Risk Management & Insurance

1. Risk Management & Insurance Bauer College/UH Feb 2012

2. Agenda • Risk Management – functions and process • Anadarko’s Risk Management Presentation • BP Oil Spill / Deepwater Horizon Incident • Synthetic Lease – Windstorm Insurance • Risk Bearing Capacity Study

3. Anadarko Petroleum Corp (APC) • One of the largest independent oil and gas exploration and production companies • $39 B in market cap • 2.5 billion barrel of oil equivalent of proved reserves • $14B of revenues • Major areas of operation include: • onshore - US & Algeria • deepwater - Gulf of Mexico, West & East Africa, China & Brazil

4. Risk Management Functions • Project RM • Marketing RM • Enterprise RM • Property/Casualty RM • What do they all have in common? • RM is aProcess – no right or wrong answers!

5. 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.

6. CONTROL TRANSFER BY CONTRACT MONITOR FOR CHANGE IDENTIFY RISKS TRANSFER BY INSURANCE ASSUME Risk Management Process

7. 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).

8. E&P Contracts HOST COUNTRY/ MINERAL OWNER CONCESSION/LEASE JOA NON - OPERATORS PRODUCERS (SUB-SEA) ANADARKO AS OPERATOR PHA FARM-OUT MSC DRILLING CHARTER - OFFSHORE - ONSHORE - VESSELS - AIRCRAFT GENERAL SERVICES G&G OTHER CONSTRUCTION - CONSULTANTS - SEISMIC - PROCESSING - SURFACE USE AGMNTS. - PROFESSIONAL SVRS. - CONSULTANTS - EQUIPMENT LEASE - ENGINEERING - FABRICATION - CONSTRUCTION - INSTALLATION

9. CONTROL TRANSFER BY CONTRACT MONITOR FOR CHANGE IDENTIFY RISKS TRANSFER BY INSURANCE ASSUME Risk Management Process

10. 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

11. Directors’ & Officers’ Liability Insurance • $365MM total limits • $100MM ABC coverages • $200MM A-side / DIC coverage • $65MM A-side IDL coverage (Independent Directors’ Liability)

12. Fiduciary Liability & Crime Insurance • Fiduciary Liability Insurance: • $100MM ABC coverage • Crime (Employee Dishonesty, Theft, Wire Transfer Fraud): • $50MM coverage

13. Property & Casualty Insurance • Property –Replacement Cost Value (ded $10MM For Interest) • Control of Well/Redrill/Pollution –$75MM Onshore / $750MM Offshore (ded $10MM ) • Third Party Liability –$675MM limits (includes Pollution) (ded$10MM ) • Aviation Liability –$925MM limits ($250MM primary + $675MM 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)

14. Flow of Foreign Insurance Anadarko Foreign Entity Locally Admitted Insurer KMIIL (Captive) London Insurance (Partner’s Share and/or APC’s share if mandatory) Anadarko’s Corporate Insurance Package

15. CONTROL TRANSFER BY CONTRACT MONITOR FOR CHANGE IDENTIFY RISKS TRANSFER BY INSURANCE ASSUME Risk Management Process

16. Significant Uninsured Risks(for which coverage may be available) • Pre-existing liability (pollution, toxic tort, etc.) in acquisitions • Gradual pollution • Business interruption • Political risks • Unauthorized trading • Terrorism – onshore • Hurricane damage for offshore platforms & blowout • Tanker Pollution ? • Consequential Damages ? • Pollution from a blowout ?

17. BP Oil Spill / Deepwater Horizon Incident

18. BP Oil Spill / Deepwater Horizon Incident “Everybody has a plan to fight me until they get hit.” • Mike Tyson

19. BP Oil Spill / Deepwater Horizon Incident Issues to reconsider Financial & Strategic: • Liquidity and credit / debt capacity (cash + credit facility / “run rate”; vendors, counterparties collateral requirements, rating agencies). • Creditworthiness of JV partners, assignees (rig), PGs, collateral, insurance requirements. • Government-mandated financial responsibility for lessees. • Utilize long-term rigs and redeploy capital during moratorium. • Whether deepwater GOM should be part of Company’s strategy?

20. BP Oil Spill / Deepwater Horizon Incident Issues to reconsider Insurance: • Available insurance limits (minimum scaling versus for interest). • Timely issuance of policies. • Claims handling if Operator • “Additional Insured” status (Transocean’s insurance) • Coverage issues (non-scaling & multiple occurrences) Operational: • Improve pollution response. • How involved should a non-operator be in drilling plans?

21. BP Oil Spill / Deepwater Horizon Incident Issues to reconsider Service Contracts & JOAs : • “Gross negligence” and “fines & penalties” in JOA and Service Contracts. Recent court rulings re enforceability. • Rights of non-operator under JOA (indemnify Operator, claims-handling, sharing of information, participating in key decisions, etc.). • Force Majeure clause in LT Drilling Contracts. • Service Contractors pushing back on pollution. • Pollution “originating on or above the surface of water from spills” versus “originating from owned equipment” or “hole”. • Approval process for exceptions.

