Transcript Title, 32pt Arial Bold - University of Houston

Risk Management
University of Houston Energy Case Study
February 2012
George E. Jones
Director of Risk Management
10200 Bellaire Blvd
Houston, TX 77072
Agenda



Halliburton Company Overview
What is “fracing” all about?
Risk Management at Halliburton
–
–
–

Insurance Programs
–
–

Contract Review
Surety Bonds
Compliance Certificates
Claim Organization
Appendix
–
–
FOR INTERNAL USE ONLY
Tactical Approach
Program Chart
Business Unit Support
–
–
–


Organization
Objectives & Strategy
Linkages
Insurance Programs – Purpose and Scope
Financial Performance
2
Halliburton Global Franchise
Halliburton Locations
Halliburton Headquarters
Halliburton Research Centers
2011
FAST
FACTS
FOR INTERNAL USE ONLY
Founded:
Employees
1919
Nearly
70,000
Operational
Countries
Research
Centers
80
14
3
Corporate
Headquarters
Houston
Dubai
Customers
National, International
and Independent
entities worldwide
Halliburton Organization
FOR INTERNAL USE ONLY
4
2011 Revenue Breakdown
Middle East / Asia Pacific
North America
Shift to gas plays in the Middle East coupled with
growing markets in Iraq, China, and Australia.
Increased offshore activity in
Asia Pac.
58%
42%
International
14%
58%
Europe / Africa / CIS
Increased share in deepwater East and West
Africa while exploratory unconventional gas
projects beginning in Europe.
16%
12%
Latin America
North America
Leveraged deepwater and unconventional
expertise for growth in Brazil, Argentina,
Colombia and Mexico.
FOR INTERNAL USE ONLY
Increased service intensity driven by 59% increase in oil
directed rig count targeting oil and liquids-rich plays.
5
Outperforming the Competition
Total Revenue (Indexed)
Q108 to Q411
HAL
SLB*
Total Operating Income** (Indexed)
Q108 to Q411
HAL
BHI*
175
180
SLB*
BHI*
200
174
180
160
160
140
137
140
113
120
120
100
126
107
80
100
60
40
80
20
60
1Q 08
*Pro forma
**Excludes certain charges
FOR INTERNAL USE ONLY
0
4Q 09
4Q 11
1Q 08
Q1 2008 = 100
6
4Q 09
4Q 11
Supply/Demand Outlook Encouraging for Energy Service
Increasing demand for liquids …
… reducing the industry’s spare capacity
World Oil Demand (MMb/d)
OPEC Effective Spare Capacity (MMb/d)
94
7
Forecast
Forecast
6
92
5
90
4
88
3
86
2
84
1
82
0
2007
2009
2011
2013
2015
2007
Source: International Energy Agency
FOR INTERNAL USE ONLY
7
2009
2011
2013
2015
Market Drivers in the Upcoming Cycle
Unconventionals
FOR INTERNAL USE ONLY
Deepwater
8
Mature Fields
Continued Growth in Unconventionals
Unconventional Basins
Tight Gas
Shale Gas
Coalbed Methane
Technically Recoverable Shale Gas
1,275
(Trillion Cubic Feet)
862
774
681
485
China
US
Argentina
Mexico
South Africa
396
388
Australia
Canada
Sources: EIA, “Worldwide Shale Gas Resources: An Initial Assessment of 14 Regions Outside the United States”,
April 2011; ARI, December 2009; EPRC, December 2009
FOR INTERNAL USE ONLY
9
290
Libya
231
226
187
180
Algeria
Brazil
Poland
France
CleanSuiteSM of Environmentally Friendly Technologies
CleanStream® Service
 Uses ultra-violet light to destroy bacteria
CleanWaveTM Water Treatment System
 High throughput, low energy use
water recycling system
CleanStimTM Fracturing Formulation
 Ingredients sourced exclusively
from the food industry
FOR INTERNAL USE ONLY
10
Risk Management Organization Chart
George Jones
Director
Risk Management
Richard Whiles
Manager
Insurance Services
Bonita Johnson
Supervisor
Insurance
FOR INTERNAL USE ONLY
Deborah Stacey
Manager
Risk Management
Programs
Daniel Garcia
Manager
Global Claims
Robert Bush
Manager
Claims Info
Systems
Virginia Dill
Manager
Workers Comp
Claims
Jack Westlund
Team Lead
ESIS Client
Services
Sandra Martinez
Supervisor
Regional Claims
Liability Unit
Claim Specialists
(3)
Helen Berhane
Coordinator
Insurance
Worker’s Comp
Claim
Representatives
(3)
TBD
Specialist
Workers Comp
Claims
Admin Unit
Claim Assistants
(3)
11
Angela Hinojosa
Coordinator
Insurance
Tiffany Barnes
Supervisor
Insurance
Risk Management Objectives and Strategy

