Transcript McDermott International - March 29, 2012

The Risk Management Function
Presented to The University of Houston
Bauer College of Business
McDermott International
March 29, 2012
© 2010 McDermott International, Inc. All rights reserved.
Cautionary Statements
In accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995,
McDermott cautions that statements in this presentation that are forward-looking and provide other than
historical information involve risks and uncertainties that may impact actual results and any future
performance suggested in the forward-looking statements. The forward-looking statements in this
presentation speak to conditions as of the date of this presentation and include statements regarding
backlog, to the extent backlog may be viewed as an indicator of future revenues, our expectation that oil
demand will grow until 2015, our plans for investments in certain markets, our expectation that revenues in
2012 and beyond will be solid, our belief that market conditions are improving, our intentions to not sell
equity, the timing, scope and execution of recent awards and the timing of delivery and technical
specification of the NO105 and planned upgrades to the NO102. Although McDermott’s management
believes that the expectations reflected in those forward-looking statements are reasonable, McDermott can
give no assurance that those expectations will prove to have been correct. Those statements are made based
on various underlying assumptions and are subject to numerous uncertainties and risks, including, without
limitation, disruptions experienced with customers and suppliers, the inability to retain key personnel and
adverse changes in the demand for oil and gas. Should one or more of these risks or uncertainties
materialize, or should the assumptions underlying the forward-looking statements prove incorrect, actual
outcomes could vary materially from those anticipated. For a more complete discussion of these and other
risks, please see McDermott’s periodic filings with the Securities and Exchange Commission, including its
annual report on Form 10-K for the year ended December 31, 2011. We do not undertake any obligation to
update the forward-looking statements included in this presentation to reflect events or circumstances after
the date of this presentation, unless we are required by applicable securities laws to do so.
2
Presentation Overview
 McDermott Company Information
 Risk Management Overview
 Risk Identification
 Examples of Risk Treatment
 Insurance Programs
 Captives
 Inside a Risk Management Department
 Post Macondo
 Enterprise Risk Management (ERM)
3
McDermott International, Inc.
 Leading engineering and construction company
 Exclusively focused on offshore upstream oil & gas
 Engineer, procure, construct and install (“EPCI”)




Front-end design and detailed engineering
Overall project management and procurement services
Construction and installation of offshore production facilities
Installation of pipelines and subsea systems
 Worldwide with approx. 15,000 employees
 Only American headquartered company with EPCI services on
global scale
 Over 90% of 2011 revenues derived outside the U.S.
 Long-term relationships with energy customers
 Primarily national (“NOCs”) and super major oil & gas companies
 Absolute commitment to safety, quality and
ethical behavior
Source: Engineering News-Record 2010 Sourcebook
4
Key Clients
Majors
Independents
NOC’s
5
Global Presence in Major Oil & Gas
Regions


Operating in about 20 countries
Engineering offices: 5 (+1 JV)
 Construction facilities / marine bases: 4 (+1 JV)
 Vessels:
 7 heavy-construction derrick lay barges
 4 multi-functional; 1 subsea; 1 lay barge
EPCI is a Unique Delivery Platform
Engineering
Procurement
Construction
Installation
Project and Risk Management
700+ engineers globally
300+ dedicated employees
Strategically located facilities
Dedicated installation fleet
 Offices in 5 locations worldwide
Capabilities / Services:
 Aggregate area: Over 1,000 acres

 FloaTEC, LLC 50:50 JV with
Keppel FELS
 Largest deck to date 23,000 tons
Capabilities / Services:
 Negotiating, purchasing,
transporting, inspecting, inventory
control and quality assurance
 Studies & conceptual designs
 Global sourcing
 Front-End Engineering & Design
(“FEED”)
 Deep local knowledge
 Detailed engineering & design
 Transportation & installation
engineering
 Strong supplier relations
 Largest jacket to date 38,000 tons
Capabilities / Services:
 Topsides & onshore modules
 Jackets, piles & compliant towers
 TLPs, SPARs, FPSOs
Capabilities / Services:

Single & dual heavy-lift

Floatover install

Various diameter pipeline install
 S-Lay, J-Lay, Flex-Lay and
Reel-Lay
 Subsea production systems
 Standardized fabrication
processes & procedures
Global construction fleet, multifunctional and subsea support
vessels

