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Oil & Gas UK London Breakfast Briefing – Risk Management
Tuesday 20 January 2015
Introduction and Welcome
Michael Tholen
Economics & Commercial Director
Oil & Gas UK
Chris BirdGroup Regional Director Western Europe,
Managing Director – UKMOL Group
An E&P Operators view of Risk ManagementThe challenges ahead
IdentificationMitigationDeliver expectations
CHRISTOPHER BIRDMOL GROUP UK
20th January 2015
AGENDA
What is risk management
Approach to risk management
Business and operational risks
Conclusions
What is Risk Management and why use it?We must add value / grow – this gives uncertainty, that requires foresight, courage and commitment
Risk management helps minimise the effects of the threats on the organization’s capital and earnings and provides a coordinated and economical application of resources to also maximize the realization of opportunities
Improve the probability of success of increasing value
Therefore relating to value
Market cap = Profitability * Multiple of (Growth plus Reputation)
Profitability – ability to extract value from the business
Growth – ability to grow and add value to the business
Reputation – ability to protect the value that can be created in the business
Key Topics for us today
Building and embedding a system to manage risk effectively
Growing a business whilst also growing and developing the team
Reconciling fast growth + value creation + commodity price + forex
Profit Growth Reputation
• Asset availability• Production rates• Oil and Gas price• Operating costs
• Reserves to production ratio
• Mergers and acquisitions
• Access to finance
• HSE performance• Meet expectations
on targets• Strength of
leadership team
Addressing risk in our business
Turnbull approachTop down risks
Asset / functionApproachBottom up
IntegratedRisk register
Action plansCostSchedule Resource
Interconnectivitychart
Bow TieDiagrams
Scenario'sMonte Carlo
PerformanceManagement
Business
Region
Asset
Verticalintegration
Verticalintegration
Our approach to integrated risk management
Bow Tie analysis for Growth Model
Understanding risk, events and actions
Global / Industry level risks ( MOL Group )
North Sea level risks ( Industry )
Asset level risks ( MOL Energy )
What are the key risks we face
Global Risks to consider – macro economics
Project 3 – 8 years
Assets 5 – 30 years
Global Risks to consider – commodity prices
Oil price stability 30 yrs Growth7 yrs
Fall6 yrs
Some variation 16 yrsGrowth11 yrs
WhatNext?
Dec 98$16
Jan 02$26
Feb 09$46
Jan 15$50
QuestionLonger term low price or just a blip as in 02/2009
Cost base
UKChallenge
Growth upside,
Risk sharing,Cost of capital
Increasing business model maturity and predictability of cashflows
Corporate Mezzanine: Expected IRR: 15%+
Brings in project management skills
(Subordinated notes, highyield bonds, convertible
shares)
EquityExpected IRR: 25%+Accessible without
collateral to pledge!Management rights
constrained (Private equity, IPO)
Senior debt:Expected IRR: 10%+
Reserve based lendingProject financeProject bonds
Comfort zone for O&G industry
Increasing leverage
Global Risks to consider – access to finance
UKCS - stable low risk environment
Develop/improve offshore capabilities
Export technologies to facilitate further growth in other basins
Bring in technologies to enhance valuecreation
Parent funding for a balanced asset portfolio and operation at reasonable scale
North Sea Risks to consider – economics
Remove barriers to entry – Key threats
Third party access to infrastructure on reasonable terms Balance between social/environmental responsibilities and costly refinancing No newcomer forever
Fiscal incentives to encourage investment and growth Key treats and opportunities
Predictable tax regime Implement regulation initiatives, but clear uncertainty as soon as possibleIncentives focusing on technological advances and innovation
Co-operation at industry level – Key opportunities
Regional infrastructure development concepts
Industry level initiatives to address sustainable resources/skills
Collaboration across the industry – all stakeholders
Facilitate new financial solutions
Remove wastage and inefficiencies
North Sea Risks to consider – economics
North Sea’s first round FPSO Largest SIP and first with accommodation and gas processing to export specification
World’s longest moveable structure, ‘flown’ offshore in January
FinanceCommodity price fluctuationsCredit risk on partnersRisk of not achieving self funding portfolioForecasting accuracyBusiness continuity & disaster recovery
GrowthFailure to acquire correct assetsUnder resourced to manage transition properlyPoor performance of asset – changes in perceptionChanges in business environmentIntegration of large legacy organization
North Sea Risks to consider
Asset risks to consider
Partnership alignment ( JV’s)Host platform constraints for process availability and / or topsides modificationsProject commercial agreement delay, impacting project execution
Subsea construction to platform topsidesOperator’s project management to maintain cost/schedule
Key contractor(s) schedule slippageWell Placement not concluded, risk to drilling rig arrival
Production technologies issues ie Water break through
Reserves & Production profile to be re-evaluated
Summary and Conclusions
Our current environment is very challenging with oil price, cost base, ageing assets,
skill base and size of opportunities in the North Sea. Therefore effective risk
management is essential
Predictive analytics to help understand what the future scenario’s may be and then
what the best course of action. Reactive management will not work in the future.