Objectives
–
–

Minimize total cost of risk (Retained Losses + Insurance Premium) through use of insurance
or retained risk programs
• Insurance just one type of risk mitigation - typically last resort
• Other risk mitigation includes Operational, Legal, Finance, etc.
Ensure compliance with compulsory and contractual insurance requirements
Strategy
–
–
–
–
FOR INTERNAL USE ONLY
Insurance risk transfer employed for:
• Catastrophic Risks where feasible
• Exposures where premiums are less than expected losses
Maintain convenience factor coverages, e.g. claim servicing, etc
Retain uninsurable and mitigated risks
Maintain capability to provide proof of insurance compliance
12
Risk Management Linkages
 Legal Department
–
–
Contract review
Claim support
•
Compliance with claim notification requirements
•
Review claim reserves
•
Supervise litigated claims
 Global F&A / Real Estate
–
–
Information for underwriting process (revenue, payroll, property values, etc…)
With RM guidance, assist with local insurance policies
•
Ad-hoc insurance placements
•
Compliance with “admitted insurance” laws
•
Claim support
 Operations
–
–
Front-line knowledge of new risk activities (projects, business strategy, etc…)
Customer facing risk negotiations
 Finance
–
–
–
FOR INTERNAL USE ONLY
Investor Relations –Information for insurance marketing
Corporate Finance –Financial analysis expertise
Treasury Operations –Financial guarantees for self-insurance programs
13
Insurance Program – Tactical Approach

Align RM Program with HAL’s risk appetite
–
Present insurance plans to Treasurer/CFO for feedback and approval
 Maintain strong relationships with underwriters
–
–
–
Leads to improved coverage terms
Facilitates claim resolution
Stabilizes market capacity available to HAL
 Maintain highest underwriting security
–
–
–
Utilize rating information from intermediaries and rating agencies
Evaluate HAL’s aggregate exposure to underwriters across all programs
Approve any exceptions to ratings policy
 Optimize insurance program renewals
–
–
FOR INTERNAL USE ONLY
Develop renewal strategies in collaboration with intermediaries for each program outlining key objectives
Verify key coverage terms are included prior to inception
14
Insurance Program
Alliant
Aon
Excess
Liability
Onshore
Property
Distribution of Insurers by A.M. Best Rating
Rating
Exposure ($M)
%
A+
712
29%
A
1,759
71%
A6
0%
Total
2,477
100%
GL / AL / EL
Aon
Primary Casualty Program
McGriff
•
•
•
•
•
•
•
D&O Liability
Side A DIC
Broker / $Premium
FOR INTERNAL USE ONLY
GL, EL, WC, AL
10M limit
10M retention – GL,EL,AL
2M retention – WC
Internal reserve for ultimate unpaid exposure
Collateralized to estimated exposure
~80 locally admitted polices
McGriff
McGriff
Aon
Alliant
Alliant
Alliant
Alliant
Fiduciary
Liability
Crime
Air
Craft
Vessels
Well
Control
Offshore
Property
Cargo
Deductible
15
Type of Coverage
Contract Management
 RM coordinates with Legal Department / Procurement for contract reviews
– Legal Department contract reviews typically occur in CAS
– Vendor reviews typically done via procurement rather than Legal Department
– Any unusual / unapproved insurance language forwarded to RM for review
 Guidelines
– Given to Legal Department / Procurement which specify acceptable insurance language
• Guidelines include actual verbiage
• Guidelines include rationale for changes that can be provided directly to the customer
• Regular presentations made to Legal and Procurement by RM
 Common principles for insurance qualifications
– Insurance is intended to “support” indemnity and should not be a risk transfer mechanism
– Vague provisions should be clarified to avoid taking on more risk than expected
FOR INTERNAL USE ONLY
16
Surety Bonds—Q3 2011

