Transcript HALLIBURTON COMPAMY - Bauer College of Business

“Confidential –Internal Halliburton Use Only. © 2004 Halliburton. All Rights Reserved.”
HALLIBURTON COMPAMY
RISK MANAGEMENT FUNCTIONS
Presentation for
University of Houston, Bauer College of Business
March 23, 2006
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Agenda
Halliburton Company Information
Risk Management & Insurance Programs
Project Case Study
Enterprise Risk Management
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HALLIBURTON COMPANY
Revenues - $20,994,000,000
Employees - approx. 106,000
Headquarters – Houston, Texas
Countries with operations – 100+
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HALLIBURTON Business Segments
Energy Services Group
Drilling and Formation Evaluation
Fluids
Production Optimization
Landmark and Other Energy Services
KBR
Government & Infrastructure
Energy & Chemicals
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Energy Services Group
Digital and
Consulting
Solutions
Drilling &
Formation
Evaluation
Fluid
Systems
$10.9B2
$9.1B2
Production
Optimization
$11.8B2
HAL Market
$1.8B1
HAL Market
HAL Market
HAL Market
Landmark
Sperry
Drilling Systems
Cementing
Production
Enhancement
Halliburton
Project Management
Security DBS
Drill Bits
Baroid
Fluid Services
Completion Tools
Logging
Services
Sources:
1) Halliburton estimates; $ billions
2) Spears & Associates 2004 estimates
WellDynamics
Global ESG Growth Focus Areas
KBR Structure
Government &
Infrastructure Division
Largest government
logistics & services
contractor with premier
worldwide civil
infrastructure
capabilities
Energy & Chemicals
Division
World-class
engineering,
procurement,
construction &
technology capability
focused on upstream
and downstream
markets
Two distinct divisions serving different customers
with streamlined corporate support
KBR Financial Mix
2005 Revenue
2005 Operating Income
(3.2%)
Iraq
$5.4B
G&I
$2.7B
E&C
$2.7B
G&I
$158MM
(5.8%)
Iraq
$172MM
E&C
$168MM
(6.1%)
(X.X%) represents operating income margin
Risk Management
Medical / Disability
Risk Management
Services
Claims
Litigation Practice
Group
Global Insurance
Programs
RMIS
Risk Management
Accounting
Halliburton Risk Management 2005
MEDICAL & DISABILITY
ADMINISTRATION
Return to work
Medical case management
Absence case management
STD, LTD, FMLA
Health care provider management
Medical treatment protocols
Corporate Medical Director
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RM SERVICES
Design, implement and administer
project insurance programs
Identify and evaluate risk exposures
Business acquisition and execution
support
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GLOBAL INSURANCE PROGRAMS
Design and place Company and
worldwide insurance plans
Implement and administer insurance
policies
Manage internal communication and
support
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GLOBAL CLAIMS
Employee Claims
General Liability Claims
Eastern Hemisphere Auto Liability Claims
Cargo Claims
Personal Effects Claims
Property Claims
Hull and Aircraft Claims
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RISK MANAGEMENT
ACCOUNTING
Retained risk program administration
Record maintenance
Accounting system & compliance
Reporting
Invoice processing and payment
Cost distribution
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OTHER ACTIVITY
Law Department Auto Liability Claims
Investigate & manage claims in
Americas
Identify and evaluate risk exposures
Loss prevention support
RM systems and data mangement
Underwriting and compliance info
Reporting
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Business Services
Conduct risk management due diligence for acquisitions and
mergers
Identify exposures arising from business activities
Determine desired means of managing exposures to risk of loss
Obtain insurance required by and in accordance with applicable
laws
Review contract proposals for consistency with insurance program
Review bids to determine project specific insurance and bond
needs
Provide evidence of insurance coverage or other required
documentation to operating groups, customers, regulatory agencies,
and courts
Execute project insurance and bonding requirements
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Halliburton Risk Management 2005
Insurance Purchasing Philosophy
The Company will assess the effects on its business activity
of
casualty,
commercial,
operational,
financial
and
environmental risks, applying consistent techniques in the
management of those risks.