Integrated or enterprise risk management is something that we should do
collectively, especially with the operator, stakeholders and the supply chain together.
Risk management is a live planning and performance management tool supported
by a culture of adding value and improving predictability
Managed right it can bring huge benefits with lower costs and higher value to
maintain a competitive advantage
Maarten van Wesemael
Director
Lloyds Banking Groupand
Alex Drummond, Senior Area Manager,
Aberdeen & North Scotland Mid Markets
Bank of Scotland, Commercial Banking
A Funder’s Perspective on
Decommissioning Risk
20 January 2014
An Overview
Decommissioning vs. Environment
22
MARINE GROWTH
• After submersion in the North
Sea, oil & gas structures are
colonised by opportunistic
marine organisms that
adhere to the structure.
• These colonies are termed
‘marine growth’ and may form
habitats containing a range of
individuals and species on a
single structure.
• During decommissioning,
these colonised subsea
structures are removed and
transported to shore.
• Transportation can take
several days during which
time some marine organisms
will dislodge, die off or
mummify.
• An innovative approach to
dismantling out-of-service
offshore oil and natural gas
production platforms is
creating new, thriving habitats
for marine life while saving
the industry money. When
the platforms are used to
create artificial reefs, needed
marine habitat is created.
An overview of decommissioning
23
The final phase in the life of a field is called decommissioning.
This broadly involves:
• The plugging and abandonment of all wells
• Cleaning of manifolds and pipelines
• The removal of topsides and subsea facilities and jackets (the steel supporting structures) to shore
• Allows the removal of large structures from the ocean, thereby restoring the seabed to its original, natural state.
• Opportunity to derive a greater return on the investment represented by the platforms by converting them to other potentially valuable uses with economic
and/or scientific benefits.
• Provides a chance to preserve a large part of the biological communities that inhabit offshore platforms, thus conserving an ecological resource that
contributes to biological production locally and perhaps regionally.
• Opportunity for the state to achieve financial benefit through its share of avoided decommissioning costs, thus increasing resources available to support
efforts that produce environmental and socioeconomic benefits.
With industry estimates of
decommissioning costs up
to £40billion
Combined with 5-year low
Oil price + corresponding
fall in net operating cash
flow - The economic limit
is reached earlier.
Existing infrastructure will
continue to be
DECOMMISSIONED
EARLIER as a result
What is it?
Why is it needed?
When is it needed?
• The economic limit is defined as the production rate below which the net operating cash flow from a project is negative
• When the economic limit of a field is reached, it becomes a financial liability.
• This means it costs more money to keep operations running.
• Because the asset is not producing enough hydrocarbons to cover operating costs one must decide whether to continue production or plug and abandon.
The Evolution
25
A Journey Through Time…
1998
Petroleum ActSection 29 notices issued to
licensees
2008
Energy ActAll relevant parties liable
2007
DSAThe standard decommissioning
security agreement
2012
DRDGuaranteed certainty of future tax
relief on decommissioning costs
2015+1975
Petroleum Revenue
TaxFairer share of profits for the
nation
2002
The
Supplementary
Charge Additional tax on UK
E&P
2014
The Wood Review
PublishedAim: to achieve the maximum
economic extension of field life
and to ensure key assets are not
decommissioned prematurely
2014
Cut in SCT Supplementary Charge fell
from 32 percent to 30 percent
Looking forward…
DECCTakes over from BERR
1992
OSPAR conventionTo protect the marine environment
of the North-East Atlantic
The UKCS: Then and now...key risks refocused
26
Operator Size
2
0
1
5
1
9
7
5Production
Source: DECC
Expenditure
The Wood review states:-
• Throughout the 1970s and 1980s, a small number of very
large fields dominated UKCS production,
• Today’s production comes from more than 300 fields operated by
an increasingly diverse mix of companies who are far more interdependent
than before.