Surety Utilization
Current Exposure to Surety Bonds / LC’s
HAL
KBR
TOTAL
Surety
Bonds
1,044,351,153
Letters of
Credit
573,345,000
TOTAL
(millions)
U.S.
Venezuela
276.3
Mexico
1,617,057,153
639,000
1,617,696,153
Colombia

Breakdown of HAL Surety Bond exposure
–
–
–
–
Performance (65%)
Labor (15%)
Court Appeal (6%)
Customs (5%)
Brazil
Argentina
Note: All KBR surety guarantees gone as of Q1 2011
FOR INTERNAL USE ONLY
17
Insurance Certificates—2,100 Outstanding as of Q2 2011
 Document evidencing HAL’s insurance coverage
– Contractual requirement
• Customer: Insurance to support indemnity structure including 1st party and liability
• Lease: Insurance for non-owned property in HAL’s care and liability
– Jurisdictional requirement
• Compulsory
• Licensing
• Permitting
International
882
U.S.
1,186
Vessels
62
FOR INTERNAL USE ONLY
18
Claim Management Organization

Services
–
–
–
–

Process and manage all insurance program claims
• Utilize onsite TPA, ESIS, for primary claims
• Liaise with insurers and brokers on risk transfer programs
• Leverage insurer relationships to maximize claim recoveries
Support Legal Department claim investigation/management
Provide risk analysis & loss prevention support
Manage production of third party actuarial opinion over the future development of losses
• Work with F&A to coordinate booking of appropriate reserves
Technology
–
–
–
Maintain risk management & claim reporting systems (Risk Advantage, HRM)
Provide underwriting and compliance information
Management reporting
FOR INTERNAL USE ONLY
19
Appendix
 Insurance Programs
–
–
–
–
–
–
–
–
–
Primary Casualty
Excess Liability
Property
D&O
Fiduciary
Crime
Vessels
Well Control
Cargo
2011 Financial Performance
FOR INTERNAL USE ONLY
20
Insurance Programs
 Primary Casualty
o Purpose and Scope
–
–
–
–
–
Comprised of Workers’ Compensation, Employer’s Liability, General Liability and Auto Liability
Statutory and contractual compliance
Retain risks which cannot be efficiently transferred to insurers
Provide claim services for losses within retention
Coverage territory is global
• Includes local programs in 37 countries
 Excess Liability
o Purpose and Scope
– Provides worldwide coverage for bodily injury and property damage liability
– Necessary for compliance with clients' contractual requirements
– Provides coverage excess of the following primary programs:
• Employer's Liability
• General Liability
• Automobile Liability
• Aircraft Liability
• Protection & Indemnity (Vessel Liability)
FOR INTERNAL USE ONLY
21
Insurance Programs
 Property
o Purpose and Scope
– Coverage against physical loss or damage to onshore property worldwide
• Covers equipment at onshore wellsites up to $15mm per occurrence
• Covers losses due to Terrorism and Political Violence
‫ ־‬Does not cover true “political risk” e.g. nationalization, expropriation, confiscation, deprivation
– Coverage for business interruption resulting from physical damage to covered properties
– Applies to facilities owned by Halliburton and property of others for which Halliburton has assumed liability
– Provides compliance with contractual lease requirements
 D&O
o Purpose and Scope
–
–
–
–
–
FOR INTERNAL USE ONLY
Coverage for personal liability of Ds and Os relating to their actions in their capacity as a director or officer
Coverage for Ds and Os while acting on charitable company boards if at request of Company
Coverage for cost of defense for alleged wrongful acts
Coverage to Halliburton against securities claims and indemnity obligations to the directors and officers
Includes local programs in 34 countries
22
Insurance Programs
 Fiduciary Liability
o Purpose and Scope
–
–
–
–
–
Covers all Company sponsored benefit plans
Provides liability coverage for alleged failure to prudently manage benefit plans
