the risk management function presented to the university of houston bauer college of business march...
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The Risk Management Function
Presented to The University of Houston Bauer College of Business
March 29, 2012
McDermott International
© 2010 McDermott International, Inc. All rights reserved.
Cautionary Statements
2
In accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, McDermott cautions that statements in this presentation that are forward-looking and provide other than historical information involve risks and uncertainties that may impact actual results and any future performance suggested in the forward-looking statements. The forward-looking statements in this presentation speak to conditions as of the date of this presentation and include statements regarding backlog, to the extent backlog may be viewed as an indicator of future revenues, our expectation that oil demand will grow until 2015, our plans for investments in certain markets, our expectation that revenues in 2012 and beyond will be solid, our belief that market conditions are improving, our intentions to not sell equity, the timing, scope and execution of recent awards and the timing of delivery and technical specification of the NO105 and planned upgrades to the NO102. Although McDermott’s management believes that the expectations reflected in those forward-looking statements are reasonable, McDermott can give no assurance that those expectations will prove to have been correct. Those statements are made based on various underlying assumptions and are subject to numerous uncertainties and risks, including, without limitation, disruptions experienced with customers and suppliers, the inability to retain key personnel and adverse changes in the demand for oil and gas. Should one or more of these risks or uncertainties materialize, or should the assumptions underlying the forward-looking statements prove incorrect, actual outcomes could vary materially from those anticipated. For a more complete discussion of these and other risks, please see McDermott’s periodic filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31, 2011. We do not undertake any obligation to update the forward-looking statements included in this presentation to reflect events or circumstances after the date of this presentation, unless we are required by applicable securities laws to do so.
Presentation Overview
McDermott Company Information Risk Management Overview Risk Identification Examples of Risk Treatment Insurance Programs Captives Inside a Risk Management Department Post Macondo Enterprise Risk Management (ERM)
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McDermott International, Inc.
Leading engineering and construction company Exclusively focused on offshore upstream oil & gas
Engineer, procure, construct and install (“EPCI”) Front-end design and detailed engineering Overall project management and procurement services Construction and installation of offshore production facilities Installation of pipelines and subsea systems
Worldwide with approx. 15,000 employees Only American headquartered company with EPCI services on
global scale Over 90% of 2011 revenues derived outside the U.S.
Long-term relationships with energy customers Primarily national (“NOCs”) and super major oil & gas companies
Absolute commitment to safety, quality and ethical behavior
Source: Engineering News-Record 2010 Sourcebook
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Key Clients
Majors Independents
NOC’s
5
6
Global Presence in Major Oil & Gas Regions
Operating in about 20 countries Engineering offices: 5 (+1 JV)
Construction facilities / marine bases: 4 (+1 JV) Vessels:
7 heavy-construction derrick lay barges 4 multi-functional; 1 subsea; 1 lay barge
EPCI is a Unique Delivery Platform
7
Construction ProcurementEngineering Installation
700+ engineers globally Offices in 5 locations worldwide
FloaTEC, LLC 50:50 JV with Keppel FELS
Capabilities / Services: Studies & conceptual designs
Front-End Engineering & Design (“FEED”)
Detailed engineering & design
Transportation & installation engineering
300+ dedicated employees
Capabilities / Services: Negotiating, purchasing,
transporting, inspecting, inventory control and quality assurance
Global sourcing
Deep local knowledge
Strong supplier relations
Strategically located facilities Aggregate area: Over 1,000 acres
Largest deck to date 23,000 tons
Largest jacket to date 38,000 tons
Capabilities / Services: Topsides & onshore modules
Jackets, piles & compliant towers
TLPs, SPARs, FPSOs
