risk management & insurance bauer college/uh feb 2010
TRANSCRIPT
Risk Management & Insurance
Bauer College/UHFeb 2010
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Agenda
Risk Management – functions and process
Anadarko’s Risk Management Presentation
Risk Bearing Capacity Study
Synthetic Lease – Windstorm Insurance
Other Risk Management Issues
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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
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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!
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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.
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Risk Management Process
IDENTIFYRISKS
MONITOR FORCHANGE
ASSUME
TRANSFER BYINSURANCE
TRANSFER BYCONTRACT
CONTROL
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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).
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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
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Risk Management Process
IDENTIFYRISKS
MONITOR FORCHANGE
ASSUME
TRANSFER BYINSURANCE
TRANSFER BYCONTRACT
CONTROL
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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
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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
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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
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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)
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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)
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Risk Management Process
IDENTIFYRISKS
MONITOR FORCHANGE
ASSUME
TRANSFER BYINSURANCE
TRANSFER BYCONTRACT
CONTROL
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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 ?
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Anadarko Risk Bearing Capacity Study
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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
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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
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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– 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
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Impact of Pricing/Production Variation on Debt/Proven Developed Reserves
2008 Threshold
2008 Breach Point
2008 Forecast
Deb
t/P
DR
Confidence Level (%)21
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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
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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
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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
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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
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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
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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
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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
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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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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.
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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)
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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
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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
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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
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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