Provides coverage for errors and omissions committed in benefit plan administration
Indemnifies against personal liability of fiduciaries
Covers Company for indemnifiable claims
 Crime
o Purpose and Scope
– Coverage for loss arising due to employee theft of money or property
– Coverage for theft of money by a non-employee, including theft via computer or funds transfer fraud
– Component of coverage required for compliance with ERISA
FOR INTERNAL USE ONLY
23
Insurance Programs
 Vessels
o Purpose and Scope
–
–
–
–
Covers physical damage to owned vessels and equipment on chartered vessels
Covers bodily injury and property damage to third parties associated with vessel
Covers removal of wreck and debris
Certification for statutory and contractual obligations
 Well Control
o Purpose and Scope
– Covers physical damage to owned offshore platforms and pipelines
– Covers control of well, redrill, pollution liability and 3rd party property
– Certification for statutory and contractual obligations
FOR INTERNAL USE ONLY
24
Insurance Programs
 Cargo
o Purpose and Scope
–
–
–
–
–
–
FOR INTERNAL USE ONLY
Covers physical loss or damage to goods in commercial transit
Coverage provided for Company property and property the Company is obligated to insure for another party
Provides access to claim adjusting network required in CIF sales
Provides bonding services for impounded cargo
Contractual compliance with international equipment sales
Statutory compliance in some jurisdictions
25
Geographic Results
Q1 09
Q2 09
Q3 09
Q4 09
Q1 10
Q2 10
Q3 10
Q4 10
Q1 11
Q2 11
Q3 11
Q4 11
2009
2010
2011
($ Millions)
Revenue
North America
$1,683
$1,259
$1,285
$1,435
$1,704
$2,111
$2,381
$2,631
$2,982
$3,445
$3,876
$4,110
$5,662
$8,827
$14,413
Latin America
556
544
542
539
495
567
568
599
612
687
806
877
2,181
2,229
2,982
Europe / Africa / CIS
968
971
1,012
997
920
981
947
1,066
911
969
991
1,085
3,948
3,914
3,956
Middle East / Asia
700
720
749
715
642
728
769
864
777
834
875
992
2,884
3,003
3,478
$3,907
$3,494
$3,588
$3,686
$3,761
$4,387
$4,665
$5,160
$5,282
$5,935
$6,548
$7,064
$14,675
$17,973
$24,829
North America
$230
$80
$37
$103
$230
$441
$573
$632
$732
$997
$1,135
$1,118
$450
$1,876
$3,982
Latin America
108
106
97
48
46
89
77
78
76
81
137
170
359
290
464
Europe / Africa / CIS
168
155
201
171
130
148
139
167
(4)
68
66
109
695
584
239
Middle East / Asia
161
186
188
160
102
137
91
165
86
96
99
170
695
495
451
Corporate and Other
(51)
(51)
(49)
(54)
(59)
(53)
(62)
(62)
(76)
(81)
(105)
(137)
(205)
(236)
(399)
$616
$476
$474
$428
$449
$762
$818
$980
$814
$1,161
$1,332
$1,430
$1,994
$3,009
$4,737
Total
Operating Income
Total
FOR INTERNAL USE ONLY
26
Segment Results
($ Millions)
Revenue
Completion and Production
Q1 09
Q2 09
Q3 09
Q4 09
Q1 10
Q2 10
Q3 10
Q4 10
Q1 11
Q2 11
Q3 11
Q4 11
2009
2010
2011
$2,028
$1,752
$1,821
$1,818
$1,964
$2,393
$2,655
$2,985
$3,172
$3,618
$4,025
$4,328
$7,419
$9,997
$15,143
1,879
1,742
1,767
1,868
1,797
1,994
2,010
2,175
2,110
2,317
2,523
2,736
7,256
7,976
9,686
$3,907
$3,494
$3,588
$3,686
$3,761
$4,387
$4,665
$5,160
$5,282
$5,935
$6,548
$7,064
$14,675
$17,973
$24,829
$363
$243
$240
$170
$238
$497
$609
$688
$660
$918
$1,068
$1,087
$1,016
$2,032
$3,733
Drilling and Evaluation
304
284
283
312
270
318
271
354
230
324
369
480
1,183
1,213
1,403
Corporate and Other
(51)
(51)
(49)
(54)
(59)
(53)
(62)
(62)
(76)
(81)
(105)
(137)
(205)
(236)
(399)
$616
$476
$474
$428
$449
$762
$818
$980
$814
$1,161
$1,332
$1,430
$1,994
$3,009
$4,737
CAPEX
518
432
440
474
404
451
557
657
704
719
741
789
1,864
2,069
2,953
DDA
215
224
238
254
261
272
284
302
320
331
340
368
931
1,119
1,359
Drilling and Evaluation
Total
Operating Income
Completion and Production
Total
FOR INTERNAL USE ONLY
27