Subsea production systems
Standardized fabrication processes & procedures
Dedicated installation fleet Global construction fleet, multi-
functional and subsea support vessels
Capabilities / Services: Single & dual heavy-lift
Floatover install
Various diameter pipeline install
S-Lay, J-Lay, Flex-Lay and Reel-Lay
Dynamic positioning & mooring systems
Subsea installation support
Repair & salvage
Providing Fully Integrated, Single-Source Solutions For Worldwide Offshore Development
Project and Risk Management
(Graphics compliments of Offshore Magazine; 2005 Offshore Oil & Gas Industry Deepwater Solutions for Concept Selection)
McDermott’s leadership covers shallow to the deepest water
Spectrum of Offshore Infrastructure
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Three Primary Market Segments
Topsides Design
Top TensionRiser Systems
Flow AssuranceDownhole -to- Shore
Field Layouts
Pipeline Design & Installation Analysis
Fixed SolutionsJacket – Tripod - CPT Floating Solutions
TLP - SPAR - SEMI
Subsea SystemArchitecture
ProcurementServicesSubsea Technologies
Marine ConstructionPipelay
InterventionIMR
FlexibleRiser Systems
RigidRiser Systems
Steel CatenaryRiser Systems
FPSOTopside Modules
Subsea StructureDesign/Fabrication
Hull Alliance
SURF Subsea Infrastructure,
Umbilicals, Risers & Flowlines
Conventional Infrastructure(Shallow)
Floating Production
Systems (FPS & FPSO)
Angel Project
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Strategy in Action – Newest Additions to our Fleet
North Ocean 102* Rigid or flex-lay pipelay capability 7,000 MT carousel payload Two 120 MT tensioners 140 MT abandonment and recovery (A&R)
system, capable for pipe abandonment or subsea lowering to 10,000-foot water depth
250 MT active heave compensation (AHC) main crane, for subsea lifts and construction supports
Dynamically positioned and fast transit
North Ocean 105 Rigid or flex-lay pipelay capability 2,700 MT vertical reel payload Pipelay tower with 400 MT tensioner 450 MT & 150 MT abandonment and recover
(A&R) system, capable for pipe abandonment or subsea lowering to 10,000-foot water depth
Two portside active heave compensation (AHC) main cranes, 100 MT and 400 MT, for subsea lifts and construction supports
Dynamically positioned and fast transit Expected availability in summer 2012
* Includes planned December 2011 upgrades
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2008 2009 2010 20110
1,000
2,000
3,000
4,000
5,000
6,000
4,404
3,261
5,039
3,879
2008 2009 2010 20110.00
0.20
0.40
0.60
0.80
1.00
1.20
0.26
0.881.00
0.64
2008 2009 2010 20110
100
200
300
400
107
279315
251
2008 2009 2010 20110
1,000
2,000
3,000
4,000 3,098 3,282
2,404
3,445
Revenues Operating Income
Diluted Earnings Per Share Historical Backlog
($MM) ($MM)
($MM)($)
____________________Note: Presented on the basis of continuing operations.[1] Includes approximately $46 million ($0.20 per share) of non-cash impairment & related expenses[2] Includes approximately $162 million of project charges, $5.5 million of non-cash impairment charges and $35 million of non-operating benefits
[1] [2]
[1] [2]
Recent Operating Performance
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Backlog by Geographic Region
Backlog by Type of Contract Backlog by Estimated Recognition Year
Backlog by End Market
____________________Note: Figures above do not include the backlog of the FloaTEC joint venture. Presented on the basis of continuing operations.
Conventional Struc-tures75%
Floating Structures
3%
SURF and Charter
22%
Middle East46%
Asia Pacific36%
Atlantic18%
201283%
201312%
2014+5%
Fixed Price71%
Other29%
Strong Backlog Provides Visibility(as of December 31, 2011)
(M = US$ million) (B = US$ billion)
Financial Position (12/31/11 or as shown)
US $
Cash & Investments 731.8 M
Available Credit 643.9 M
Debt 93.7 M
Equity - Book Value 1.7 B
Equity - Market Cap (2/21/12) 3.2 B
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What We Do – Jacket Loadout
15
Risk Management Overview
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Risk Analysis
Design Risk Management Strategy
Risk Identification
Implement Strategy
Review
Loss Control
Captives
Go bare
Finite ins, retros, etc
Transfer - Contract
Debt
Risk Financing
Transfer - Ins
Risk Avoidance
17
Risk Management Process
Risk Identification - Attitude
The view of some:
“ But in all my experience, I have never been in any accident…of any sort worth speaking about. I have seen but one vessel in distress in all my years at sea. I never saw a wreck and never have been wrecked nor was I ever in any predicament that threatened to end in disaster of any sort.”
