
40
(RCF-Sustaining Capex)/Debt
Portfolio Impact of Risks
Commodity Only
All Risk
2008 Threshold
“All Risk” includes insurance programs
Confidence Level (%)
41
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
42
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)
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Other RM Issues
 Impact of Ike, Katrina/Rita
 Impact of Commodity Prices (crude/gas)
 Impact of Financial/Banking Crisis
 ERM (Enterprise Risk Management)
 El Merk Project
 Ghana Project
 MLP
44