Dynamic positioning & mooring
systems

Subsea installation support

Repair & salvage
Providing Fully Integrated, Single-Source Solutions For Worldwide Offshore Development
7
Spectrum of Offshore Infrastructure
McDermott’s leadership covers shallow to the deepest water
(Graphics compliments of Offshore Magazine; 2005 Offshore Oil & Gas Industry Deepwater Solutions for Concept Selection)
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Three Primary Market Segments
Fixed Solutions
Jacket – Tripod - CPT
Topsides
Design
Conventional
Infrastructure
(Shallow)
Subsea System
Architecture
Marine Construction
Pipelay
Intervention
IMR
Floating Solutions
TLP - SPAR - SEMI
FPSO
Topside Modules
Hull Alliance
Rigid
Riser Systems
Subsea Structure
Design/Fabrication
Top Tension
Riser Systems
Steel Catenary
Riser Systems
Flexible
Riser Systems
Pipeline Design &
Installation Analysis
SURF
Subsea Infrastructure,
Umbilicals, Risers & Flowlines
Flow Assurance
Downhole -to- Shore
Subsea Technologies
9
Floating
Production
Systems
(FPS & FPSO)
Field Layouts
Procurement
Services
Angel Project
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Strategy in Action – Newest Additions to our Fleet
North Ocean 105
North Ocean 102*


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Rigid or flex-lay pipelay capability
7,000 MT carousel payload
Two 120 MT tensioners
140 MT abandonment and recovery (A&R)
system, capable for pipe abandonment or
subsea lowering to 10,000-foot water depth
 250 MT active heave compensation (AHC)
main crane, for subsea lifts and construction
supports
 Dynamically positioned and fast transit
* Includes planned December 2011 upgrades



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Rigid or flex-lay pipelay capability
2,700 MT vertical reel payload
Pipelay tower with 400 MT tensioner
450 MT & 150 MT abandonment and recover
(A&R) system, capable for pipe abandonment
or subsea lowering to 10,000-foot water depth
 Two portside active heave compensation
(AHC) main cranes, 100 MT and 400 MT, for
subsea lifts and construction supports
 Dynamically positioned and fast transit
 Expected availability in summer 2012
11
Recent Operating Performance
Revenues
Operating Income
($MM)
4,000
($MM)
3,098
3,445
3,282
3,000
400
279
300
2,404
2,000
200
1,000
100
251
107
0
0
2008
2009
2010
2008
2011
Diluted Earnings Per Share
2009
2010 [1]
2011 [2]
Historical Backlog
($)
($MM)
1.20
1.00
1.00
6,000
0.88
5,000
0.80
0.64
0.60
0.40
315
5,039
4,404
4,000
3,879
3,261
3,000
2,000
0.26
0.20
1,000
0
0.00
2008
2009
2010 [1]
2011 [2]
2008
2009
2010
2011
____________________
Note: Presented on the basis of continuing operations.
[1] Includes approximately $46 million ($0.20 per share) of non-cash impairment & related expenses
[2] Includes approximately $162 million of project charges, $5.5 million of non-cash impairment charges and $35 million of non-operating benefits
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Strong Backlog Provides Visibility
(as of December 31, 2011)
Backlog by Type of Contract
Backlog by Estimated Recognition Year
2014+
5%
2013
12%
Other
29%
Fixed Price
71%
2012
83%
Backlog by Geographic Region
Backlog by End Market
Atlantic
18%
Asia Pacific
36%
Middle East
46%
____________________
Note: Figures above do not include the backlog of the FloaTEC joint venture. Presented on the basis of continuing operations.
Floating
Structures
3%
SURF and
Charter
22%
Conventional
Structures
75%
13
Financial Position (12/31/11 or as shown)
(M = US$ million) (B = US$ billion)
US $
Cash & Investments
731.8 M
Available Credit
643.9 M
Debt
93.7 M
Equity - Book Value
1.7 B
Equity - Market Cap (2/21/12) 3.2 B
14
What We Do – Jacket Loadout
15
Risk Management Overview
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Risk Management Process
Risk Identification
Risk Analysis
Review
Design Risk Management Strategy
Risk Avoidance
Loss Control
Risk Financing
Captives
Transfer - Ins
Finite ins, retros, etc
Transfer - Contract
Go bare
Debt
Implement Strategy
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Risk Identification - Attitude
The view of some:
“ But in all my experience, I have never been in any
accident…of any sort worth speaking about. I have
seen but one vessel in distress in all my years at
sea. I never saw a wreck and never have been
wrecked nor was I ever in any predicament that
threatened to end in disaster of any sort.”
-E.J. Smith 1907
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Risk Identification
 Your own Experience (trailing):
 Prior losses
 Near Misses
 Your Own Experience (leading)
 Questionnaires/interviews (labor, staff)
 Audits (e.g., safety, property, financial controls)
 The experience of others (leading – at least to you):
 Trade/industry peer groups (e.g., CII, IMCA)
 Subject matter experts (e.g., surveyor, lawyers)
©
 Risk Wellness Assessments
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Risk Wellness Assessments
Deliverables:
Risk Management Process
Executive Summary
RWA Report
Action Item Registry
Risk Wellness Assessment
Prevention Review
Coverage Evaluation
20
Risk Identification
Other Contractor
People and Property
McD People and
Property
Work in Progress
The Environment
Company People
and Property
21
Risk Identification – Sometimes Difficult
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Risk Analysis
 Think in terms of frequency and severity
 How often? What is the likelihood?
 How much? What is the impact?
 Tools for analyzing risk include:

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

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

Trend Lines
Probability Distributions
Benchmarking databases
Probable Maximum Loss/Maximum Possible Loss Analysis
Simulation and models
Claims and near miss reviews
Legal analysis of exposures
Mapping
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Risk Analysis – Risk Map
1
2
3
4
5
6
7
8
9
10
C a ta stro p h e
9
10
10
11
4
2
9
1
8
3
7
C h a lle n g e
5
6, 13
6
8
5
12
4
3
D istra ctio n
C onsequence
7
2
• Chart the risks
identified in
interviews and
questionnaires
• Where should we
start with loss
control?
• How much should
we be willing to
spend (not relevant
if HSE&S)
1
Im p ro b a b le
P ro b a b le
C e rta in
L ik e lih o o d
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Risk Treatment Methods
 Avoidance
 Do not engage in task/activity
 Drastic step as revenue = zero
 Loss Control
 Steps to decrease frequency and/or severity
 Examples are safety systems, sprinklers, containment systems
 Components of an effective loss control system
 Management commitment – it all starts (and can end) here
 Procedures - Practices/policies that reduce risk
 Training – It doesn’t matter if no one knows
 Behavior – Need to have rewards and accountability to drive the
correct behavior
 Communication – Need to talk and walk, share results and updates,
etc.
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Risk Treatment (continued)
 Financing (not mutually exclusive)
 Go bare
 Take as current expense when loss occurs
 Can use cash or debt to finance
 Self finance through:
 Reserves
 Captives
 Transfer
 Pure/guaranteed cost insurance
 Contractual indemnity from third party
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Risk Categorization for Financing
Low Freq
High Severity
High Freq
High Severity
Severity
Transfer/Finance
via Insurance
Avoid
Low Freq
Low Severity
High Freq
Low Severity
Cost Effective Loss
Control or Ignore
Retain and
Finance via Captive
Frequency
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Risk Financing – The Basics
Limits - $$$$$$
Limits based on:
• Benchmarking
MII Captives:
• Calculated exposure
• Allow us to avoid “dollar
• Historic losses
swapping” with insurers
• Market capacity
• Allow us to control our claims
• Cost
• Risk transfer from OUs;
Captives accept risk for
a fixed
Low
premium with no adjustments
Frequency
• Premiums based on actuarial
Transfer/Finance
High
analysis, market conditions,
Via Insurance
and risk factorsSeverity
Transfer point determined
actuarially and by insurance
market’s appetite for risk
Risk Retention
Financed Via Captives
High
Frequency
Low
Severity
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What We Do – Jacket Launch
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Other Contractor People
and Property
• Contractual indemnity
with customer and/or
contractor
• Corporate liability
program excess of
captive funded SIR
• Perhaps project specific
CGL
Risk Treatment – Real Life
McD People and
Property
•Contractual indemnity
•Backed by naming
and waiving to
relevant insurance
policies (liability, hull,
etc.)
•Extensive loss control
Work in Progress
•McD indemnity from
customer
•Also CAR coverage
•Maybe McD DIC CAR
•Extensive loss control
The Environment
• Clean up coverage
•Liability Coverage
•Extensive loss control
Company People
and Property
•Customer Indemnity
•If not full, project
CGL
•Corporate liability
excess captive
funded SIR and
excess project cover
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32
33
34
What We Do – Deck Floatover
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Piracy
Not Really…
Modern day Pirates (Pictures of
Pirates in the Gulf of Aden)
36
Piracy Reports
Vessel Incidents (Right)
Piracy Heat
Map of
potential
encounters.
(Left)
37
Risk Treatment - Piracy
 Risk Identification and Assessment:
 London Offshore Consultants to assess vessel readiness ($30K)
 Control Risk to assess security plan, vessel, & intended route ($20K)
 Naval architect to verify hull integrity ($10K)
 Medical assessments of riding crew ($32K)
 Risk Management:
 Change tow route to decrease racking stress ($200K)
 Add emergency tow gear, new damage control equipment, and enhanced crew
safety equipment (e.g., new survival suits) ($70K)
 Continuous Wilkens weather forecast($4K)
 Damage control training for crew and add welders to riding crew ($10K)
 De-mob crew prior to Gulf of Aden ($200K direct and $100K increased tow time)
 Guys with guns ($400K)
 Total cost: > $1,100,000 plus internal cost
 Incidents: Zero
38
Convoy through the Gulf of Aden (March 2011)
Marshal-5 (right) and Marshal 1
(below) providing escort duty to
McDermott’s Agile Sea during
her transit of the Gulf of Aden.
Pictures taken from the bridge of
the Agile Sea.
39
The Hardening of the Agile Sea
McDermott fortifies its vessels on top of hiring
security contractors to ensure a high level of
security has been reached.
40
Insurance: Because Loss Control Does not Always Work
41
Insurance: Because of Ingenuity….
42
Risk Treatment – Role of Insurance
 The view of some (per Cecil Beaton):
Americans have an abiding belief in their ability to control reality
by purely material means... airline insurance replaces the fear
of death with the comforting prospect of cash.
 McDermott’s (current) view:
 Use only to finance low frequency, high severity losses
 The less you use it, the happier everyone is
 Growing bias towards retaining risk
 Down Low – avoid dollar swapping with insurers
 Quota share – skin in game
 Invest in loss control - not in insurers
43
Excess Liability and Captive Program
$90,000,000
$80,000,000
$70,000,000
1992 cost of $24.04
per $1K revenue
2011 cost of $4.25 per
$1K revenue
Difference of $68.2M
E xc e s s T ra ns f e r P re m ium s
C a pt iv e P re m ium
2 0 0 8 C a pt iv e P ro gra m s
E xpe ns e s & <$ 2 M M R is k
T ra ns f e r
$60,000,000
HIGH $ 82.2M
$50,000,000
2011 $ 14.6M
$40,000,000
$30,000,000
$20,000,000
$10,000,000
$0
44
($10,000,000)
Insurance Programs