-E.J. Smith 1907
18
Your own Experience (trailing): Prior losses Near Misses
Your Own Experience (leading) Questionnaires/interviews (labor, staff) Audits (e.g., safety, property, financial controls)
The experience of others (leading – at least to you): Trade/industry peer groups (e.g., CII, IMCA) Subject matter experts (e.g., surveyor, lawyers)
Risk Wellness Assessments ©
Risk Identification
19
Risk Wellness Assessments
Risk Management Process
Risk Wellness Assessment
Prevention Review
Coverage Evaluation
Deliverables:Executive SummaryRWA Report Action Item Registry
20
Other Contractor People and PropertyMcD People and
Property
Work in Progress
Company People and PropertyThe Environment
Risk Identification
21
Risk Identification – Sometimes Difficult
22
Think in terms of frequency and severity How often? What is the likelihood? How much? What is the impact?
Tools for analyzing risk include: Trend Lines Probability Distributions Benchmarking databases Probable Maximum Loss/Maximum Possible Loss Analysis Simulation and models Claims and near miss reviews Legal analysis of exposures Mapping
Risk Analysis
23
1 2 3 4 5 6 7 8 9 10
9 10
10 2 9
11 4 1 8
7 3 7
5 6
6, 13 8 5
12 4
3
2
1
Co
ns
eq
ue
nce
Likelihood
Ca
tast
rop
he
Ch
alle
ng
eD
istr
act
ion
Probable CertainImprobable
Risk Analysis – Risk Map
• Chart the risks identified in interviews and questionnaires
• Where should we start with loss control?
• How much should we be willing to spend (not relevant if HSE&S)
24
Avoidance Do not engage in task/activity Drastic step as revenue = zero
Loss Control Steps to decrease frequency and/or severity Examples are safety systems, sprinklers, containment systems Components of an effective loss control system
Management commitment – it all starts (and can end) here Procedures - Practices/policies that reduce risk Training – It doesn’t matter if no one knows Behavior – Need to have rewards and accountability to drive the
correct behavior Communication – Need to talk and walk, share results and updates,
etc.
Risk Treatment Methods
25
Risk Treatment (continued)
Financing (not mutually exclusive) Go bare
Take as current expense when loss occurs Can use cash or debt to finance
Self finance through: Reserves Captives
Transfer Pure/guaranteed cost insurance Contractual indemnity from third party
26
Transfer/Financevia Insurance
Frequency
Cost Effective LossControl or Ignore
Avoid
Retain andFinance via Captive
Severity
Low FreqHigh Severity
Low FreqLow Severity
High FreqLow Severity
High FreqHigh Severity
Risk Categorization for Financing
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Low Frequency
High Severity
Risk Financing – The Basics
Risk RetentionFinanced Via Captives
Transfer/FinanceVia Insurance
High Frequency
Low Severity
Lim
its - $$$$$$
Limits based on:• Benchmarking
• Calculated exposure• Historic losses• Market capacity
• Cost
Transfer point determined actuarially and by insurance
market’s appetite for risk
MII Captives:• Allow us to avoid “dollar
swapping” with insurers• Allow us to control our claims
• Risk transfer from OUs; Captives accept risk for a fixed premium with no adjustments
• Premiums based on actuarial analysis, market conditions,
and risk factors
28
What We Do – Jacket Launch
29
Work in Progress•McD indemnity from customer•Also CAR coverage•Maybe McD DIC CAR•Extensive loss control
Company People and Property
•Customer Indemnity•If not full, project CGL•Corporate liability excess captive funded SIR and excess project cover
The Environment• Clean up coverage• Liability Coverage• Extensive loss control
Other Contractor People and Property
• Contractual indemnity with customer and/or contractor
• Corporate liability program excess of captive funded SIR
• Perhaps project specific CGL
McD People and Property
•Contractual indemnity•Backed by naming and waiving to relevant insurance policies (liability, hull, etc.)•Extensive loss control
Risk Treatment – Real Life
30
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32
33
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What We Do – Deck Floatover
35
Piracy
Not Really…
Modern day Pirates (Pictures of Pirates in the Gulf of Aden)
36
Piracy Reports
37
Piracy Heat Map of potential encounters. (Left)
Vessel Incidents (Right)
Risk Identification and Assessment: London Offshore Consultants to assess vessel readiness ($30K) Control Risk to assess security plan, vessel, & intended route ($20K) Naval architect to verify hull integrity ($10K) Medical assessments of riding crew ($32K)