Insurance transfer mechanisms will be employed only in the
following circumstances:
 catastrophic risks where feasible
 exposures that can be insured at a cost less than
expected losses
 where required by law or contract
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Halliburton Risk Management 2005
Global Insurance Placements
 General Liability – 3rd party liability or civil liability
 Auto Liability – Liability resulting from use of vehicles
 Workers’ Compensation – Statutory requirements
 Employer’s Liability – Covers liability to employees
 Cargo
 Property – Fixed facilities
 Vessels - Hull & Machinery
 Protection & Indemnity
 Other Corporate Coverages
 Fiduciary Liability
 Crime
 Director’s & Officer’s Liability
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Halliburton Risk Management 2005
2006 Insurance Program Overview
$650M
$600M
$100M
$175M
Per
Schedule
Per
Schedule
$50M
£20M/
A$20
M
$5M (WC
$2M)
$10M
Nil
$1M
$10M
$250K
$25M
$100M
Per
Shipment
$10M
Nil
Corporate Aircraft Crime Fiduciary K&R
Liability
Liability Liability
£500K/ $10M
A$1M
$1M
KBR
PI
Water
craft
D&O
$1M
$250K
Cargo Well Offshore Onshore
Control Property Property
$10K
$1M
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Barracuda / Caratinga
Project Insurance
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Fig 6.2
Fig 6.3
Fig 6.4
Fig 6.5
Fig 6.6
Fig 6.7
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Types of Insurance
Construction All Risk (CAR)
Control of Well (COW)
Delay in Start-Up (DSU)
Third Party Liability
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Issues Faced
Market Conditions
Cost
Local regulation requirements
Coverage Terms
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Policy Form
Package of different coverages
Welcar – New Concepts
Valuation – Schedule A and B
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Barracuda & Caratinga Development
Project Insurance Structure
$175,000,000
FCV: FPSO P-43 $761,500,000
Excess of
FPSO P-48 $678,100,000
$150,000,000
Well Control
Sublimits
Pollution
Redrill
$10,000,000 - Existing Property
$25,000,000 - Engineering/Management/Etc.
$5,000,000 - Forwarding Charges
$25,000,000
$10,000,000 - Offshore Cancellation Costs
Drilling
Materials
$5,000,000
$5,000,000 - Standby Charges
Cargo
Onshore
Fabrication
$100,000
$250,000
$1,000,000
Yard
Towage
Subsea
$250,000/$50,000
CCC/supplies
($666,667
per day, up
to 180 days)
90 Days
Section III
Section II
Section I
Builder’s Risk
$120,000,000
$25,000,000
Primary policy
C.C.C.
$10,000,000 - Tests/Trials/Search Costs
$50,000 $100,000
$25,000,000
Control of
Well
Delay In
Start Up
$250,000
Policies For
Third Party
Liability
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Finished with Project Insurance ??
Not so fast ….
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Value and Schedule Changes
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BARRACUDA / CARATINGA PROJET
Values’ Placement At
November 15, 2004
$1,051,395,601
(est. Final Completed Value)
$1,011,600,000
$906,434,430
(est. Final Completed Value)
$761,600,000
$678,100,000
BARRACUDA
“P-43”
CARATINGA
“P-48”
Policy No. ARS – 2759 insuring Schedule “B” values but not to exceed
each Unit’s Schedule “A” amount in the aggregate
Policy No. ARS – 3915 $250,000,000 per occurrence and in the
aggregate each unit in excess of Schedule “A” primary values
Policy No. ARS – (T.B.A.) $50,000,000 per occurrence and in the
aggregate, each unit; in further excess of $250,000,000
Initial Completion Dates – 12/03 & 4/04
Revised Completion Dates – 4/05 & 6/05, then
9/05 & 11/05
Actual Completion Date – March 2006
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Halliburton
Risk Assessment Process
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Purpose
To develop and implement a plan that will enable the
Company to demonstrate its activities to assess its
business risk exposures and the effectiveness with
which those risks are managed. Risks are defined as
any events the occurrence of which has the potential
for significant impact to the Company.