• Most new fields are considerably smaller in size
• The average UKCS discovery size over the past ten years has been 25
million boe
• 90 per cent of current fields in production on the UKCS are producing less
than 15,000 boepd
Supply Chain Impact
>500 >45,000km >10,000
installations of pipeline,
umbilical and
cables
platform and
subsea wells
Supply Chain Impact
£30-40bn spend by 2040
28
28
Decommissioning – a significant supply chain opportunity…
Supply Chain Impact
29
Timing of activity
Commodity price v. Cost
Relative lack of experience
Hostile operating environment
Overseas competition
Environmental and safety concerns
Investment required
...but there are challenges
Supply Chain Impact
30
Market conditions
Counterparty
Contract terms
Cash flows
Execution
Contractor
Risk in the decommissioning supply chain..
Supply Chain Impact
31
Fixed price v. cost plus
Payment terms /
milestones
Termination rights
Contractor liabilities
Security/ step-in/
enforcement rights
Contract terms
32
Supply Chain ImpactExecution Risk
Scale of the project
Access to resources
Significant stakeholder
interest
Reliance on wider supply
chainSeasonality
Experience and track
record
?
? ?
Alexander Oddy
Partner
Herbert Smith Freehills LLP
Alexander Oddy, Partner, +44 207 466 2407, [email protected]
20 JANUARY 2015
OIL & GAS UK BREAKFAST
IMPLEMENTING EFFECTIVE INSURANCE AND MAXIMISING INSURANCE RECOVERIES – A LEGAL PERSPECTIVE
36
INTRODUCTION
• E&P companies operating on the UKCS take a wide range of approaches to risk transfer
and insurance buying dependent on their balance sheets and risk transfer philosophy.
• Limited compulsory insurance: Employers’ Liability. Insurance often used to support OPOL
obligations
• For the majority that buy at least some insurance NB that insurance policies are not normal
contracts in practice; insurance claims are not normal contractual claims. The insurance
market experience is that it is taking longer to adjust, settle and collect claims.
• Impact of declining oil price in a soft insurance market?
– Should represent an opportunity to enhance coverage
– Represents a further challenge to getting material claims paid
37
ENSURE THAT EFFECTIVE INSURANCE IS IN PLACE AND MAINTAINED
• Insurance policies are contracts of good faith – positive obligation to disclose all material facts
which are or ought to be known. The remedy for material non-disclosure or misrepresentation is
avoidance of the whole contract. [NB: Insurance Contracts Bill]
• Duty can be limited and the remedy for breach can be amended by contractual agreement – if
insurers agree. But NB additional questions, project extensions, scope changes which usually
revive the duty of disclosure.
• The disclosure process requires effort and cooperation: operational personnel with insurance
teams; operators with non-operators.
• Review insured values of assets regularly including assets of others on which production is
dependent.
• Review business interruption (LOPI) limits in light of oil price decline.
38
ENSURE THAT EFFECTIVE INSURANCE IS IN PLACE AND MAINTAINED
• Particular terms in insurance contracts have a different meaning to the usual meaning in
contracts, for example:
– Warranties – non-compliance brings the contract to an end (e.g. Marine Warranty
Surveyor scope)
– Conditions (e.g. reasonable care)
– Conditions precedent to cover or liability to pay claims (e.g. premium payment or
notification of claims)
– Beware of obscure insurance market language: operational personnel must
understand their obligations, so ask questions!