Risk Management: Change tow route to decrease racking stress ($200K) Add emergency tow gear, new damage control equipment, and enhanced crew
safety equipment (e.g., new survival suits) ($70K) Continuous Wilkens weather forecast($4K) Damage control training for crew and add welders to riding crew ($10K) De-mob crew prior to Gulf of Aden ($200K direct and $100K increased tow time) Guys with guns ($400K)
Total cost: > $1,100,000 plus internal cost Incidents: Zero
Risk Treatment - PiracyRisk Treatment - Piracy
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39
Convoy through the Gulf of Aden (March 2011)
Marshal-5 (right) and Marshal 1 (below) providing escort duty to McDermott’s Agile Sea during her transit of the Gulf of Aden. Pictures taken from the bridge of the Agile Sea.
The Hardening of the Agile Sea
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McDermott fortifies its vessels on top of hiring security contractors to ensure a high level of security has been reached.
Insurance: Because Loss Control Does not Always Work
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Insurance: Because of Ingenuity….
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Risk Treatment – Role of Insurance
The view of some (per Cecil Beaton):Americans have an abiding belief in their ability to control reality
by purely material means... airline insurance replaces the fear of death with the comforting prospect of cash.
McDermott’s (current) view: Use only to finance low frequency, high severity losses The less you use it, the happier everyone is Growing bias towards retaining risk
Down Low – avoid dollar swapping with insurers Quota share – skin in game Invest in loss control - not in insurers
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($10,000,000)
$0
$10,000,000
$20,000,000
$30,000,000
$40,000,000
$50,000,000
$60,000,000
$70,000,000
$80,000,000
$90,000,00019
92
1993
1994
1995
1996
1997
1998
1999
New
99
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Excess Transfer Premiums
Captive Premium
2008 Captive Programs
Expenses & <$2MM RiskTransfer
HIGH $ 82.2M
2011 $ 14.6M
1992 cost of $24.04 per $1K revenue
2011 cost of $4.25 per $1K revenue
Difference of $68.2M
44
Excess Liability and Captive Program
Insurance Programs
Diversity of MII’s operations drive diversity and complexity of insurance programs Currently approx. 32 different insurance policies in place Most are placed at the McD level on behalf of it and its subs Cumulative annual premium spend of approx. $20M for risk
transfer Also self finance SIRs on most programs through captives with
annual “spend” of approx. $8M Tendency to be very conservative
Higher limits vis-à-vis peers Very stable markets with focus on long term relationships Conservative reserving for captives
Lockton is our universal Broker
45
Synopsis of Major Insurance Programs Limits Cost
Liability/Third Party
Primary Casualty
Captives finance most workers comp, auto and general liability up to attachment point of excess programs $2M $8M
Directors & Officers
Protects D’s & O’s and the Company for “Wrongful Acts “committed in fulfilling duties
$165M - side A$115M - Side B $1.4M
Employment Practices
Protects against claims by employees for discrimination, sexual harassment or other employment related allegations
$15M xs &$15M
$66K &$108K
Fiduciary Liability
Protects against breach of fiduciary duty claims in regards to Company’s sponsored Employee Benefit Plans $40M $192K
Aircraft/Aviation Non-owned for chartered aircraft $10M $121.6 K
Excess Liability
Excess coverage on General Liab; Auto Liab; Employers Liability, certain Marine Insurance (e.g. MEL, Wreck Removal, P&I), Non – Owned Aircraft Liab
$535.75M $5.97M
Terrorism Separate terrorism liability placement $100M $230K
Secunda P&I Club
Covers vessel related risk including crew liability, vessel liability, and wreck removal Circa $7B $710K
Property/First Party
Global Property
Covers all risks of direct physical loss or damage from any external cause, except as excluded or limited (e.g., flood and named windstorm) $250M $1.2M
Marine Insurance
Covers physical loss or damage to Hull or Contractors Equipment; loss of hire, and other incidental marine risks (e.g., Lift/Loading Risk; Construction/Installation)
Fleet value$1B
Plus LOH & ROW$7.6M
Cargo McD programs covering loss or damage to shipments As declared
Terrorism Separate property coverage for terrorism losses $200M $212.8K
Example: EPL Limit Benchmarking – This allows us to price against the Market to make sure we are getting accurate pricing from insurers and the market.