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Why implement a formal risk assessment
process at Halliburton?
To satisfy NYSE corporate governance rules and
Sarbanes Oxley internal controls requirements that
dictate Halliburton have a formal approach for
identification, evaluation and management of risks
faced by the Company.
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What have we done to develop and put a
Halliburton risk assessment process in
place?
A team was formed to establish a system for:
- Identification and categorization of risk
exposures
- Determination of executive responsibility for
each risk category
- Assessment of specific risk’s impact on
Company success
- Ascertain controls in place for management of
the risks
- Develop documentation and reports to
demonstrate functioning of the process
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Basic Risk Categories
· Strategic – Factors that may interfere with the
execution of Halliburton’s strategies and objectives such
as reputation risks, adverse publicity, investor and
analyst confidence and general and industry economic
conditions.
· Financial - Risks associated with Halliburton's capital
structure, liquidity, margin erosion, tax burden, foreign
exchange volatility and credit risks.
· Legal & Regulatory - Traditional liability and
regulatory compliance, as well as the vulnerability of
intellectual capital and effectiveness of business
transactions.
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Basic Risk Categories, cont’d
. Human Capital – Critical areas such as employee
selection, retention and turnover, compensation,
executive effectiveness, depth and succession planning.
· Political – The affect of domestic and international
politics, in addition to traditional nationalization,
confiscation and trade disruption risks.
· Operational & Project –Business-specific exposures such
as contract performance, project and business entity
management, customer relations, environmental
damage and crisis management.
· Technology - Product and process obsolescence, system
security and effectiveness and network liability.
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Management Responsibility for Risk
Exposures
Category
Responsible Executive
Position
Strategic Risks
Corporate CEO
Financial Risks
Corporate CFO
Legal & Regulatory Risks
Corporate General Counsel
Human Capital Risks
HR VP’s (ESG & KBR)
Political Risks
Corporate General Counsel
Operational & Project Risks
Corporate COO (fka Group
CEO’s)
Technology Risks
CIO/VP Tech (ESG)
CTO/Dir IT (KBR)
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Risk Ranking Scoring System
Significance: This rating is based on the potential negative
impact to the Company if a single significant adverse event or
situation or a continuing series of connected events occurred
within a specific risk exposure. The score is based on the
largest monetary impact realistically possible for a particular
event.
1
2
3
4
5
–
–
–
–
–
Less than $.01 per share ($5mm)
Between $.01 and $.10 per share ($5 - $50mm)
Between $.10 and $.25 per share ($50 - $125mm)
Between $.25 and $1.00 per share ($125 - $500mm)
More than $1.00 per share ($500mm)
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Risk Ranking Scoring System, cont’d
Likelihood: This rating is the quantification of how often a loss
will occur within a specific risk exposure. The score here is
based on how often it is thought that an event of the most
significance within the particular risk exposure will happen.
1 – Extremely rare, not expected to occur once in 20 years
2 – Rare, may occur once in 10 years
3 – Periodic will probably happen in the next 5 years
4 – Recurrent, almost certain to happen in the next 2 years
5 – Frequent, multiple times per year
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Top Ten Risks – Absolute Basis
Corporate Level
Risk
Absolute
Consequence
Absolute Likelihood
Severity
1
Mass Toxic Tort Liability
>$500 million
Recurrent
Extreme
2
Damage to Reputation/Image
>$500 million
Recurrent
Extreme
3
Unfavorable Public Relations
>$500 million
Recurrent
Extreme
4
Unsuccessful Projects
>$500 million
Recurrent
Extreme
5
Failure to Maintain Adequate Internal
Financial Controls
>$500 million
Periodic
High
6
Legal Mistakes in Business Transactions
>$500 million
Periodic
High
7
Shareholder Class Action and Derivative
Liability
>$500 million
Periodic
High
8
Loss of Investor/Analyst Confidence
>$500 million
Periodic
High
9
Adverse Action by Competition
>$500 million
Periodic
High
10
General Economic Slowdown
>$500 million
Periodic
High
“For External Distribution. © 2004 Halliburton. All Rights Reserved.”