39
CHECKLIST FOR MAXIMISING INSURANCE RECOVERIES
1. NOTIFY CLAIMS PROMPTLY AND PROPERLY
• “Do exactly what it says on the tin”
• Inform insurance manager and/or broker quickly and strictly in accordance with
insurance policy terms
2. GATHER AND PRESERVE EVIDENCE
• Carry out effective internal investigations, privileged where appropriate (and be careful
of lessons learned exercises)
• Take appropriate records of physical evidence (especially if items are being scrapped)
• Agree protocols for inspection and testing with relevant stakeholders
40
CHECKLIST FOR MAXIMISING INSURANCE RECOVERIES
3. CLAIMS ROLES AND RESPONSIBILITIES
• Loss adjuster is an agent of the insurer and reports prepared are for the benefit of insurers
no matter how established the relationship
• Manage engagement between asset personnel/engineers and adjusters carefully
• Broker acts on behalf of policyholder in relation to claims
4. CONSIDER INTERFACE BETWEEN CONTACTUAL AND INSURANCE CLAIMS
• The insured is not obliged to exhaust his remedies against third parties before pursuing
his insurance claim e.g. Caledonia North Sea Ltd v BT & Ors [2002] All ER (D) 85 (HL)
• If the contractual claim proceeds ahead of the insurance claim, think about the material
that is generated and its impact on the insurance claim
• Insurance money in hand helps mitigate contractual disputes
41
CHECKLIST FOR MAXIMISING INSURANCE RECOVERIES
5. UNDERSTAND WHAT INSURERS WANT TO KNOW
• Causation – do I understand what has happened on this loss?
• Coverage – am I in a position to form a view on policy liability?
• Quantum - how much should I reserve and has the loss adjuster received appropriate
assistance?
• Claims control – am I satisfied that other interested insurers are aligned with me and are
ready to pay their share?
• Proof of Loss – will settlement buy me finality and allow me to collect my reinsurance?
42
CHECKLIST FOR MAXIMISING INSURANCE RECOVERIES
6. UNDERSTAND INSURERS’ RESPONSE
•Reservation of rights - to protect the insurer against inadvertently taking action inconsistent
with an available defence under the policy
•Denial of cover - understand the consequences:
– Avoidance for non-disclosure (consider replacement cover)
– Breach of warranty (cover terminated – replacement or contingent cover)
– Claim declined since loss outside cover
– Claim not payable since breach of condition precedent
– Reduction in claim for breach of bare policy condition
Critically, continue to observe all policy terms
43
CHECKLIST FOR MAXIMISING INSURANCE RECOVERIES
7. PROJECT MANAGE YOUR CLAIM
• Develop an effective and realistic project plan (in conjunction with insurers if possible)
• Consider express confidentiality regime for sensitive and/or proprietary information
• Agree structure for communication given the policyholder typically has multiple insurer
counterparties
8. PROVE YOUR CLAIM
• Most E&P companies are forward-looking BUT insurance claims look backwards, so
recognise risk of loss of project/corporate knowledge
• Cross discipline team likely to be required (internal and external) including technical,
quantum, legal – possibly over an extended period
• You cannot rely on evidence which has been lost – document (including electronic
document) retention supported by a litigation hold in an appropriate storage system or
archive for the claim.
44
CHECKLIST FOR MAXIMISING INSURANCE RECOVERIES
9. OBSERVE POLICY TERMS AND PRESENT A PROPER CLAIM
•Check and diarise limitation deadlines:
– 6 years from date of damage under English law property policy
– 6 years from ascertainment of liability by judgment, award or settlement under English
law
– BUT these periods are often varied by contract and under other systems of law
– If in doubt, get a standstill agreement in place or issue protective proceedings
•Read the policy and tell the story of the claim on your terms. Don’t rely on the loss adjusters or
insurers to work it out for you.
45
CHECKLIST FOR MAXIMISING INSURANCE RECOVERIES
10. MANAGE CLAIM RESOLUTION ACTIVELY
•Dialogue and negotiation are always the primary means to effective resolution of insurance
claims but:
– Lots of intermediaries: claims consultants, brokers, loss adjusters, lawyers
– Lack of clarity over who has authority is inherent in the subscription market at present
•Build pressure through multi-track approach:
– Negotiations including through mediation
– Claims adjustment without prejudice to defences and liability
– Formal dispute resolution on coverage if appropriate
•Utilise commercial relationships with insurers and your broker’s commercial relationships (but
understand their limits)
Ken Ume
Director of Product Marketing
Petrotechnics
Connecting Operational Risk Management to Day to Day OperationsUsing Operational Risk Management to drive improved production efficiency, sustainable cost management and safer operations
Complex, Dangerous, Risky – Business As Usual?