47
Insurance Industry: Market Participation
London Market Casualty Program Marine Program Property Terrorism
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Insurance Industry: Market Participation
Domestic Market Financial Products Property
49
Bermuda Market Excess Casualty
Insurance Industry: Market Participation
50
Captives
•Captives used to fund self-insured retentions for WC, General Liability, and Auto Liability
•Max per occurrence $2mm
•Annual “premiums” total $8mm
•Consolidated captives for: decrease admin cost, and increase ability to retain risk
•McD makes almost all claim decisions•Pre-fund losses (through actuary) so premium can be invested, Investment
income helps to defray claim costs•Allows us to retain risk in hard markets•Favorable tax treatment (e.g. Bermuda)•Fewer regulatory restrictions and better access to reinsurance•Possible accumulation of cash reserves
Captive Benefits
51
Captives Cont.
Fronting Insurer
•Captives typically are not admitted insurers by states. Therefore, a fronting insurer is needed to:
•Provide evidence of Insurance
•Administer and Pay claims (later reimbursed)
•May or may not accept risk of claims at certain levels
•ACE (our Fronting Insurer) agrees to evidence coverage to employee’s and third parties above a deductible and up to a limit
•ACE also pays claims and is reimbursed the amounts paid within McD’s Deductible
•The captives are funded by the data from analysis done by 3rd party actuaries and industry trends
•These use law of large numbers and macro trends, not individual claims
How do McDermott’s Captives Work?
52
Historically, and with the exception of domestic GL liability, we transferred through insurance number of certain casualty risks below $2M
For example, we bought: Auto liability cover above $250K domestic and $100K
foreign Foreign GL cover above $1.5M Workers Comp above $1M non-Ohio and $750K Ohio
A Case Study in Risk Retention
53
Be Careful What You Buy
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
Ohio W/C Non Ohio W/C Domestic Auto Domestic GL MEL Foreign GL Foreign WC Foreign Auto
Do
llar
s
Retention Transfer
ACE or London X/S
A Case Study in Risk Retention
54
The issue: from 1999 through 2008, we have paid approx. $18M in premiums to transfer these risks, during which time insurers have paid out approx. $1M in claims Total of 3 losses with 2 of them very minor and one serious Net underwriting profit of about $17M or $1.9M per year Calculations do not include time value of money which
would bolster profits given the delays in pay out on claims CIRM proposed we retain these risks in the captives
rather than transferring them Significant savings to company since the change
55
Be Careful What You Buy
Inside a Risk Management Department
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Risk Management Group
Year over Year Insurance Cost
58
Prem. ($mm) 23.6 25.4 29.4 28.6 30.1 28.1 26.4
Rev. ($B) 1.2 1.6 2.5 3.8 3.4 2.4 3.45
Limit ($B) 2.83 3.19 5.09 5.86 5.89 6.0 6.6
• We need to track how we are doing as stewards of the Company’s resources
• Here we look at insurance cost in relation to the amounts of coverage we are buying, or our “Rate per Mill”
2005 2006 2007 2008 2009 2010 2011$0
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
$30,000,000
$35,000,000
$-
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000 8,3497,930
5,766
4,875 5,1154,664
3,959
Property
Marine Package
Other-Cargo, EPC, Air…
FinPro
Excess Liability
Primary Risk Transfer
Captive
MII Corp
Cost/Limits
Premium per $1K of Revenue
59
• Here we look at insurance cost in relation to our revenue• It shoes an uptick in our cost of insurance per $1K of
