understanding-the-oil-and-gas-industry-and-its-risks

Monday, March 4, 2013 Houston, TX 1:00–5:30 p.m UNDERSTANDING THE OIL AND GAS INDUSTRY AND ITS RISKS Presented by Vance Fairchild John A Jacobi, P.E., J.D Bruce M Laubacher President and Managing Principal G2 Partners, LLC Vice President, Pipeline Systems Compliance and Operations Services G2 Parters, LLC Vice President ACE Excess Casualty J.D Kern Jacob Parsons Connie Stum Vice President and Principal G2 Partners, LLC Director The Claro Group Senior Manager of Insurance Devon Energy Corporation Brian Twellman Trey Whitley, P.E John Paul Wiggin Director The Claro Group Vice President and Principal G2 Partners, LLC Senior Mgmt Consultant G2 Partners, LLC Copyright © 2013 International Risk Management Institute, Inc www.IRMI.com The first step in setting up an insurance program is identifying the risks that must be managed and insured One of the keys to identifying the risks and designing a good insurance program is an understanding of the industry, how it works, and the unique vocabulary that goes with it This primer will help anyone who is new to oil and gas risk management and insurance understand how oil and gas is found, wells are drilled, and production is maintained Additionally, you will know the risks associated with each step of the exploration, production, and servicing process Your new knowledge will improve your ability to communicate with clients or underwriters and enhance your understanding of how to properly insure the risks associated with oil and gas exploration and production Today’s energy industry demands a risk management partner who thinks two steps ahead in every area of your business As a sophisticated global risk management partner, Gallagher Energy provides a broad range of products & services beyond the traditional brokering of insurance transactions Our industry leading advice and expertise, team-oriented approach, and award-winning service combine to provide tailored solutions for your unique business needs t In-Depth Risk Review t Enterprise Risk Management Programs t Comprehensive Risk Analysis t Detailed Risk Mapping Gallagher ranked #1 in overall client satisfaction among the five largest brokers in Greenwich Associates 2012 Large Corporate Insurance Survey Gallagher was also named one of the :RUOGnV Most Ethical Companies for 2012 by The Ethisphere Institute Bill Farnan | Managing Director, Gallagher Energy 713-358-7888 1900 West Loop South William_Farnan@ajg.com Suite 1600 www.ajg.com/energy Houston, TX 77027 Minimize your well control risks Travelers has been protecting the oil and gas industry for more than 30 years Our claim, risk control and product professionals are exclusively dedicated to serving your industry and providing the risk transfer solutions you need We are the first insurance company to offer such industry-leading innovations as: • “First Sign of Trouble” Endorsement • Free IADC WellCAPđ Well Control Certication Training ã Well Control Emergency Response Plan • Incident Management Training – Executive & Field Level • Kick Drills & Crew Awareness Training at the Rig Site We’re proud to work with Wild Well Control, Inc as our preferred well control provider and training resource Don’t wait for a well control event to occur – contact your agent today or visit travelers.com/oilgas for more information travelers.com © 2013 The Travelers Indemnity Company All rights reserved Travelers and the Travelers Umbrella logo are registered trademarks of The Travelers Indemnity Company in the U.S and other countries CP-7853 Rev 1-13 Notes This file is set up for duplexed printing Therefore, there are pages that are intentionally left blank If you print this file, we suggest that you set your printer to duplex Vance Fairchild President and Managing Principal G2 Partners, LLC Mr Fairchild serves as president and managing principal of G2 Partners, LLC, leading G2’s strategic direction, business service lines, and client development and identifying and forging key partnering relationships, largely focused on the development of G2’s environmentally distressed asset business Mr Fairchild has 20-plus years’ professional experience, having worked across the entire environmental market spectrum Mr Fairchild has worked on permitting capital pipeline and compression projects and managing soil, sediments, surfaces, and groundwater remediation and operational and emergency response of pipeline disruptions He also successfully led the financial recovery of environmental expenses through commercial general liability insurance and the Federal Energy Regulatory Commission of hundreds of millions of dollars Mr Fairchild has extensive experience in the acquisition of environmentally impaired industrial real estate, fully liquidated liability assumption, and cost-effective mitigation, land re-entitlement, and profitable monetization of real property for highest and best use, including creative ecological and beneficial reuse Mr Fairchild has led several as-is real estate acquisitions and successful remediation, regulatory closure, and asset divestitures totaling $150 million of contract and real estate value and has provided principal oversight for the execution of many tens of millions of dollars more of liability transfer, assessment and remediation, facilities demolition, and related environmental services