22. BP Oil Spill / Deepwater Horizon Incident ASSURED DEFINED             Wherever used in the policy the word "Assured" shall include but shall not be limited tomean: a.      The Named Assured as set out in Item 1 of the General Declarations. b.      At the option of the Named Assured, Charterers, Lessees, Operators, and/or Managers of Vessels, Marine Craft, or Aircraft.c.          Any individual, firm, corporation, partnership, joint venture, or any other entity for whom the Named Assured is, during the term of this policy, required through contract to provide insurance, but only to the extent that the Named Assured has contracted to provide such insurance, and in no event, for any greater limits of such as is afforded by this policy, but it is expressly understood that coverage afforded to any such party under this Policy:                         i) is subject to and limited by any restrictions or limitations on the scope, extent, terms, and/or amounts of such provision of coverage as are contained in such contract;                         ii) shall be no broader than the provision of coverage as required by such contract;                         iii) is limited to and shall not serve to increase the overall amount(s) of insurance required of the Named Assured under such contract to any such party; and

23. BP Oil Spill / Deepwater Horizon Incident iv) subject always to i), ii) and iii),above the foregoing shall in no way serve to increase the limits of Underwriters’ liability or expand the scope of coverage than isas provided inby this policy to the Named Assured nor for a greater extent than required by contract.” CO-VENTURERS ThisSubject to the terms of condition (Assured Defined), this insurance may be extended by the Named Assured as they may require to insure the interest of Co‑venturers, defined as co-owners, partners or other party(ies) having a financial and insurable interest in the subject matter of this insurance, all of whom individually and collectively are non-operators (all hereinafter referred to as "Co‑venturers") provided the agreement to include such interests is entered into prior to any occurrence giving rise to a claim hereunder.      The coverage granted by this extension shall be limited to the operations in which a Co‑venturer has a common interest with the Named Assured(s) and shall be subject in all respects to the terms and conditions of this Policy.  Such Co‑Venturers whose interests are insured hereunder shall be deemed to be named as Additional Assureds hereunder only in respect of operations insured hereunder and only for the period(s) of time said operations are insured hereunder.

24. E&P Contracts HOST COUNTRY/ MINERAL OWNER CONCESSION/LEASE JOA NON - OPERATORS PRODUCERS (SUB-SEA) ANADARKO AS OPERATOR PHA FARM-OUT MSC DRILLING CHARTER - OFFSHORE - ONSHORE - VESSELS - AIRCRAFT GENERAL SERVICES G&G OTHER CONSTRUCTION - CONSULTANTS - SEISMIC - PROCESSING - SURFACE USE AGMNTS. - PROFESSIONAL SVRS. - CONSULTANTS - EQUIPMENT LEASE - ENGINEERING - FABRICATION - CONSTRUCTION - INSTALLATION

25. Synthetic Lease – Windstorm Insurance

26. 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.

27. Synthetic Lease – cont’d • Commissioned Willis to prepare a report to review past offshore GOM losses from hurricanes (utilizing its database) • Findings: • Since 1994, offshore GOM structures have incurred $12B in losses • Only $1B related to deepwater structures • $0.4B relates to collapse of drilling packages • $0.3B relates to design flaw • $0.2B relates to different design than our 3 structures • net losses = $0.1B • Estimated value of GOM structures ~ $21B • 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)

28. Synthetic Lease – cont’d • Conclusions to Willis Report: • “Burn cost” = 0.06% per annum (net) or 0.50% per annum (gross) • Market rate (10%) represents 160 times (net) and 20 times (gross) greater than burn cost • Insurance market is not offering hurricane coverage for deepwater structures based on any sound technical rate approach

29. 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

30. Synthetic Lease – cont’d • Other considerations: • Anadarko is investment grade (S&P BBB-) and can easily self-insure $200MM. • Arbitrator (“Nationally-recognized Insurance Expert”) was an insurance broker • Arbitrator’s decision was not sealed

31. Anadarko Risk Bearing CapacityStudy 31

32. 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 Background 32

33. 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 strategies Risk Assessment Objectives 33

34. 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 Determining Risk Appetite 34

35. Impact of Pricing/Production Variation on Debt/Proven Developed Reserves 2008 Breach Point Debt/PDR 2008 Threshold 2008 Forecast Confidence Level (%) 35

36. 2008 Forecast 2008 Breach Point (RCF-Sustaining Capex)/Debt 2008 Threshold Confidence Level (%) Impact of Pricing/Production Variation(RCF-Sustaining Capex)/Debt 36

37. 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 Algerian Risk Perils and APC 37

38. 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 Algerian Risk Model 38

39. 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 Energy Package Risk Model 39

40. The current insurance program provides significant financial protection against catastrophic event scenarios Total Cost of Risk Comparison Tail protection provided by current program Total Cost of Risk Confidence Level (%) 40

41. Portfolio Impact of Risks (RCF-Sustaining Capex)/Debt 2008 Threshold “All Risk” includes insurance programs Confidence Level (%) 41

42. 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 Framework Observations and Actions 42

43. 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) Framework Observations and Actions 43

44. 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 • MLP