revenue because our insurance cost we basically consent while our revenue decreased
• We could have purchased less coverage but elected not to
2005 2006 2007 2008 2009 2010 2011$0
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
$30,000,000
$35,000,000
$-
$5.00
$10.00
$15.00
$20.00
$25.00
$19.07
$15.76
$12.00
$7.48 $8.87
$11.66
$7.67
PropertyMarine PackageOther - Cargo, EPC, AirFinProExcess LiabilityPrimary Risk TransferCaptiveMII CorpCost Per $1000 of Revenue
Claim Analysis
60* Based on actual cost or current reserve
MII total Liability claims: 2005 – 46 2006 – 7 2007 – 20 2008 – 10 2009 – 5 2010 – 0 2011 – 4 2012 YTD – 1
Percent of Claims since 2000 below*: $250K – 97.78% $500K – 98.33% $1M – 100%
20002001
20022003
20042005
20062007
20082009
20102011
2012$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
$1,800,000
$2,000,000
Largest Single Claim*
61
Post Macondo
Macondo Well Insurance Market Issues
Aggregation. The accumulation of Insureds at one location was much greater than insurers believed. This created significant concerns because multiple Insureds being brought into the same loss could result in catastrophic global market limit erosion. For example, just the key participants in the Macondo Well Incident had insurances available of approximately $3 billion including Operators Extra Expense and General Liability. BP was self-insured.
62
Macondo Well Insurance Market Issues Cont.
Contracts. Almost immediately, the Operator (BP) began posturing that the Drilling Contractor (Transocean) should be responsible for pollution resulting from the Control of Well event. This, for the most part, goes against common indemnity agreements between operators and drillers in the energy industry. If the indemnity was ruled void, the protection insurers believed existed for service contractors would become non-existent and change how business has been done in the energy industry forever.
63
Macondo Well Insurance Market Issues Cont.
Loss Potential. Before the Macondo Well Incident, insurers did not consider that such a large loss could occur. The Macondo Well Incident became the largest accidental marine oil spill in the history of the energy industry. The explosion killed 11 men working on the platform, injured 17 others and released about 5 million barrels of crude oil. BP has approximately $37 billion budgeted for spill-related expenses.
Post the Macondo Well Incident, the liability market for offshore Operators, Drilling Contractors, and Service Contractors saw rate increases between 20% to 100%+ on average. Some had even higher increases depending on their loss history and how close they were to the Macondo Well Incident.
64
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McDermott “IS NOT”
A Drilling Contractor An Operator/Non-Operator of oil and/or gas wells An Owner or Operator of pipelines An Over-Hole Service Contractor i.e. Well Completion,
Casing, Cementing, Fracturing, Workover, etc. A designer, manufacturer or servicer of Production
Equipment. i.e. BOPs, SSSCVs, etc. Commonly operating on or adjacent to any live wells Commonly operating with other contractors on
location
66
McDermott “IS”
A Marine Engineering and Construction Contractor Focused 95%+ internationally with minimal exposure
in the Gulf of Mexico Willing to have “skin in the game” as evidenced by
McDermott’s Risk Retention and NO paid claims to Underwriters during the past 10 years for CGL, EL, MEL, or AL
67
Instances Esso KTT Project – Work conducted adjacent
to producing platforms
Su Tu Vang – Removal/Replacement of drilling template, stabbed a jacket over 2 live wells.
