February 2012 George E. Jones Director of Risk Management 10200 Bellaire Blvd Houston, TX 77072 Risk...

February 2012

George E. Jones

Director of Risk Management

10200 Bellaire Blvd

Houston, TX 77072

Risk ManagementUniversity of Houston Energy Case Study

2FOR INTERNAL USE ONLY

Agenda Halliburton Company Overview What is “fracing” all about? Risk Management at Halliburton

– Organization– Objectives & Strategy– Linkages

Insurance Programs – Tactical Approach– Program Chart

Business Unit Support – Contract Review– Surety Bonds– Compliance Certificates

Claim Organization Appendix

– Insurance Programs – Purpose and Scope– Financial Performance


Halliburton Global Franchise

CustomersFounded: EmployeesCorporate Headquarters

ResearchCenters

OperationalCountries2011

FASTFACTS

1919 Nearly70,000

HoustonDubai

National, International and Independent entities worldwide

1480

Halliburton Locations

Halliburton Headquarters

Halliburton Research Centers


Halliburton Organization


58%

12%

16%

14%

58%

42%

North America

International

North America

Increased service intensity driven by 59% increase in oil directed rig count targeting oil and liquids-rich plays.

Middle East / Asia Pacific

Shift to gas plays in the Middle East coupled with growing markets in Iraq, China, and Australia. Increased offshore activity in Asia Pac.

Europe / Africa / CIS

Increased share in deepwater East and West Africa while exploratory unconventional gas projects beginning in Europe.

Latin America

Leveraged deepwater and unconventional expertise for growth in Brazil, Argentina, Colombia and Mexico.

2011 Revenue Breakdown


*Pro forma **Excludes certain charges

Outperforming the Competition

60

80

100

120

140

160

180 175

126

137

HAL SLB* BHI*

Total Revenue (Indexed)Q108 to Q411

Total Operating Income** (Indexed)Q108 to Q411

0

20

40

60

80

100

120

140

160

180

200

107

174

113

HAL SLB* BHI*

Q1 2008 = 100

4Q 111Q 08 4Q 09 4Q 111Q 08 4Q 09


Source: International Energy Agency

World Oil Demand (MMb/d) OPEC Effective Spare Capacity (MMb/d)

2007 2008 2009 2010 2011 2012 2013 2014 20150

1

2

3

4

5

6

7

Supply/Demand Outlook Encouraging for Energy Service

Forecast

2007 2008 2009 2010 2011 2012 2013 2014 201582

84

86

88

90

92

94

Forecast

Increasing demand for liquids … … reducing the industry’s spare capacity


Unconventionals Deepwater Mature Fields

Market Drivers in the Upcoming Cycle


Tight GasShale GasCoalbed Methane

Unconventional Basins

Sources: EIA, “Worldwide Shale Gas Resources: An Initial Assessment of 14 Regions Outside the United States”, April 2011; ARI, December 2009; EPRC, December 2009

Continued Growth in Unconventionals

China US Argentina Mexico South Africa Australia Canada Libya Algeria Brazil Poland France

1,275

862774

681

485396 388

290 231 226 187 180

Technically Recoverable Shale Gas(Trillion Cubic Feet)


CleanSuiteSM of Environmentally Friendly Technologies

CleanStream® Service Uses ultra-violet light to destroy bacteria

CleanWaveTM Water Treatment System High throughput, low energy use

water recycling system

CleanStimTM Fracturing Formulation Ingredients sourced exclusively

from the food industry


Risk Management Organization Chart

George JonesDirector

Risk Management

Daniel GarciaManager

Global Claims

Virginia DillManager

Workers Comp Claims

Richard WhilesManager

Insurance Services

Deborah StaceyManager

Risk Management Programs

Bonita JohnsonSupervisorInsurance

Robert BushManager

Claims Info Systems

Angela HinojosaCoordinatorInsurance

Sandra MartinezSupervisor

Regional Claims

Helen BerhaneCoordinatorInsurance

TBDSpecialist

Workers Comp Claims

Tiffany BarnesSupervisorInsurance

Jack WestlundTeam LeadESIS Client

Services

Liability UnitClaim Specialists

(3)

Worker’s CompClaim

Representatives (3)

Admin UnitClaim Assistants

(3)


Risk Management Objectives and Strategy

Objectives– Minimize total cost of risk (Retained Losses + Insurance Premium) through use of insurance

or retained risk programs• Insurance just one type of risk mitigation - typically last resort• Other risk mitigation includes Operational, Legal, Finance, etc.