Diversity of MII’s operations drive diversity and complexity of
insurance programs
 Currently approx. 32 different insurance policies in place
 Most are placed at the McD level on behalf of it and its subs
 Cumulative annual premium spend of approx. $20M for risk
transfer
 Also self finance SIRs on most programs through captives with
annual “spend” of approx. $8M
Tendency to be very conservative
 Higher limits vis-à-vis peers
 Very stable markets with focus on long term relationships
 Conservative reserving for captives
Lockton is our universal Broker
45
Synopsis of Major Insurance Programs
Limits
Cost
Liability/Third Party
Property/First Party
Primary
Casualty
Captives finance most workers comp, auto and general liability up to
attachment point of excess programs
$2M
$8M
Directors &
Officers
Protects D’s & O’s and the Company for “Wrongful Acts “committed in
fulfilling duties
$165M - side A
$115M - Side B
$1.4M
Employment
Practices
Protects against claims by employees for discrimination, sexual
harassment or other employment related allegations
$15M xs &
$15M
$66K &
$108K
Fiduciary
Liability
Protects against breach of fiduciary duty claims in regards to Company’s
sponsored Employee Benefit Plans
$40M
$192K
Aircraft/
Aviation
Non-owned for chartered aircraft
$10M
$121.6 K
Excess
Liability
Excess coverage on General Liab; Auto Liab; Employers Liability, certain
Marine Insurance (e.g. MEL, Wreck Removal, P&I), Non – Owned
Aircraft Liab
$535.75M
$5.97M
Terrorism
Separate terrorism liability placement
$100M
$230K
Secunda P&I
Club
Covers vessel related risk including crew liability, vessel liability, and
wreck removal
Circa $7B
$710K
Global
Property
Covers all risks of direct physical loss or damage from any external
cause, except as excluded or limited (e.g., flood and named windstorm)
$250M
$1.2M
Marine
Insurance
Covers physical loss or damage to Hull or Contractors Equipment; loss of
hire, and other incidental marine risks (e.g., Lift/Loading Risk;
Construction/Installation)
Fleet value
$1B
Plus LOH & ROW
$7.6M
Cargo
McD programs covering loss or damage to shipments
Terrorism
Separate property coverage for terrorism losses
As declared
$200M
$212.8K
Example: EPL Limit Benchmarking – This allows us to price against the Market to
make sure we are getting accurate pricing from insurers and the market.
47
Insurance Industry: Market Participation
 London Market
 Casualty Program
 Marine Program
 Property Terrorism
48
Insurance Industry: Market Participation
 Domestic Market
 Financial Products
 Property
49
Insurance Industry: Market Participation
 Bermuda Market
 Excess Casualty
50
Captives
• Captives used to fund self-insured retentions for WC, General Liability,
and Auto Liability
• Max per occurrence $2mm
• Annual “premiums” total $8mm
• Consolidated captives for: decrease admin cost, and increase ability to
retain risk
Captive Benefits
• McD makes almost all claim decisions
• Pre-fund losses (through actuary) so premium can be invested, Investment
income helps to defray claim costs
• Allows us to retain risk in hard markets
• Favorable tax treatment (e.g. Bermuda)
• Fewer regulatory restrictions and better access to reinsurance
• Possible accumulation of cash reserves
51
Captives Cont.