ARAMCO Karan – Installation of jackets and piles with drilling rig
Exxon Mobil AKG 1&2 – Post completion hook up on live wells
Ras Gas Phase 1&2 – Post completion hook up on live wells
ADMA Project – Shutdown work adjacent to production platform
Platong Project – Set up adjacent to production platforms and LQs
PV Gas Pipeline project – Laid pipeline adjacent to live production platform
PM – CAA Bunga Tulip A Project – Offshore installation work
Instances in last 5 Years Where We Worked Adjacent to Live Well*
Risk Treatment
Every time had a consequential damage waiver
8 times - indemnity from customer for pollution losses from well (either ground up or excess of a reasonable cap)
5 times bought project specific CGL coverage
* Out of about a total of 170 contracts; Not scientific but no others known
68
Other Contractor People and Property
• Not originally part of “Customer Group” but did enter into mutual hold harmless agreement for:• People• Property excess of US
$350mm• However, we required
Customer indemnity and placed project specific $350mm CGL
McD People and Property
•McD took its people and property•Backed by naming and waiving of Customer Group to relevant insurance policies
Work in Progress•US$300K during fab; US$1mm offshore•Customer waiver and indemnity above this•BAR
Customer People and Property
•Customer took its people•McD first $1mm for existing property
Pollution•McD took emanating from our vessels•Customer indemnity all other excess $1mm
Conoco Indonesia Kerisi
Enterprise Risk Management
69
Question: What do we want to achieve with our ERM Process?
Why do this?
Answer: The Company wants to anticipate surprises and avoid
them or lessen their impact so that we achieve our goals; we need
to reduce uncertainty
External Drivers: Credit rating agencies, outside auditor, customer
requirements, etc.
What Do We Seek to Accomplish and Why?
70
McDermott ERM Mission Statement
To facilitate achievement of Company goals through
the creation of a sophisticated risk culture that
systematically identifies and appropriately treats risk
at all levels of the Company
71
Revenue and Income Volatility Operational Disruptions Project Management Financial Controls Supply Chain Information and Technology Geopolitical Strategic Market and Customer Regulatory and Environmental Compliance Many others
Controlled, not controlled,or uncontrollable?
Which to acceptand which to avoid?
Who owns risks?
A Few Enterprise Risks We Face
72
Patents
• Attrition
Patents
Attrition
Discovery Development Manufacturing Marketing Sales
• Communication
• Skills/Competencies
• Accountability
• Change Readiness
• Global Diversity
• Culture
• Leadership
• Decision -makingHuman Capital
• Treasury Operations
• Insurance
• Market
• Tax Payments
• Loss of
Revenues/EarningsFinance
• Ethics/Social
Responsibility
• Conflict of Interest
• Fraud
• Reputation/ Industry &
CompanyIntegrity
• Organizational Model • Change Response• Lack of Business Process
• Lack of SOPsProcess• Applications of
Lessons Learned
• Crisis Management
• Strategic Plan
Development
• Political/ Government• Business ModelStrategy
• Shareholder Relations• Media
• Governance/
Oversight
• Environmental Health
and Safety
• Compliance Network/
InfrastructureRegulatory/
Compliance
• SEC/ Disclosures • Health Authority
Reporting
• Stakeholder Class
Actions
• Product LiabilityRegulatory/Legal
• Physical SecurityMiscellaneous
• Financial Reporting
• Debt Rating
• Strategic Plan
Execution
• Regulatory/Legal
Controls
• Hiring/Retention
• Human Rights• Empowerment• Succession Plans
• Business Continuity
• Data IntegrityInformation
Technology
• Data Security/Access
• Reliability
• Availability
• Capacity
• Infrastructure
• Ecommerce
• Cash Flow• Currency