Hazardous Regulations
Demographics Oil Price
In a Low Oil Price Environment…
Doing more of the same isn’t the answer…
Cost management + Performance optimisation + Safety Improvement is more important than ever
Operational Risk Management
By Starting with a Better Understanding of Operational Risk
(people, assets, environment & reputation)
Asset ProductivitySafely & Cost Efficiently
Extract the Maximum Value from Our Assets
Operational Effectiveness & Efficiency
…We can get more of the right things done in
the right way to…
How We Manage Operations
Daily Operations
But do we know what’s actually being
done?
We know what needs to be done to manage process safety risks & assure the integrity of operations….
Despite Knowing “What to Do”…
…And Incidents & Accidents Still Occur
Unplanned Shutdowns, Maintenance Backlogs, Asset
Integrity Issues increasing Costs Are Common…
We can’t get enough of the “right” things done safely & efficiently.
We should have been able to “connect the dots” before something happened.
What it looks like from the Office…
How Do We Reconcile These?
Our Indicators Look Good
Our Operational Reality
• Unplanned Shutdowns
• Rising Costs
• Growing Maintenance Backlog
• Declining Production
Efficiency
• Near Misses
What it looks like from the Frontline…
So what…do they mean to him?
(1) Tier-2 Process Safety Events in this Unit last Q
Operational RealityWhat He is Aware of…
8% MOCs don’t have updated drawings & procedures
5% of Safety Critical Maintenance not up to date (Gas Detector in the Unit)
Emergency response drills were not completed as scheduled in this Unit
KPIs
(2) Tier-2 Process Safety Events in the past year
92% MoCs have updated drawings & procedures
95% of Safety Critical Maintenance is up to date
87% of emergency response drills completed as scheduled.
How do they impact him?
All of the
Risks are in
Different
Places
What Gets in the Way
90 Days
30 Days
14 Days
7 Days
REAL TIME
Safety & Compliance rather than Operations
requirement.
Lack of VisibilityLagging KPIs &
Focussed on program health
Everyone can’t be a Risk Management
expert. Risks are assessed differently & outside the
context of Daily Operations
Cross-Functional Collaboration is
challenging
A Common View of Risk is Key
90 Days
30 Days
14 Days
7 Days
REAL TIME
Holistic Operational Risk Management
Optimised Performance
Improved Operational Decision Making
Enhanced Coordination & Collaboration
Common Currency of Risk
Simplify the Complexities of Frontline Operations
A Risk Based Approach to Fill the Gaps & Connect the Dots…
…so Safety doesn’t have to be set against Production.
In a Low Oil Price Environment…
Reduce Risk, Improve the Productivity of Operations and Keep Your People & Assets Safe
Improved Coordination & Collaboration
Better integrated “Planning to Execution” process
Get more of the right things done safely & efficiently
Cost Control
Optimize Business Performance
Say and prove that assets are running safely, reliably, sustainably and cost effectively
Compete in a Low Oil Price Environment
Operational Risk Management
Operational Effectiveness & Efficiency
Asset Productivity
Common View of Risk
Increased Visibility
Holistic Risk Management across the organization
Improved Operational Decision Making
Global Presence & Reach
24 Countries*
800+ Sites*
75,000+ Users*
*Live & planned H1 2015 deployments
Oil & Gas UK London Breakfast Briefing – Risk Management
Tuesday 20 January 2015
Panel Discussion
Chaired by Michael Tholen, Oil & Gas UK
Our panellists are…
Chris Bird, MOL Group
Maarten van Wesemael, Lloyds Banking Group
Alex Drummond, Bank of Scotland, Commercial Banking
Alexander Oddy, Herbert Smith Freehills LLP
Ken Ume, Petrotechnics
Summary and Vote of Thanks
Michael Tholen
Economics & Commercial Director
Oil & Gas UK