Fronting Insurer
• Captives typically are not admitted insurers by states. Therefore, a
fronting insurer is needed to:
• Provide evidence of Insurance
• Administer and Pay claims (later reimbursed)
• May or may not accept risk of claims at certain levels
How do McDermott’s Captives Work?
• ACE (our Fronting Insurer) agrees to evidence coverage to
employee’s and third parties above a deductible and up to a limit
• ACE also pays claims and is reimbursed the amounts paid within
McD’s Deductible
• The captives are funded by the data from analysis done by 3rd party
actuaries and industry trends
• These use law of large numbers and macro trends, not individual
claims
52
Be Careful What You Buy
A Case Study in Risk Retention
 Historically, and with the exception of domestic GL liability,
we transferred through insurance number of certain
casualty risks below $2M
 For example, we bought:
 Auto liability cover above $250K domestic and $100K
foreign
 Foreign GL cover above $1.5M
 Workers Comp above $1M non-Ohio and $750K Ohio
53
A Case Study in Risk Retention
2,500,000
ACE or London X/S
2,000,000
Dollars
1,500,000
1,000,000
500,000
0
Ohio W/C
Non Ohio W/C Domestic Auto
Domestic GL
Retention
MEL
Foreign GL
Foreign WC
Foreign Auto
Transfer
54
Be Careful What You Buy
 The issue: from 1999 through 2008, we have paid
approx. $18M in premiums to transfer these risks,
during which time insurers have paid out approx.
$1M in claims
 Total of 3 losses with 2 of them very minor and one serious
 Net underwriting profit of about $17M or $1.9M per year
 Calculations do not include time value of money which
would bolster profits given the delays in pay out on claims
 CIRM proposed we retain these risks in the captives
rather than transferring them
 Significant savings to company since the change
55
Inside a Risk Management Department
56
Risk Management Group
57
Year over Year Insurance Cost
• We need to track how we are doing as stewards of the
Company’s resources
• Here we look at insurance cost in relation to the amounts
of coverage we are buying, or our “Rate per Mill”
$35,000,000
8,349
$9,000
7,930
$8,000
$30,000,000
$7,000
Marine Package
$6,000
Other-Cargo, EPC, Air…
$5,000
FinPro
5,766
$25,000,000
4,875
$20,000,000
5,115
4,664
3,959
$15,000,000
$4,000
$3,000
$10,000,000
Property
Excess Liability
Primary Risk Transfer
Captive
$2,000
$5,000,000
$1,000
$0
MII Corp
Cost/Limits
$2005
Prem. ($mm) 23.6
2006
2007
2008
2009
2010
2011
28.1
26.4
25.4
29.4
28.6
30.1
Rev. ($B)
1.2
1.6
2.5
3.8
3.4
2.4
3.45
Limit ($B)
2.83
3.19
5.09
5.86
5.89
6.0
6.6
58
Premium per $1K of Revenue
• Here we look at insurance cost in relation to our revenue
• It shoes an uptick in our cost of insurance per $1K of
revenue because our insurance cost we basically consent
while our revenue decreased
• We could have purchased less coverage but elected not to
$35,000,000
$25.00
Property
$30,000,000
$20.00
$19.07
$25,000,000
$15.76
$20,000,000
$15.00
Other - Cargo, EPC, Air
FinPro
$12.00
$15,000,000
Marine Package
$11.66
$7.48
$10,000,000
$10.00
$8.87
Primary Risk Transfer
$7.67
$5.00
$5,000,000
Excess Liability
Captive
MII Corp
$0
$2005
2006
2007
2008
2009
2010
Cost Per $1000 of Revenue
2011
59
Claim Analysis
 MII total Liability claims:








Largest Single Claim*
$2,000,000
2005 – 46
2006 – 7
2007 – 20
2008 – 10
2009 – 5
2010 – 0
2011 – 4
2012 YTD – 1
$1,800,000
$1,600,000
$1,400,000
$1,200,000
$1,000,000
$800,000
$600,000
 Percent of Claims since 2000 below*:



$250K – 97.78%
$500K – 98.33%
$1M – 100%
60
$400,000
$200,000
$0
* Based on actual cost or current reserve
Post Macondo
61
Macondo Well Insurance Market Issues
 Aggregation. The accumulation of Insureds at one location
was much greater than insurers believed. This created
significant concerns because multiple Insureds being brought
into the same loss could result in catastrophic global market
limit erosion. For example, just the key participants in the
Macondo Well Incident had insurances available of
approximately $3 billion including Operators Extra Expense
and General Liability. BP was self-insured.
62
Macondo Well Insurance Market Issues Cont.
 Contracts. Almost immediately, the Operator (BP) began
posturing that the Drilling Contractor (Transocean) should be
responsible for pollution resulting from the Control of Well
event. This, for the most part, goes against common
indemnity agreements between operators and drillers in the
energy industry. If the indemnity was ruled void, the
protection insurers believed existed for service contractors
would become non-existent and change how business has
been done in the energy industry forever.
63
Macondo Well Insurance Market Issues Cont.
 Loss Potential. Before the Macondo Well Incident, insurers did not
consider that such a large loss could occur. The Macondo Well
Incident became the largest accidental marine oil spill in the history of the
energy industry. The explosion killed 11 men working on the platform,
injured 17 others and released about 5 million barrels of crude oil. BP has
approximately $37 billion budgeted for spill-related expenses.
 Post the Macondo Well Incident, the liability market for offshore
Operators, Drilling Contractors, and Service Contractors saw rate increases
between 20% to 100%+ on average. Some had even higher increases
depending on their loss history and how close they were to the Macondo
Well Incident.
64
McDermott “IS NOT”




A Drilling Contractor
An Operator/Non-Operator of oil and/or gas wells
An Owner or Operator of pipelines
An Over-Hole Service Contractor i.e. Well Completion,
Casing, Cementing, Fracturing, Workover, etc.
 A designer, manufacturer or servicer of Production
Equipment. i.e. BOPs, SSSCVs, etc.
 Commonly operating on or adjacent to any live wells
 Commonly operating with other contractors on
location
65
McDermott “IS”
 A Marine Engineering and Construction Contractor
 Focused 95%+ internationally with minimal exposure
in the Gulf of Mexico
 Willing to have “skin in the game” as evidenced by
McDermott’s Risk Retention and NO paid claims to
Underwriters during the past 10 years for CGL, EL,
MEL, or AL
66
Instances in last 5 Years Where We Worked
Adjacent to Live Well*
Instances

Esso KTT Project – Work conducted adjacent
to producing platforms

Su Tu Vang – Removal/Replacement of
drilling template, stabbed a jacket over 2 live
wells.