• Liquidity• Credit
• Unauthorized Acts
• Knowledge Management
• Management Reporting
Patents
• Attrition
• Quality• Security of Supply• Sourcing Diversity• Supplier
Certification• Tariffs• Ethical Production• Political Issues
DiscoverySourcing DevelopmentSupply Chain ManufacturingProduction MarketingMarketing SalesSales
Cross-Organizational Risks
Operational Risks
• Communication• Skills/Competencies
• Accountability• Change Readiness
• Diversity• Culture
• Leadership
• Decision MakingHuman
Resources
• Treasury Operations• Insurance
• Capital Allocation• Tax Payments
• Loss of Revenues/Earnings
Finance
• Ethics/Social • Responsibility
• Conflict of Interest• Fraud
• Reputation/ Industry Company & Integrity
• Organizational Model • Change Response• Lack of Bus Process• Lack of SOPs
Process• Applications of Lessons Learned
•Crisis Management
• Strategic Plan • Development • Political/ Government
• Business ModelStrategy
• Shareholder Relations• Media
• Governance/ Oversight
• Environmental, Health, and Safety
• Compliance Network/ • Infrastructure
Regulatory - Compliance
• SEC/ Disclosures• Local/Federal • Reporting
• Stakeholder Class• Actions
• Product LiabilityRegulatory -Legal
• Physical SecurityMiscellaneous
• Financial Reporting• Debt Rating
• Strategic Plan • Execution
• Regulatory/Legal • Controls
• Hiring/Retention• Human Rights
• Empowerment• Succession Plans
• Business Continuity• Data Integrity
Information
Technology• Data Security/Access• Reliability
• Availability• Capacity
• Infrastructure• E-commerce
• Cash Flow• Currency
• Liquidity• Credit
• Unauthorized Acts
• Knowledge Management• Management Reporting
• Labor Relations• Transportation Costs• Warehousing• Product Safety• Logistics• Fleet Security• Product Tracking• Inventory Control
• Competitors• Brand Protection• Reputation• Customer Trends• Emerging Social
Issues
• Transaction Control• Turnover• Labor Relations• Compliance Execution• Regulatory• Facility Closures
Sales & Marketing Practices
Product Pricing Site Acquisition
Partnering Customer Needs Project Lead Time Country of Origin Political Issues
• Consistency
• Operational Execution
• Customer Damage Lawsuits• Interest Group Lawsuits
• Regulatory Adherence• Port Security• Transportation Costs• Product Tampering• Labor Shutdowns• Terrorism
Customer Needs Media Pressures Government Relations
73
74
2.0 3.0 4.0 5.0 6.0 7.0 8.02.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
2011 survey resultsThe risk map utilizes impact and likelihood scores to depict which risks have high inherent risk and may require further management attention
Likelihood
Imp
ac
t
Possible - 5 Likely – 7+Unlikely - 3
Minor 3
Moderate5
Major 7+
LBC
DE
F
G
K
HA
I
M
N
O
P
J QR
ST
U
75
0
1
2
3
4
5
6
7
8
9
0
1
2
3
4
5
6
7
8
9
Management Effec-tiveness
Inherent Risk
Inherent risk 7.7 7.3 7.5 8.1 8 7.1 4 8 8 7 7.5 7.4 6.5 7 9 6 7 7 8 8 5 Inherent riskME 5.4 6.3 4 4.1 7 4.6 5 6.4 5 3.7 2.5 5.4 5.5 7 8 6 5.3 6 5 7 5 MEGap 2.3 1 3.5 4 1 2.5 1 1.6 3 3.3 5 2 1 0 1 0 1.7 1 3 1 0 Gap
2011 survey resultsManagement gap analysis provides insight into which risks may not be receiving sufficient management attention by examining residual risk.
Minimal 1
Minor 3
Moderate 5
Major 7
Catastrophic 9
Gap analysis compares the relationship between inherent risk and current risk management effectiveness to determine if a risk is over- or under-managed. Large positive gaps indicate potential under-management and the need to develop a risk response
9 Extremely effective
7 Strong
5 Moderately effective
3 Limited
1 Minimally effective
Inherent riskManagement effectiveness
2011 Focus Risk
Thank You!
McDermott Risk Management and Insurance Department
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