– Ensure compliance with compulsory and contractual insurance requirements

Strategy– Insurance risk transfer employed for:

• Catastrophic Risks where feasible• Exposures where premiums are less than expected losses

– Maintain convenience factor coverages, e.g. claim servicing, etc– Retain uninsurable and mitigated risks– Maintain capability to provide proof of insurance compliance


Risk Management Linkages Legal Department

– Contract review– Claim support

• Compliance with claim notification requirements• Review claim reserves• Supervise litigated claims

Global F&A / Real Estate– Information for underwriting process (revenue, payroll, property values, etc…)– With RM guidance, assist with local insurance policies

• Ad-hoc insurance placements• Compliance with “admitted insurance” laws• Claim support

Operations – Front-line knowledge of new risk activities (projects, business strategy, etc…)– Customer facing risk negotiations

Finance– Investor Relations –Information for insurance marketing– Corporate Finance –Financial analysis expertise– Treasury Operations –Financial guarantees for self-insurance programs


Insurance Program – Tactical Approach

Align RM Program with HAL’s risk appetite– Present insurance plans to Treasurer/CFO for feedback and approval

Maintain strong relationships with underwriters – Leads to improved coverage terms– Facilitates claim resolution– Stabilizes market capacity available to HAL

Maintain highest underwriting security– Utilize rating information from intermediaries and rating agencies– Evaluate HAL’s aggregate exposure to underwriters across all programs – Approve any exceptions to ratings policy

Optimize insurance program renewals– Develop renewal strategies in collaboration with intermediaries for each program outlining key objectives – Verify key coverage terms are included prior to inception


Insurance Program

Deductible Type of Coverage

Distribution of Insurers by A.M. Best Rating

Rating Exposure ($M) % A+ 712 29%

A 1,759 71% A- 6 0% Total 2,477 100%

Fiduciary Liability

AirCraft

VesselsWell

ControlOffshoreProperty

CargoCrime

Onshore Property

Side A DIC

D&O Liability

GL / AL / EL

Excess

Liability

Alliant Aon

Aon

McGriff

Alliant Alliant McGriff Alliant Aon McGriff Alliant

Broker / $Premium

Primary Casualty Program• GL, EL, WC, AL• 10M limit• 10M retention – GL,EL,AL• 2M retention – WC• Internal reserve for ultimate unpaid exposure• Collateralized to estimated exposure• ~80 locally admitted polices


RM coordinates with Legal Department / Procurement for contract reviews– Legal Department contract reviews typically occur in CAS– Vendor reviews typically done via procurement rather than Legal Department– Any unusual / unapproved insurance language forwarded to RM for review

Guidelines – Given to Legal Department / Procurement which specify acceptable insurance language

• Guidelines include actual verbiage• Guidelines include rationale for changes that can be provided directly to the customer• Regular presentations made to Legal and Procurement by RM

Common principles for insurance qualifications– Insurance is intended to “support” indemnity and should not be a risk transfer mechanism – Vague provisions should be clarified to avoid taking on more risk than expected

Contract Management


Surety Bonds—Q3 2011

Argentina

Venezuela276.3

Colombia

Mexico

U.S. Current Exposure to Surety Bonds / LC’s

Breakdown of HAL Surety Bond exposure– Performance (65%)– Labor (15%)– Court Appeal (6%)– Customs (5%)

Note: All KBR surety guarantees gone as of Q1 2011

HAL KBR TOTAL

Surety Bonds 1,044,351,153

Letters of Credit 573,345,000

TOTAL 1,617,057,153 639,000 1,617,696,153

Surety Utilization(millions)

Brazil


Insurance Certificates—2,100 Outstanding as of Q2 2011

Document evidencing HAL’s insurance coverage– Contractual requirement

• Customer: Insurance to support indemnity structure including 1st party and liability• Lease: Insurance for non-owned property in HAL’s care and liability

– Jurisdictional requirement• Compulsory• Licensing• Permitting

U.S.1,186

International882

Vessels62


Claim Management Organization

Services– Process and manage all insurance program claims

• Utilize onsite TPA, ESIS, for primary claims• Liaise with insurers and brokers on risk transfer programs• Leverage insurer relationships to maximize claim recoveries

– Support Legal Department claim investigation/management– Provide risk analysis & loss prevention support– Manage production of third party actuarial opinion over the future development of losses

• Work with F&A to coordinate booking of appropriate reserves

Technology– Maintain risk management & claim reporting systems (Risk Advantage, HRM)– Provide underwriting and compliance information– Management reporting


Appendix

Insurance Programs– Primary Casualty– Excess Liability– Property– D&O– Fiduciary– Crime– Vessels– Well Control– Cargo

2011 Financial Performance


Insurance Programs

Primary Casualtyo Purpose and Scope

– Comprised of Workers’ Compensation, Employer’s Liability, General Liability and Auto Liability– Statutory and contractual compliance– Retain risks which cannot be efficiently transferred to insurers– Provide claim services for losses within retention – Coverage territory is global

• Includes local programs in 37 countries

Excess Liabilityo Purpose and Scope

– Provides worldwide coverage for bodily injury and property damage liability – Necessary for compliance with clients' contractual requirements– Provides coverage excess of the following primary programs:

• Employer's Liability • General Liability • Automobile Liability • Aircraft Liability• Protection & Indemnity (Vessel Liability)


Insurance Programs

Property o Purpose and Scope

– Coverage against physical loss or damage to onshore property worldwide• Covers equipment at onshore wellsites up to $15mm per occurrence• Covers losses due to Terrorism and Political Violence