ARAMCO Karan – Installation of jackets and
piles with drilling rig

Exxon Mobil AKG 1&2 – Post completion hook
up on live wells

Ras Gas Phase 1&2 – Post completion hook
up on live wells

ADMA Project – Shutdown work adjacent to
production platform

Platong Project – Set up adjacent to
production platforms and LQs

PV Gas Pipeline project – Laid pipeline
adjacent to live production platform

PM – CAA Bunga Tulip A Project – Offshore
installation work
Risk Treatment

Every time had a consequential damage
waiver

8 times - indemnity from customer for
pollution losses from well (either ground up
or excess of a reasonable cap)

5 times bought project specific CGL
coverage
* Out of about a total of 170 contracts;
Not scientific but no others known
67
McD People and
Property
•McD took its people
and property
•Backed by naming
and waiving of
Customer Group to
relevant insurance
policies
Work in Progress
•US$300K during fab;
US$1mm offshore
•Customer waiver and
indemnity above this
•BAR
68
Conoco Indonesia Kerisi
Pollution
•McD took emanating
from our vessels
•Customer indemnity all
other excess $1mm
Other Contractor People
and Property
• Not originally part of
“Customer Group” but did
enter into mutual hold
harmless agreement for:
• People
• Property excess of US
$350mm
• However, we required
Customer indemnity
and placed project
specific $350mm CGL
Customer People
and Property
•Customer took its
people
•McD first $1mm for
existing property
Enterprise Risk Management
69
What Do We Seek to Accomplish and Why?
 Question: What do we want to achieve with our ERM Process?
Why do this?
 Answer: The Company wants to anticipate surprises and avoid
them or lessen their impact so that we achieve our goals; we need
to reduce uncertainty
 External Drivers: Credit rating agencies, outside auditor, customer
requirements, etc.
70
McDermott ERM Mission Statement
To facilitate achievement of Company goals through
the creation of a sophisticated risk culture that
systematically identifies and appropriately treats risk
at all levels of the Company
71
A Few Enterprise Risks We Face











