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Risk Management

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Creditworthiness of JV partners, assignees (rig), PGs, collateral, insurance ... EQUIPMENT LEASE - CONSULTANTS - SEISMIC - PROCESSING ... – PowerPoint PPT presentation

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Title: Risk Management


1
Risk Management Insurance
  • Bauer College/UH
  • Feb 2012

2
Agenda
  • Risk Management functions and process
  • Anadarkos 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
7
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).

8
EP Contracts
HOST COUNTRY/ MINERAL OWNER
CONCESSION/LEASE
JOA
NON - OPERATORS
PRODUCERS (SUB-SEA)
ANADARKO AS OPERATOR
PHA
FARM-OUT
MSC
DRILLING
CHARTER
- OFFSHORE - ONSHORE
- VESSELS - AIRCRAFT
GENERAL SERVICES
GG
OTHER
CONSTRUCTION
- SURFACE USE AGMNTS. - PROFESSIONAL
SVRS. - CONSULTANTS - EQUIPMENT LEASE
- CONSULTANTS - SEISMIC -
PROCESSING
- ENGINEERING - FABRICATION -
CONSTRUCTION - INSTALLATION
9
Risk Management Process
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
  • Workers Compensation Employers Liability

11
Directors Officers Liability Insurance
  • 365MM total limits
  • 100MM ABC coverages
  • 200MM A-side / DIC coverage
  • 65MM A-side IDL coverage (Independent Directors
    Liability)

12
Fiduciary Liability Crime Insurance
  • Fiduciary Liability Insurance
  • 100MM ABC coverage
  • Crime (Employee Dishonesty, Theft, Wire Transfer
    Fraud)
  • 50MM coverage

13
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/Woodland
    s Bldg /25MM sub- limit 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
KMIIL (Captive)
London Insurance (Partners Share and/or APCs
share if mandatory)
Anadarkos Corporate Insurance Package
15
Risk Management Process
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 ?

17
  • BP Oil Spill / Deepwater Horizon Incident

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
  • Liquidity and credit / debt capacity (cash
    credit facility / run rate vendors,
    counterparties collateral requirements, rating
    agencies).
  • Creditworthiness of JV partners, assignees (rig),
    PGs, collateral, insurance requirements.
  • Government-mandated financial responsibility for
    lessees.
  • Utilize long-term rigs and redeploy capital
    during moratorium.
  • Whether deepwater GOM should be part of Companys
    strategy?

20
BP Oil Spill / Deepwater Horizon Incident
  • Issues to reconsider
  • Insurance
  • Available insurance limits (minimum scaling
    versus for interest).
  • Timely issuance of policies.
  • Claims handling if Operator
  • Additional Insured status (Transoceans
    insurance)
  • Coverage issues (non-scaling multiple
    occurrences)
  • Operational
  • Improve pollution response.
  • How involved should a non-operator be in drilling
    plans?

21
BP Oil Spill / Deepwater Horizon Incident
  • Issues to reconsider
  • Service Contracts JOAs
  • Gross negligence and fines penalties in
    JOA and Service Contracts. Recent court rulings
    re enforceability.
  • Rights of non-operator under JOA (indemnify
    Operator, claims-handling, sharing of
    information, participating in key decisions,
    etc.).
  • Force Majeure clause in LT Drilling Contracts.
  • Service Contractors pushing back on pollution.
  • Pollution originating on or above the surface of
    water from spills versus originating from
    owned equipment or hole.
  • Approval process for exceptions.

22
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
  •   

23
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.

24
EP Contracts
HOST COUNTRY/ MINERAL OWNER
CONCESSION/LEASE
JOA
NON - OPERATORS
PRODUCERS (SUB-SEA)
ANADARKO AS OPERATOR
PHA
FARM-OUT
MSC
DRILLING
CHARTER
- OFFSHORE - ONSHORE
- VESSELS - AIRCRAFT
GENERAL SERVICES
GG
OTHER
CONSTRUCTION
- SURFACE USE AGMNTS. - PROFESSIONAL
SVRS. - CONSULTANTS - EQUIPMENT LEASE
- CONSULTANTS - SEISMIC -
PROCESSING
- ENGINEERING - FABRICATION -
CONSTRUCTION - INSTALLATION
25
  • Synthetic Lease Windstorm Insurance

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 contd
  • Commissioned Willis to prepare a report to review
    past offshore GOM losses from hurricanes
    (utilizing its database)
  • Findings
  • Since 1994, offshore GOM structures have incurred
    12B in losses
  • Only 1B related to deepwater structures
  • 0.4B relates to collapse of drilling packages
  • 0.3B relates to design flaw
  • 0.2B relates to different design than our 3
    structures
  • net losses 0.1B
  • Estimated value of GOM structures 21B
  • Plotted past hurricane paths to show that
    Anadarkos deepwater GOM structures have been
    directly exposed to Ivan, Katrina, Rita, Gustav
    Ike with minimal damage (lt 1MM)

28
Synthetic Lease contd
  • Conclusions to Willis Report
  • Burn cost 0.06 per annum (net) or 0.50 per
    annum (gross)
  • Market rate (10) represents 160 times (net) and
    20 times (gross) greater than burn cost
  • Insurance market is not offering hurricane
    coverage for deepwater structures based on any
    sound technical rate approach

29
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

30
Synthetic Lease contd
  • Other considerations
  • Anadarko is investment grade (SP BBB-) and can
    easily self-insure 200MM.
  • Arbitrator (Nationally-recognized Insurance
    Expert) was an insurance broker
  • Arbitrators decision was not sealed

31
Anadarko Risk Bearing Capacity Study
31
32
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

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 APCs major
    risks
  • Develop what if scenarios for catastrophic
    exposures
  • Develop a framework to analyze the benefits of
    alternative risk management strategies

33
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 Breach Point
Debt/PDR
2008 Threshold
2008 Forecast
Confidence Level ()
35
36
Impact of Pricing/Production Variation(RCF-Sustai
ning Capex)/Debt
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
Total Cost of Risk Comparison
  • The current insurance program provides
    significant financial protection against
    catastrophic event scenarios

Tail protection provided by current program
Total Cost of Risk
Confidence Level ()
40
41
Portfolio Impact of Risks
(RCF-Sustaining Capex)/Debt
2008 Threshold
All Risk includes insurance programs
Confidence Level ()
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
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