contracts at many sites across the United States At some of these sites, the highest and best use for previously environmentally impacted properties included integrating “beneficial reuse” (e.g., wetlands, natural resource and habitat mitigation, critical land conservation and enhancement, creative “ready for reuse” of landfills, water quality and quantity enhancements, green and open space, and other beneficial natural resource use) By implementing sustainable and balanced development, with the extensive use of “green” remediation approaches and technologies, including phyto-remediation, in-situ treatment, and less energy-intensive passive cleanup approaches, Mr Fairchild is successful in differentiating projects and properties by setting a “green vision” for the collective benefit of sellers, buyers, and developers and, in the process, builds and sustains grassroots community, public, and regulatory support for the proposed efficient, timely, and cost-effective cleanup and restoration/reuse of prior industrial operations Most recently, Mr Fairchild has been managing pipeline data improvement and regulatory compliance initiatives supporting natural gas transmission and gas utility companies These projects include resolving pipeline attribute information, integrating in-line inspection data, and improving data quality for determining maximum allowable operating pressure John A Jacobi, P.E., J.D Vice President, Pipeline Systems Compliance and Operations Services G2 Partners, LLC Mr Jacobi is an industrial engineer and a licensed attorney with over 30 years of energy industry experience Prior to joining G2, Mr Jacobi served as community assistance/technical services manager in the U.S Department of Transportation’s Office of Pipeline Safety, Southwest Region, for almost a decade He began his career with the U.S Army Materiel Command with assignments at Red River Army Depot and the Aviation Systems Command before becoming chief engineer, Lake City Army Ammunition Plant His private sector experience includes 13 years with Tenneco Inc and Tennessee Gas Pipeline (TGP), including stints as planning manager, manager of technical services, and attorney dealing with health, safety, and environmental compliance issues for both Tenneco Inc and TGP He left Tenneco for a career as an environmental consultant focusing on regulatory compliance, pipelines, and energy issues A former Presidential Exchange Executive, Mr Jacobi received his Bachelor of Science in mechanical engineering (with Honors) from Rose-Hulman Institute of Technology, his Master of Science in industrial engineering from Texas A&M University, and his Juris Doctorate from the University of Missouri - Kansas City Bruce Laubacher Vice President ACE Excess Casualty Bruce Laubacher serves as vice president in ACE USA’s Casualty Risk Division Based in Houston, Texas, Mr Laubacher has responsibility for all aspects of production and development of the ACE Excess Casualty energy product portfolio within the regions of Houston, Southwest (Dallas), Los Angeles, and San Francisco Mr Laubacher has served in the insurance industry for more than 36 years Since 1981, he has mainly been involved in primary umbrella and excess casualty underwriting Mr Laubacher joined ACE in 2004 as part of the National Accounts team in New York City He moved to Houston in 2005 to focus on underwriting excess casualty coverage for the energy industry Prior to his tenure with ACE, Mr Laubacher served in various management roles at American International Group (AIG), Chubb Group of Insurance Companies, Great American Insurance Company, and Prudential Reinsurance Mr Laubacher received his bachelor of sciences degree in business administration from San Diego State University J.D Kern Vice President and Principal G2 Partners, LLC Mr Kern focuses on developing and delivering solutions to complex environmental health, safety, and asset integrity issues facing the integrated oil and gas industry (upstream to downstream) He also serves on development teams for large capital projects where he focuses on developing strategies, plans/schedules to achieve regulatory approvals and permits and identifying, quantifying, and mitigating key project risks Mr Kern also oversees pipeline systems integrity projects for the midstream oil and gas and pipeline industries focusing on meeting the growing challenges of ensuring that safety and integrity performance satisfies corporate governance, regulatory, and operational expectations Mr Kern has supported projects that have ranged from the development of liquefied natural gas import terminals to removal of pump stations on an Alaskan pipeline He has also led G2 Partners’ efforts to develop programs such as a comprehensive Facility Integrity Management (FIM) program for a major natural gas pipeline operator He provides critical support to mergers and acquisitions by valuing, characterizing, and timing risks associated with assets and developing corresponding risk allocation provisions/management solutions Mr Kern guides his clients through environmental risk transfer transactions that facilitate closure of mergers and acquisitions; resolve indemnifications and other multi-party interdependencies; provide cost-certain solution to highly variable liabilities; and create a means for companies to monetize discontinued operations/surplus properties