Revenue and Income Volatility
Operational Disruptions
Project Management
Financial Controls
Supply Chain
Information and Technology
Geopolitical
Strategic
Market and Customer
Regulatory and Environmental Compliance
Many others
Controlled,
not controlled,
or uncontrollable?
Which to accept
and which to avoid?
Who owns risks?
72
Operational Risks
Development
Supply
Chain
Discovery
Sourcing
• Quality
• Security of Supply
Patents
Patents Diversity
• Sourcing
• Attrition
Attrition Certification
• Supplier
• Tariffs
• Ethical Production
• Political Issues
• Regulatory Adherence
• Port Security
• Transportation Costs
• Product Tampering
• Labor Shutdowns
• Terrorism
 Partnering
 Customer Needs
 Project Lead Time
 Country of Origin Political Issues
Manufacturing
Production
• Labor Relations
• Transportation Costs
• Warehousing
• Product Safety
• Logistics
• Fleet Security
• Product Tracking
• Inventory Control
Marketing
Marketing
• Competitors
• Brand Protection
• Reputation
• Customer Trends
• Emerging Social
Issues
 Sales & Marketing
Practices
 Product Pricing
 Site Acquisition
Sales
Sales
• Transaction Control
• Turnover
• Labor Relations
• Compliance Execution
• Regulatory
• Facility Closures
Customer Needs
 Media Pressures
 Government Relations
Cross-Organizational Risks
• Leadership
Human
• Leadership
Human Capital
• Decision
- making
• Decision
Making
Resources
• Communication
• Communication
• Skills/Competencies
• Skills/Competencies
• Accountability
• Accountability
Change Readiness
• •Change
Readiness
Hiring/Retention • Empowerment
Global Diversity • •Hiring/Retention
•• Diversity
• Empowerment
•
Human
Rights
•• Culture
Culture
• • Succession
Plans
• Human Rights
Succession
Plans
Finance
Finance
• Loss
• Treasury
Operations
• Treasury
Operations
• Loss
of of
Revenues/Earnings
•
Insurance
Revenues/Earnings • Insurance
•
•
•Capital
Market Allocation
•Tax
Tax Payments
Payments
••
••
Integrity
Integrity
• Reputation/
Industry &• Ethics/Social
• Ethics/Social
• Reputation/
Industry
Company
Responsibility
• Responsibility
Company &
•
•
•Conflict
Conflict of
ofInterest
Interest
•Fraud
Fraud
• Lack
of Business
Process • Organizational Model
• Lack
of Bus
Process
• Organizational Model
• Lack
of SOPs
• Lack
of SOPs
• Change Response
ActsActs
•• Unauthorized
Unauthorized
• Consistency
•• Applications
Applications
of of
Lessons Learned
Lessons
Learned
• Business
Model
• Business
Model
Strategic Plan
• •Strategic
Plan
Execution
• Execution
• Political/ Government
Environmental Health
• •Environmental,
and Safety
Health,
and Safety
• SEC/ Disclosures
• Health Authority
• Local/Federal
• SEC/ Disclosures Reporting
• Reporting
Process
Process
Strategy
Strategy
Regulatory/
•
Regulatory
Compliance
•
Compliance
Regulatory
Regulatory/Legal •
Legal
•
Information
Information
•
Technology
Technology
• Strategic
Plan
• Strategic
Plan
Development
• Development
• Compliance
Network/ • Governance/
• Governance/
Compliance
Network/
Infrastructure
Oversight
Infrastructure
Oversight
• Product Liability
Product Liability
• Stakeholder
Class
• Stakeholder
Class
Actions
• Actions
Business
Continuity
Security/Access
• Data
Security/Access
• Business
Continuity • Data
Data
Integrity
•
Reliability
• Data Integrity
• Reliability
• Physical
Security
Miscellaneous
• Physical Security
Miscellaneous
• Crisis
Management
• Crisis Management
• Change Response
•
•
•Regulatory/Legal
Regulatory/Legal
Controls
Controls
Availability
• • Availability
Capacity
• • Capacity
• •Media
Media
Financial
Reporting
• Cash Flow
• Liquidity
Financial
Reporting
• Liquidity
• Cash Flow
Debt
Rating
• Currency
Debt Rating
• Currency• Credit • Credit
• Operational Execution
• Political/ Government
• Customer Damage Lawsuits
• Interest Group Lawsuits
•• Infrastructure
Infrastructure
•• Ecommerce
E-commerce
• Knowledge
Management Management
• Knowledge
• Management
Reporting
• Management
Reporting
• Shareholder Relations
• Shareholder Relations
73
2011 survey results
The risk map utilizes impact and likelihood scores to depict which risks have
high inherent risk and may require further management attention
10.0
9.0
O
8.0
T
Major
7+
E
Impact
K
C
R N
7.0
D
H
I
S
A
B
L
F
J
Q
M
P
6.0
Moderate
5
5.0
U
G
4.0
Minor
3
3.0
2.0
2.0
3.0
Unlikely - 3
74
4.0
5.0
6.0
Likely – 7+
Possible - 5
Likelihood
7.0
8.0
2011 survey results
Management gap analysis provides insight into which risks may not be receiving sufficient
management attention by examining residual risk.
Management
effectiveness
Inherent risk
Catastrophic 9
Major 7
Moderate 5
Minor 3
Minimal 1
9
9 9 Extremely effective
8
8
7
7 7 Strong
6
6
5
4
5 effective
4
3
3
2
2
1
1
0
0
5 Moderately
3 Limited
1 Minimally effective
Management
Effectiveness
Inherent Risk
2011 Focus Risk
Inherent risk
7.7
7.3
7.5
8.1
8
7.1
4
8
8
7
7.5
7.4
6.5
7
9
6
7
7
8
8
5 Inherent risk
ME
5.4
Gap
2.3
6.3
4
4.1
7
4.6
5
6.4
5
3.7
2.5
5.4
5.5
7
8
6
5.3
6
5
7
5 ME
1
3.5
4
1
2.5
1
1.6
3
3.3
5
2
1
0
1
0
1.7
1
3
1
0 Gap
Gap analysis compares the relationship between inherent risk and current risk management effectiveness to determine
if a risk is over- or under-managed. Large positive gaps indicate potential under-management and the need to develop a
risk response
75
McDermott Risk Management and
Insurance Department
76