Top Ten Risks – Controlled Basis
Corporate Level
Name
Controlled Consequence
Controlled Likelihood
Controlled Risk
1
Unsuccessful Projects
$125-$500 million
Recurrent
Extreme
2
Damage to Reputation/Image
>$500 million
Periodic
High
3
Adverse Action by Competition
>$500 million
Periodic
High
4
General Economic Slowdown
>$500 million
Periodic
High
5
Inaccurate Budget/Business Planning
$125-$500 million
Periodic
High
6
Failure to Maintain Adequate Internal Financial
Controls
>$500 million
Rare
High
7
Loss of Investor/Analyst Confidence
>$500 million
Rare
High
8
Unavailability of Catastrophic Insurance
Coverage
>$500 million
Rare
High
9
Inadequate Planning in M&A Implementation
>$500 million
Rare
High
10
Retained Risk from Divestitures
>$500 million
Rare
High
“For External Distribution. © 2004 Halliburton. All Rights Reserved.”
ESG Operational Risks
Sample Comparison Chart and Specific Risk Register
Information
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Top 5 ESG Absolute/Controlled Risks
Risk
Severity
Controlled Risk
1
Ineffective Crisis Management
Extreme
High
2
Procurement Failures
Extreme
Moderate
3
Severe Weather
High
High
4
JV Management Failure
High
Moderate
5
Security Breach
High
High
“For External Distribution. © 2004 Halliburton. All Rights Reserved.”
1. Ineffective Crisis Management or
Business Continuity Planning
Description: Adverse cost impact or loss of
business resulting from slow or inadequate
response to catastrophic events.
Controls:
Maintain current crisis management and
recovery plans
System for constant information update to
anticipate events or respond immediately
Absolute
With Controls
Significance
5
5
Likelihood
4
2
Gross Total Score
20
10
Adjusted Classification
Extreme
High
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2. Procurement Failures:
Description:
 Financial impact of insufficient or delayed
resources for performance of business activities.
Controls:
Procurement capabilities
Business forecasting
Training and assignment of personnel
Absolute
With Controls
Significance
4
3
Likelihood
5
4
Gross Total Score
20
12
Adjusted Classification
Extreme
Moderate
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3. Severe Weather
Description:
Delays causing inability to meet contract
requirements and damage to work or company
facilities.
Controls:
Planning foreseeable weather into schedules
Insurance against catastrophic weather events
Absolute
With Controls
Significance
3
2
Likelihood
5
5
Gross Total Score
15
10
Adjusted Classification
High
High
“For External Distribution. © 2004 Halliburton. All Rights Reserved.”
4. Joint Venture Management Failure
Description:
Financial losses from unsuccessful business
performance. Improper accounting leading to
misstatements in accounts.
Controls:
Specific process for approval of and formation of joint
ventures
Management oversight
Internal audit for compliance with company procedures
Absolute
With Controls
Significance
3
3
Likelihood
5
3
Gross Total Score
15
9
Adjusted Classification
High
Moderate
“For External Distribution. © 2004 Halliburton. All Rights Reserved.”
5. Security Breach
Description:
Loss of data, intellectual property, or financial
assets due to unauthorized access to company
facilities or IT systems.
Controls:
 IT procedures
 Physical security plan
•
Internal Audit process.
With Controls
Absolute
Significance
5
5
Likelihood
2
2
Gross Total Score
10
10
Adjusted Classification
High
High
“For External Distribution. © 2004 Halliburton. All Rights Reserved.”
How will the risk assessment process at
Halliburton function in the future?
Maintain system
Validate and update identification and evaluation
Expand scope to other tiers of management
Develop more detail control analysis
Utilize as tool to assist management implementation of
new controls and risk avoidance strategies.
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Q&A