Mr Kern has assisted his clients (integrated oil and gas sectors, upstream–downstream) in successfully consummating numerous successful mergers and acquisitions worth billions of dollars involving the health and safety evaluation, management, and integration of hundreds millions of dollars of environmental liabilities Prior to forming G2 Partners, LLC, Mr Kern served as a senior executive for a publically traded engineering company for years where he led the successful development and management of exit strategy (environmental risk transfer and distressed real estate acquisition transactions—full assumption of environmental obligations) transactions valued at $80 million Critical client assets included: gas processing plants and compressor stations, pipelines, refined product storage terminals, and manufacturing facilities Mr Kern has a Bachelor of Science degree in petroleum engineering from Colorado School of Mines Jacob S Parsons Director The Claro Group Connie Stum Senior Manager of Insurance Devon Energy Corporation Ms Stum is the senior manager of insurance at Devon Energy She is a native of central "bluegrass country" Kentucky She began her insurance career in Nashville, Tennessee, in 1975 working for Continental Insurance Company and then transitioned to what is now Willis Brokerage Ms Stum and her family made their way to Oklahoma City in 1991 where she was employed as an account executive at HRH of Oklahoma, now Willis of Oklahoma, where she administered the Devon account She was recruited by Devon Energy as an insurance manager in the spring of 2000 shortly after Devon had merged with PennzEnergy in the fall of 1999 She has witnessed the growth of Devon from a mere 200 employees to in excess of 5,000 today She was instrumental in the placement of brokerage services and insurance programs for the United States, Canada, and the Gulf of Mexico, in addition to numerous international locations as a result of five major acquisitions and/ or mergers by Devon Energy since 1999 To date, her responsibilities include risk and project management analysis, procurement and administration of property, casualty and surety insurance programs, contract review from purchase and sale agreements to joint operating agreement, master service agreements, drilling contracts, lease agreements, etc Additional responsibilities include a steady stream of committee participation in EHS, Security, E & P and M & M operations, Business Continuity, and upper management Her most recent noteworthy accomplishment is the 3-year OCIP and Builders Risk program administration for the new Devon Energy Center situated in downtown Oklahoma City The end result of this $850 million construction project was a 22 percent work comp loss ratio over the life of the project, with no fatalities There were a total of 5, 620,000 +/– man hours worked, ending in a $0.43 work comp expense per man hour Ms Stum is an active member of the local RIMS chapter in Oklahoma City, a member of the National Association of Professional Women, co-educational member of the Houston Energy Risk Managers Association, an active member of the North TX Energy Risk Managers Association, and a Certified Insurance Counselor 10 Baker Panel Report – January 2007 BP has not provided effective leadership or established appropriate operational expectations … for process safety management BP’s decentralized management system and entrepreneurial culture have delegated substantial discretion … to managers without clearly defining process safety expectations, responsibilities, or accountabilities BP has not implemented an integrated, comprehensive, and effective process safety management system … BP has …mistakenly used improving personal safety performance … as an indication of acceptable process safety performance [BP] does not ensure timely compliance with internal process safety standards … has not implemented an effective process safety audit system … does not ensure that identified process safety deficiencies … are tracked to correction [A] lack of operating discipline, toleration of serious deviations from safe operating practices, and apparent complacency toward serious process safety risks existed … BP has not established a positive, trusting, and open environment at some of its U.S refineries with effective lines of communication between management and the workforce, including employee representatives BP … does not effectively measure and monitor process safety performance 19 The skeptics … • “Flavor of the month” - Just need to wait it out and it will go away • Organization is already suffering from “initiative fatigue” - This management system stuff will just make it worse • This is Voodoo or astrology, without scientific basis - Who’s to say it will work? 20 44 The reality … • When management systems are well-designed, they can incrementally reduce risk over time, i.e., when they … - Leverage and build on in-place practices and culture - Are adequately resourced - Have explicit management support over long time spans • Management systems can also be tools to drive efficiency and cultural integration - Especially in a post-acquisition/merger operation - Really just another form of “continuous improvement” • Momentum has shifted - “Hiding” will not be a viable strategy much longer 21 Closing thoughts … • Agencies are driving change • Recent incidents