־ Does not cover true “political risk” e.g. nationalization, expropriation, confiscation, deprivation– Coverage for business interruption resulting from physical damage to covered properties– Applies to facilities owned by Halliburton and property of others for which Halliburton has assumed liability– Provides compliance with contractual lease requirements

D&Oo Purpose and Scope

– Coverage for personal liability of Ds and Os relating to their actions in their capacity as a director or officer– Coverage for Ds and Os while acting on charitable company boards if at request of Company– Coverage for cost of defense for alleged wrongful acts– Coverage to Halliburton against securities claims and indemnity obligations to the directors and officers– Includes local programs in 34 countries


Insurance Programs

Fiduciary Liabilityo Purpose and Scope

– Covers all Company sponsored benefit plans– Provides liability coverage for alleged failure to prudently manage benefit plans– Provides coverage for errors and omissions committed in benefit plan administration– Indemnifies against personal liability of fiduciaries– Covers Company for indemnifiable claims

Crimeo Purpose and Scope

– Coverage for loss arising due to employee theft of money or property– Coverage for theft of money by a non-employee, including theft via computer or funds transfer fraud– Component of coverage required for compliance with ERISA


Insurance Programs

Vesselso Purpose and Scope

– Covers physical damage to owned vessels and equipment on chartered vessels– Covers bodily injury and property damage to third parties associated with vessel– Covers removal of wreck and debris – Certification for statutory and contractual obligations

Well Controlo Purpose and Scope

– Covers physical damage to owned offshore platforms and pipelines– Covers control of well, redrill, pollution liability and 3rd party property– Certification for statutory and contractual obligations


Insurance Programs

Cargoo Purpose and Scope

– Covers physical loss or damage to goods in commercial transit – Coverage provided for Company property and property the Company is obligated to insure for another party– Provides access to claim adjusting network required in CIF sales– Provides bonding services for impounded cargo– Contractual compliance with international equipment sales– Statutory compliance in some jurisdictions


Geographic Results

Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 2009 2010 2011($ Millions)

Revenue

North America $1,683 $1,259 $1,285 $1,435 $1,704 $2,111 $2,381 $2,631 $2,982 $3,445 $3,876 $4,110 $5,662 $8,827 $14,413

Latin America 556 544 542 539 495 567 568 599 612 687 806 877 2,181 2,229 2,982

Europe / Africa / CIS 968 971 1,012 997 920 981 947 1,066 911 969 991 1,085 3,948 3,914 3,956

Middle East / Asia 700 720 749 715 642 728 769 864 777 834 875 992 2,884 3,003 3,478

Total $3,907 $3,494 $3,588 $3,686 $3,761 $4,387 $4,665 $5,160 $5,282 $5,935 $6,548 $7,064 $14,675 $17,973 $24,829

Operating Income

North America $230 $80 $37 $103 $230 $441 $573 $632 $732 $997 $1,135 $1,118 $450 $1,876 $3,982

Latin America 108 106 97 48 46 89 77 78 76 81 137 170 359 290 464

Europe / Africa / CIS 168 155 201 171 130 148 139 167 (4) 68 66 109 695 584 239

Middle East / Asia 161 186 188 160 102 137 91 165 86 96 99 170 695 495 451

Corporate and Other (51) (51) (49) (54) (59) (53) (62) (62) (76) (81) (105) (137) (205) (236) (399)

Total $616 $476 $474 $428 $449 $762 $818 $980 $814 $1,161 $1,332 $1,430 $1,994 $3,009 $4,737


Segment Results

Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 2009 2010 2011($ Millions)Revenue

Completion and Production $2,028 $1,752 $1,821 $1,818 $1,964 $2,393 $2,655 $2,985 $3,172 $3,618 $4,025 $4,328 $7,419 $9,997 $15,143

Drilling and Evaluation 1,879 1,742 1,767 1,868 1,797 1,994 2,010 2,175 2,110 2,317 2,523 2,736 7,256 7,976 9,686

Total $3,907 $3,494 $3,588 $3,686 $3,761 $4,387 $4,665 $5,160 $5,282 $5,935 $6,548 $7,064 $14,675 $17,973 $24,829

Operating Income

Completion and Production $363 $243 $240 $170 $238 $497 $609 $688 $660 $918 $1,068 $1,087 $1,016 $2,032 $3,733

Drilling and Evaluation 304 284 283 312 270 318 271 354 230 324 369 480 1,183 1,213 1,403

Corporate and Other (51) (51) (49) (54) (59) (53) (62) (62) (76) (81) (105) (137) (205) (236) (399)

Total $616 $476 $474 $428 $449 $762 $818 $980 $814 $1,161 $1,332 $1,430 $1,994 $3,009 $4,737

CAPEX 518 432 440 474 404 451 557 657 704 719 741 789 1,864 2,069 2,953

DDA 215 224 238 254 261 272 284 302 320 331 340 368 931 1,119 1,359

February 2012 George E. Jones Director of Risk Management 10200 Bellaire Blvd Houston, TX 77072 Risk...

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