Risk Management & Insurance

1. Risk Management & Insurance Bauer College/UH Feb 2011

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

3. Anadarko Petroleum Corp (APC) • One of the largest independent oil and gas exploration and production companies • $39 B in market cap • 2.4 billion barrel of oil equivalent of proved reserves • $11B of revenues, $5B in CFFO • Major areas of operation include onshore US, deepwater Gulf of Mexico, Algeria, offshore West Africa & 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. NON - OPERATORS ANADARKO AS OPERATOR PRODUCERS (SUB-SEA) JOA PHA MSC DRILLING CHARTER GENERAL SERVICES • OFFSHORE • ONSHORE - VESSELS - AIRCRAFT G&G OTHER CONSTRUCTION - CONSULTANTS - SEISMIC - PROCESSING • - SURFACE USE AGMNTS. • - PROFESSIONAL SVRS. • - CONSULTANTS • LEASE AGREEMENTS - ENGINEERING - FABRICATION - CONSTRUCTION - INSTALLATION E&P Contracts

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. Anadarko Petroleum Corporation Directors & Officers Liability Insurance August 1, 2010 – August 1, 2011 $365MM $65MM Coverage A IDL only Chartis (AIG) Limit: $25mm xs $340mm ACE Westchester Limit: $10mm xs $330mm U.S. Specialty (HCC) Limit: $15mm xs $315mm Beazley U.S. Limit: $15mm xs $300mm $300MM BerkleyPro Limit: $10mm xs $290mm $200MM Coverage A D&O D.I.C. Torus Limit: $10mm xs $280mm Catlin Limit: $10mm xs $270mm CNA Limit: $15mm xs $255mm Arch Limit: $15mm xs $240mm AXIS Limit: $15mm xs $225mm Liberty Mutual Limit: $10mm xs $215mm Navigators Limit: $10mm xs $205mm RSUI Limit: $20mm xs $185mm Freedom Specialty Limit: $20mm xs $165mm Chartis Excess (AIG Bermuda) Limit: $25mm xs $140mm Federal (Chubb) Limit: $25mm xs $115mm X.L. Specialty Limit: $15mm xs $100mm $100MM $100MM Coverages A,B,C ACE American Limit: $20mm xs $80mm U.S. Specialty (HCC) Limit: $25mm xs $55mm Zurich American Limit: $15mm xs $40mm X.L. Specialty Limit: $25mm xs $15mm Chartis (AIG) Limit: $15mm Corporate Retention - $10mm (each loss)

12. Anadarko Petroleum Corporation Fiduciary Liability Insurance September 12, 2009 – September 12, 2010* $100MM U.S. Specialty (HCC) Limit: $10mm xs $90mm* Chubb Limit: $10mm xs $80mm* $50MM* Policy Term: August 1, 2010 – September 12, 2011 IronShore Limit: $10mm xs $70mm* Zurich American Limit: $10mm xs $60mm* X.L. Specialty Limit: $10mm xs $50mm* AWAC Limit: $10mm xs $40mm $50MM Chartis Limit: $10mm xs $30mm $50MM* Policy Term: September 12, 2009-10 AEGIS Limit: $10mm xs $20mm St. Paul Limit: $10mm xs $10mm AEGIS Limit: $10mm Corporate / Plans Retention - $5mm (each loss)* * Current $50 million program led by AEGIS will expire September 12, 2010. The $50 million excess program led by X.L. will serve as excess until September 12, 2010 and then drop down to primary (subject to a $2.5 million deductible) effective September 12, 2010.

13. $675MM Excess Liability $100MM xs $575MM (Chartis) (5) Excess Liability $75MM xs $500MM ($25MM Axis / $25MM Iron-Starr / $25MM OCIL) (5) Property and Casualty Insurance Program 2010/2011 Excess Liability $100MM xs $400MM ($50MM ACE / $50MM Iron-Starr) (5) Excess Liability $50MM xs $350MM (OCIL) (5) Excess Liability $50MM XL $2.8M per day 180 days Max a.o.o. Not to exceed $500MM a.o.o. Energy Package Excess Liability $100MM xs $250MM (XL) (5) Excess Liability $50MM xs $200MM (Torus) (5) Excess Liability $50MM xs $150MM (Argo) (5) $500MM (100%) Areas III, IV & V Excess Liability $150MM (Energy Package) (5) Statutory Limits AIU Statutory Limits ACE $75MM (100%) Scheduled Values Energy Package Areas I & II Energy Package Agreed Values USAIG Excess Liability $15MM / $30MM AEGIS (4) $100MM Owned $100MM Non-Owned $40MM Hangarkeepers $25 MM Per. Injury USAIG $3MM SIR $3MM SIR $4MM SIR £5MM AIU $5MM SIR $5MM SIR $2MM (1) ACE $1MM (1) ACE $2MM AIU $250,000 $250,000 (2) (1) (3) Aircraft Liability Onshore/ Offshore Property Marine/Offshore Liability Onshore General Liability Foreign Auto/EL Liability UK EL Auto Liability Employers Liability US WC Foreign WC (Voluntary) Aircraft Hulls OEE LOPI

14. Property & Casualty Insurance • Property –Replacement Cost Value (ded $10MM For Interest) • Control of Well/Redrill/Pollution –$75MM Onshore / $500MM Offshore (ded $10MM FI) • Third Party Liability –$675MM limits (includes Pollution) (ded $5MM FI) • 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)

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

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

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

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 Short term: • Available insurance limits. • Liquidity and credit / debt capacity. • Utilize long-term rigs and redeploy capital during moratorium. • Rights under JOA (indemnify Operator, claims-handling, etc.) Longer term: • Creditworthiness of JV partners, assignees (rig), etc. • “Gross negligence” in JOA and Service Contracts. • How involved should a non-operator be in drilling plans? • Whether deepwater GOM should be part of Company’s strategy? • Improve pollution response. • Government-mandated financial responsibility for lessees.

20. NON - OPERATORS ANADARKO AS OPERATOR PRODUCERS (SUB-SEA) JOA PHA MSC DRILLING CHARTER GENERAL SERVICES • OFFSHORE • ONSHORE - VESSELS - AIRCRAFT G&G OTHER CONSTRUCTION - CONSULTANTS - SEISMIC - PROCESSING • - SURFACE USE AGMNTS. • - PROFESSIONAL SVRS. • - CONSULTANTS • LEASE AGREEMENTS - ENGINEERING - FABRICATION - CONSTRUCTION - INSTALLATION E&P Contracts

21. Anadarko Risk Bearing CapacityStudy 21

22. 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 22

23. 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 23

24. 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 24

25. Impact of Pricing/Production Variation on Debt/Proven Developed Reserves 2008 Breach Point Debt/PDR 2008 Threshold 2008 Forecast Confidence Level (%) 25

26. 2008 Forecast 2008 Breach Point (RCF-Sustaining Capex)/Debt 2008 Threshold Confidence Level (%) Impact of Pricing/Production Variation(RCF-Sustaining Capex)/Debt 26

27. 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 27

28. 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 28

29. 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 29

30. 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 (%) 30

31. Portfolio Impact of Risks (RCF-Sustaining Capex)/Debt 2008 Threshold “All Risk” includes insurance programs Confidence Level (%) 31

32. 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 32

33. 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 33

34. 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.

35. 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)

36. 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

37. 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

38. 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

39. 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