have focused the attention of Boards and executive offices on risk management and compliance assurance • Getting the operating discipline / conduct of operations message out to the field workforce is a tremendous challenge • A “common standard of care” is emerging … separate from agency action … that will dictate management action for implementing some sort of management systems to manage risk and assure compliance 22 45 Closing thoughts (cont.) • The is generally no silver bullet … no “one-size-fits-all” solution - Systems should generally be tailored to fit with, and leverage, the in-place processes and culture • Management systems CAN be used to move cultures, over time, to support the emergence of a zero defect / zero incident operations environment 23 Operations Management Systems Emerging use in managing risk and assuring compliance Wiggin & Company, LLC Management Consultants 46 25 Pre-Disaster Preparedness: Unique Challenges Faced by Oil and Gas Companies—Accidents and Disasters Presented By: Brian Twellman Director The Claro Group Jake Parsons Director The Claro Group Overview Ź Introduction Ź Pre-Loss Claim Preparation Best Practices Ź Have a Claim? Don’t Forget Your Initial Claim Checklist Ź Critical Steps for Smooth Sailing—Claim Resolution TCG Proprietary to Claro, LLC Not for distribution For internal Client purposes only 47 Introduction Ź Brian Twellman is a director and one of the original members of The Claro Group Ź As part of the firm’s Global Disputes, Claims and Investigations Consulting practice, Brian has spent 15 years advising clients on complex property and business interruption claims for insured businesses, having led engagements encompassing more than $1 billion in recoveries Ź Prior to The Claro Group, Brian was part of the economic and financial consulting firm of LECG and the Financial Advisory Services consulting practice at Arthur Andersen Ź Jake Parsons is a director in The Claro Group’s Disputes, Claims and Investigations Consulting practice based in Houston Ź Jake specializes in providing corporate policyholders with claim and risk management solutions He has assisted clients quantify and successfully resolve claims for property damage, business interruption, contingent business interruption, and extra expense losses arising from equipment failure, fire, flood, explosion, hurricane, tornado, supply disruption, and other covered causes of loss Jake has also served as a policyholder-appointed appraiser and measured economic damages for matters in litigation Ź He holds an M.B.A from the University of Texas and a B.S from Indiana University TCG Proprietary to Claro, LLC Not for distribution For internal Client purposes only 48 Pre-Loss Claim Preparation Best Practices TCG Proprietary to Claro, LLC Not for distribution For internal Client purposes only Pre-Loss Claim Preparation Best Practices Ź Proper Preparation Prevents Poor Performance Ź Do you have an overall game plan for managing the situation? Ź Is Risk Management part of the Corporate Emergency Response team? Ɣ Financial recovery is as vital as operations recovery Ź How current are your stated property and business interruption values? Ź Have you identified contingent supplier/customer relationships in the underwriting process? TCG Proprietary to Claro, LLC Not for distribution For internal Client purposes only 49 Pre-Loss Claim Preparation Best Practices Ź BEFORE THE LOSS: Assemble the right team INTERNAL EXTERNAL Risk Manager Insurance Broker Operations Mgmt Forensic Accountant Financial Mgmt Coverage Counsel Inside Legal Engineer/Construction TCG Proprietary to Claro, LLC Not for distribution For internal Client purposes only Pre-Loss Claim Preparation Best Practices Ź Is Risk Management a part of the corporate emergency response team? Has Risk Management participated in crisis drills and planning? Ź Does Risk Management have established procedures for: Ɣ Claim notification Ɣ Accounting cost capture Ɣ Adjuster/expert management Ɣ Claim consultants/forensic accountants Ź TCG Proprietary to Claro, LLC Not for distribution For internal Client purposes only 50 Have a Claim? Don’t Forget Your Initial Claim Checklist TCG Proprietary to Claro, LLC Not for distribution For internal Client purposes only Have a Claim? Don’t Forget Your Initial Claim Checklist Ź Designate single person in charge of the claim Ɣ Ź Ź One point of contact: establish a protocol for transfer of documentation Review all available coverages Ɣ Obtain all forms and correspondence from brokers Ɣ Consider outside assistance for coverage interpretation Promptly provide notice to all potentially affected insurers Ɣ Review drafts before sent out: may impact coverages Ɣ Follow up with brokers to confirm notices Ɣ Calendar deadline for filing proof of loss TCG Proprietary to Claro, LLC Not for distribution For internal Client purposes only 51 Have a Claim? Don’t Forget Your Initial Claim Checklist Ź Establish internal cost codes to track all time and expenses Ɣ Ź Ź Ź Many policies have “claim preparation” coverage Undertake (and document) all reasonable mitigation measures Ɣ Important from operations perspective Ɣ Critical from coverage perspective Involve in-house counsel early in process Ɣ May provide valuable advice and access to outside counsel if needed Ɣ Certain communications may be privileged from later discovery If material to