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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 Organization

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Risk management university of houston energy case study

Risk ManagementUniversity of Houston Energy Case Study

February 2012

George E. Jones

Director of Risk Management

10200 Bellaire Blvd

Houston, TX 77072


Agenda

Agenda

  • Halliburton Company Overview

  • What is “fracing” all about?

  • Risk Management at Halliburton

    • Organization

    • Objectives & Strategy

    • Linkages

  • Insurance Programs

    • Tactical Approach

    • Program Chart

  • Business Unit Support

    • Contract Review

    • Surety Bonds

    • Compliance Certificates

  • Claim Organization

    • Appendix

    • Insurance Programs – Purpose and Scope

    • Financial Performance


Risk management university of houston energy case study

Halliburton Global Franchise

Halliburton Locations

Halliburton Headquarters

Halliburton Research Centers

2011FASTFACTS

OperationalCountries

ResearchCenters

Corporate Headquarters

Founded:

Employees

Customers

1919

Nearly

70,000

80

14

Houston

Dubai

National, International and Independent entities worldwide


Halliburton organization

Halliburton Organization


2011 revenue breakdown

2011 Revenue Breakdown

North America

58%

42%

International


Outperforming the competition

Outperforming the Competition

Total Revenue (Indexed)

Q108 to Q411

Total Operating Income** (Indexed)

Q108 to Q411

4Q 11

1Q 08

4Q 09

4Q 11

4Q 09

1Q 08

*Pro forma

**Excludes certain charges

Q1 2008 = 100


Supply demand outlook encouraging for energy service

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)

Forecast

Source: International Energy Agency


Market drivers in the upcoming cycle

Market Drivers in the Upcoming Cycle

Deepwater

Unconventionals

Mature Fields


Continued growth in unconventionals

Continued Growth in Unconventionals

Unconventional Basins

Tight Gas

Shale Gas

Coalbed Methane

Sources: EIA, “Worldwide Shale Gas Resources: An Initial Assessment of 14 Regions Outside the United States”,

April 2011; ARI, December 2009; EPRC, December 2009


Risk management university of houston energy case study

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


Risk management organization chart

Risk Management Organization Chart


Risk management objectives and strategy

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

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


Risk management linkages

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

Investor Relations –Information for insurance marketing

Corporate Finance –Financial analysis expertise

Treasury Operations –Financial guarantees for self-insurance programs


Insurance program tactical approach

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

    • Develop renewal strategies in collaboration with intermediaries for each program outlining key objectives

    • Verify key coverage terms are included prior to inception


Insurance program

Insurance Program

Aon

Alliant

Onshore Property

Excess

Liability

GL / AL / EL

Aon

  • Primary Casualty Program

    • 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

D&O Liability

Side A DIC

McGriff

McGriff

Aon

Alliant

Alliant

Alliant

Alliant

Vessels

Cargo

Fiduciary Liability

Crime

Air

Craft

Well

Control

Offshore

Property

Deductible

Type of Coverage

Broker / $Premium


Risk management university of houston energy case study

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

Contract Management


Risk management university of houston energy case study

Surety Bonds—Q3 2011

Surety Utilization

(millions)

U.S.

  • Current Exposure to Surety Bonds / LC’s

  • Breakdown of HAL Surety Bond exposure

    • Performance (65%)

    • Labor (15%)

    • Court Appeal (6%)

    • Customs (5%)

Venezuela

276.3

Mexico

Colombia

Brazil

Argentina

Note: All KBR surety guarantees gone as of Q1 2011


Insurance certificates 2 100 outstanding as of q2 2011

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


Claim management organization

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


Appendix

Appendix

  • Insurance Programs

    • Primary Casualty

    • Excess Liability

    • Property

    • D&O

    • Fiduciary

    • Crime

    • Vessels

    • Well Control

    • Cargo

  • 2011 Financial Performance


Insurance programs

Insurance Programs

  • Primary Casualty

    • 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

    • 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)


Insurance programs1

Insurance Programs

  • Property

    • 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

    • Purpose and Scope

      • 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


Insurance programs2

Insurance Programs

  • Fiduciary Liability

    • 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

    • 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


Insurance programs3

Insurance Programs

  • Vessels

    • 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

    • 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


Insurance programs4

Insurance Programs

  • Cargo

    • Purpose and Scope

      • 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


Geographic results

Geographic Results


Segment results

Segment Results


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