Risk Management & Insurance

Bauer College/UHFeb 2012

2

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

3

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

4

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!

5

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.

6

Risk Management Process

IDENTIFYRISKS

MONITOR FORCHANGE

ASSUME

TRANSFER BYINSURANCE

TRANSFER BYCONTRACT

CONTROL

7

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).

8

E&P Contracts

GENERALSERVICES

ANADARKOAS OPERATOR

NON -OPERATORS

- OFFSHORE - ONSHORE

- SURFACE USE AGMNTS. - PROFESSIONAL SVRS. - CONSULTANTS - EQUIPMENT LEASE

- CONSULTANTS - SEISMIC - PROCESSING

- VESSELS - AIRCRAFT

- ENGINEERING - FABRICATION - CONSTRUCTION - INSTALLATION

JOA

MSC DRILLING CHARTER

G&G OTHER CONSTRUCTION

FARM-OUT

HOST COUNTRY/ MINERAL OWNER

CONCESSION/LEASE

PRODUCERS(SUB-SEA)

PHA

9

Risk Management Process

IDENTIFYRISKS

MONITOR FORCHANGE

ASSUME

TRANSFER BYINSURANCE

TRANSFER BYCONTRACT

CONTROL

10

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

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

13

Property & Casualty Insurance

14

Flow of Foreign Insurance

Anadarko Foreign Entity

Locally Admitted Insurer

KMIIL

(Captive)

Anadarko’s Corporate Insurance Package

London Insurance (Partner’s Share and/or

APC’s share if mandatory)

15

Risk Management Process

IDENTIFYRISKS

MONITOR FORCHANGE

ASSUME

TRANSFER BYINSURANCE

TRANSFER BYCONTRACT

CONTROL

16

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 ?

BP Oil Spill / Deepwater Horizon Incident

17

18

BP Oil Spill / Deepwater Horizon Incident

“Everybody has a plan to fight me until they get hit.”

– Mike Tyson

19

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?

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

21

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.

BP Oil Spill / Deepwater Horizon Incident

22

BP Oil Spill / Deepwater Horizon Incident

23

24

E&P Contracts

GENERALSERVICES

ANADARKOAS OPERATOR

NON -OPERATORS

- OFFSHORE - ONSHORE

- SURFACE USE AGMNTS. - PROFESSIONAL SVRS. - CONSULTANTS - EQUIPMENT LEASE

- CONSULTANTS - SEISMIC - PROCESSING

- VESSELS - AIRCRAFT

- ENGINEERING - FABRICATION - CONSTRUCTION - INSTALLATION

JOA

MSC DRILLING CHARTER

G&G OTHER CONSTRUCTION

FARM-OUT

HOST COUNTRY/ MINERAL OWNER

CONCESSION/LEASE

PRODUCERS(SUB-SEA)

PHA

Synthetic Lease – Windstorm Insurance

25

26

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.

27

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 losses2. Only $1B related to deepwater structures

a) $0.4B relates to collapse of drilling packagesb)$0.3B relates to design flawc) $0.2B relates to different design than our 3 structuresd)net losses = $0.1B

3. Estimated value of GOM structures ~ $21B4. 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)

28

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

29

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

30

Synthetic Lease – cont’d

Other considerations:

1. Anadarko is investment grade (S&P BBB-) and can easily self-insure $200MM.

2. Arbitrator (“Nationally-recognized Insurance Expert”) was an insurance broker

3. Arbitrator’s decision was not sealed

31

Anadarko Risk Bearing Capacity Study

31

32

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

33

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 strategies33

34

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– Investment grade levels for

each key metric

• 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

34

35

Impact of Pricing/Production Variation on Debt/Proven Developed Reserves

2008 Threshold

2008 Breach Point

2008 Forecast

Deb

t/P

DR

Confidence Level (%)35

36

Impact of Pricing/Production Variation(RCF-Sustaining Capex)/Debt

(RC

F-S

usta

inin

g C

apex

)/D

ebt

Confidence Level (%)

2008 Threshold

2008 Forecast2008 Breach Point

36

37

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

38

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

39

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 re-

classification, and damage assumptions generated through collaborative effort

• This information was used to generate exposure based parameters for frequency and severity

39

40

No Insurance Insurance

Total Cost of Risk Comparison• The current insurance program provides significant

financial protection against catastrophic event scenarios

Tail protectionprovided by

current program

Tot

al C

ost

of R

isk

Confidence Level (%) 40

41

Portfolio Impact of Risks

Commodity Only All Risk

(RC

F-S

usta

inin

g C

apex

)/D

ebt

Confidence Level (%)

2008 Threshold

“All Risk” includes insurance programs

41

42

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

43

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)

43

44

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