company, work with PR team on external message Ɣ Assume your insurers (or their counsel) will be reading releases Ɣ Overly optimistic public statements can come back to haunt claim TCG Proprietary to Claro, LLC Not for distribution For internal Client purposes only 10 52 Have a Claim? Don’t Forget Your Initial Claim Checklist Ź Establish project calendar for key dates to keep process moving Operational Recovery Loss Mitigation and Investigation Rebuild Planning Restart Rebuild Full Recovery 53 Insurance Recovery Early Communication with Insurers/ Protocol with Adjuster Accumulate and Document Hard Costs for PD claim Analyze BI and EE Losses/ Coordinate with PD Adjustment Interim Payment? Diligent Updates to Adjuster/ Foundation for Prompt Resolution Prepare Detailed Proof of Loss and Supporting Materials Negotiate and Respond to Additional Request for Information Settle or Arbitrate/ Litigate Early Settlement of PD and EE Claims? TCG Proprietary to Claro, LLC Not for distribution For internal Client purposes only 11 Critical Steps for Smooth Sailing Claim Resolution TCG Proprietary to Claro, LLC Not for distribution For internal Client purposes only 12 Critical Steps for Smooth Sailing—Claim Resolution Ź Ź Timely and strategic communication Ɣ Internal: key to have main point of contact to maintain control Ɣ External: should coordinate with corporate communications department Ɣ Caution: Every analysis, e-mail, memo, and press release eventually may be viewed by your insurers in litigation context Realistic claim philosophy Ɣ Establish early on that you are carefully and fully preparing a fair, credible claim for all losses to which you may be entitled under relevant policies ƒ Do not be shy about including potentially covered aspects of claim ƒ Similarly, not include obviously noncovered claims as it will impair credibility TCG Proprietary to Claro, LLC Not for distribution For internal Client purposes only 13 54 Critical Steps for Smooth Sailing—Claim Resolution Ź Ź Ź Ź Fully and fairly respond to Insurer requests Ɣ Cat and mouse games lead to delay, bickering, and loss of credibility Ɣ However, at some point don’t be afraid to say “Enough!” Demand payment for undisputed elements of the claim Ɣ Many policies have express provisions requiring such payment Ɣ Some states also have statutes that require it Create an estimate of loss EARLY Ɣ Insurers will want to set reserve—good to have input from insured Ɣ Apples versus oranges comparisons are not helpful Ɣ Identify hard costs—low hanging fruit Ɣ Work with insurer to have mutual BI model concept adopted early When available, utilize policy provisions to hire outside help TCG Proprietary to Claro, LLC Not for distribution For internal Client purposes only 14 Critical Steps for Smooth Sailing—Claim Resolution Ź Cash is good Ɣ Interim payments should be requested once sufficient claim dollars documented excess of applicable deductibles Ź Written confirmation of significant decisions Ź Utilize technology Ź Ɣ Hosted Web-based depositories for larger claims Ɣ Different levels of access for internal versus external Ɣ Speeds up transmission of data; everyone working from same page Prior to settlement day, set internal management expectations on strengths and weaknesses of claim Ɣ One of most common mistakes in negotiations is to go into settlement discussions only with hope to get “as much as we can!” Ɣ Need to take into consideration all relevant factors, not just coverage, legal, technical, but also relationships, market factors, renewal, etc TCG Proprietary to Claro, LLC Not for distribution For internal Client purposes only 15 55 Critical Steps for Smooth Sailing—Claim Resolution Ź Ź Ź Conduct negotiations on principal-to-principal basis with true “decision makers” present from all parties Ɣ Cuts through the usual “filtering” done by both sides’ advocates Ɣ Important that claim is mature enough before such meeting takes place Ɣ Preview claim before the actual negotiations—surprises are not good in middle of negotiations Be flexible—expect the unexpected Ɣ In any complex claim, there are inevitably new, unexpected issues that arise or your perspective on things changes as more information about claim is developed Ɣ Be prepared to walk away and come back to table at a later time Utilize business relationships when necessary Ɣ A holistic view of the claim and parties’ relationship may help close the deal TCG Proprietary to Claro, LLC Not for distribution For internal Client purposes only 16 Conclusion Ź It takes longer to collect a claim than to restart operations Ź Be prepared for false starts and misunderstandings by the adjuster—they have to learn your business model Ź Planning in advance for a loss response speeds the process and improves the opportunity for a more favorable outcome TCG Proprietary to Claro, LLC Not for distribution For internal Client purposes only 17 56 Contacts Brian Twellman Director (713) 454–7734 (Office) (713) 320–6698 (Cell) btwellman@theclarogroup.com Jake Parsons Director (713) 454–7736 (Office) (713) 884–7636 (Cell) jparsons@theclarogroup.com TCG Proprietary to Claro, LLC Not for distribution For internal Client purposes only 18 57 Notes This file is set up for duplexed printing Therefore, there are pages that are intentionally left blank If you print this file, we suggest that you set your printer to duplex 58