Risk Management & Insurance Bauer College/UH Feb 2010.

Risk Management & Insurance

Bauer College/UHFeb 2010

2

Agenda

Risk Management – functions and process

Anadarko’s Risk Management Presentation

Risk Bearing Capacity Study

Synthetic Lease – Windstorm Insurance

Other Risk Management Issues

3

Anadarko Petroleum Corp (APC)

One of the largest independent oil and gas exploration and production companies

$32 B in market cap

2.3 billion barrel of oil equivalent of proved reserves

$9B of revenues, $4B in CFFO

Major areas of operation include onshore US, deepwater Gulf of Mexico, Algeria, offshore West Africa & 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

ANADARKOAS OPERATOR

NON -OPERATORS

- OFFSHORE- ONSHORE

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

GENERALSERVICES

- CONSULTANTS - SEISMIC - PROCESSING

- VESSELS - AIRCRAFT

- ENGINEERING- FABRICATION- CONSTRUCTION- INSTALLATION

JOA

MSC DRILLING CHARTER

G&G OTHER CONSTRUCTION

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

11

Professional Indemnity CoveragesSeptember 12, 2009 - September 12, 2010

50800120_1

Retention:$200,000, except $5MM

for Security Claims

AEGIS$10MM

St. Paul$10MM xs $10MM

AEGIS$10MM xs $20MM

Fiduciary Liability$50MM

Chartis$10MM xs $30MM

AWAC$10MM xs $40MM

Retention:$500,000

Chartis$25MM

Commercial Crime$50MM

Chubb$25MM xs $25MM

Not to Scale

Retention:$5,000,000

Chartis$25MM

AEGIS$25MM xs $25MM

Hartford$15MM xs $50MM

Directors & Officers-$200MM

Zurich$15MM xs $65MM

AWAC$15MM xs $80MM

Liberty$10MM xs $95MM

AIG CAT- Bermuda$25MM xs $105MM

Energy Insurance Mutual$25MM xs $130MM

Endurance - Bermuda$25MM xs $155MM

Chubb$10MM xs $180MM

XL Insurance$10MM xs $190MM

12

Property and Casualty Insurance Program 2009/2010

(1) $1,000,000 deductible plan(2) $25k deductible(3) Limits actually carried are $275MM for GIV’s and $100MM for Citation (vs. “scheduled underlying” shown above)(4) LOPI coverage in respect of Independence Hub onlyEnergy Package: - PD/OEE subject to a $10MM for Interest retention; LOPI 180 days waiting period - Excluding coverage for Named Windstorm (except Excess Liabilities) - Offshore PD/OEE/LOPI subject to an overall $750MM limit and Onshore PD/OEE subject to an overall $250MM limit (except Anadarko Tower/Timberloch Building which is insured on full value basis)

Excess Liability$50MM

XL

Excess Liability$150MM

Energy PackageExcess Liability$15MM / $30MM

AEGIS$5MM

SIR$250,000 $250,000

Marine/Offshore Liability

$100MMOwned

$100MMNon-Owned

$40MMHangarkeep

ers$25 MM

Per. Injury

USAIGAircraftLiability

UK EL AutoLiability

EmployersLiability

Onshore/OffshoreProperty

ScheduledValues

Energy Package

Cargo

AgreedValues

USAIGAircraftHulls

$250MM(100%)AreasIII, IV& V$75MM

(100%)

OEE

Statutory

Limits

ACE

US WC

Statutory

Limits

AIU

Foreign WC

(Voluntary)

ForeignAuto/ELLiability

$2MMAIU

$1MM(1)

ACE

$2MM(1)

ACE

$10MMSouthern

Marine

(2)

$4MMSIR

(3) (1)

$3MMSIR

£5MMAIU

$3MMSIR

Excess Liability$50MM

Argo$2.8M per day

180 days Max

a.o.o.Not to exceed

$500MMa.o.o.

EnergyPackage

AreasI & II

Energy Package

LOPI

$5MMSIR

Onshore General Liability

Excess Liability$50MM

Torus

Excess Liability$100MM

XL

Excess Liability$50MM

OCIL

(4)

$400 MM

13

Property & Casualty Insurance

Property – Replacement Cost Value (ded $10MM For Interest)

Control of Well/Redrill/Pollution – $75MM Onshore / $250MM Offshore (ded $10MM FI)

Third Party Liability – $400MM limits (includes Pollution) (ded $5MM FI)

Aviation Liability – $650MM limits ($250MM primary + $400MM TPL)

Terrorism – full limits Offshore/Aviation/Woodlands 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

KMILL

(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 (except I-Hub)

Political risks

Unauthorized trading

Terrorism – onshore

Hurricane damage for offshore platforms

Tanker Pollution ?

Consequential Damages ?

17

Anadarko Risk Bearing Capacity Study

17

18

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

18

19

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 strategies19

20

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

20

21

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

2008 Threshold

2008 Breach Point

2008 Forecast

Deb

t/P

DR

Confidence Level (%)21

22

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

22

23

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 23

24

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

24

25

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

25

26

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 (%) 26

27

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

27

28

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

28

29

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)

29

30

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.

31

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)

32

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

33

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

34

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

35

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