HALLIBURTON COMPAMY - Bauer College of Business

HALLIBURTON COMPAMY - Bauer College of Business

Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. HALLIBURTON COMPAMY RISK MANAGEMENT FUNCTIONS Presentation for University of Houston, Bauer College of Business March 23, 2006 Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. Agenda Halliburton Company Information Risk Management & Insurance Programs Project Case Study Enterprise Risk Management Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. HALLIBURTON COMPANY Revenues - $20,994,000,000 Employees - approx. 106,000

Headquarters Houston, Texas Countries with operations 100+ Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. HALLIBURTON Business Segments Energy Services Group Drilling and Formation Evaluation Fluids Production Optimization Landmark and Other Energy Services KBR Government & Infrastructure Energy & Chemicals Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. Energy Services Group Digital and Consulting

Solutions Drilling & Formation Evaluation $10.9B2 Fluid Systems $9.1B2 Production Optimization $11.8B2 HAL Market $1.8B1 HAL Market HAL Market

HAL Market Landmark Sperry Drilling Systems Cementing Production Enhancement Halliburton Project Management Security DBS Drill Bits Baroid Fluid Services

Completion Tools Logging Services Sources: 1) Halliburton estimates; $ billions 2) Spears & Associates 2004 estimates WellDynamics Global ESG Growth Focus Areas KBR Structure Government & Infrastructure Division Largest government logistics & services contractor with premier

worldwide civil infrastructure capabilities Energy & Chemicals Division World-class engineering, procurement, construction & technology capability focused on upstream and downstream markets Two distinct divisions serving different customers with streamlined corporate support KBR Financial Mix 2005 Revenue 2005 Operating Income

(3.2%) Iraq $5.4B G&I $2.7B E&C $2.7B Iraq $172MM G&I $158MM (5.8%) E&C $168MM

(6.1%) (X.X%) represents operating income margin Risk Management Medical / Disability Risk Management Services Claims Litigation Practice Group Global Insurance Programs RMIS

Risk Management Accounting Halliburton Risk Management 2005 MEDICAL & DISABILITY ADMINISTRATION Return to work Medical case management Absence case management Health care provider Medical treatment STD, LTD, management FMLA Corporate protocols Medical Director

Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. RM SERVICES Design, implement and administer project insurance programs Identify evaluateand risk Businessand acquisition exposures execution support Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. GLOBAL INSURANCE PROGRAMS Design and place Company and worldwide insurance plans Implement and administer insurance policies

Manage internal communication and support Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. GLOBAL CLAIMS Employee Claims General Liability Claims Eastern Hemisphere Auto Liability Claims Cargo Claims Personal Effects Claims Property Claims Hull and Aircraft Claims

Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. RISK MANAGEMENT ACCOUNTING Retained risk program administration Record maintenance Accounting system & compliance Reporting Invoice processing and payment Cost distribution Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. OTHER ACTIVITY Law Department Auto Liability Claims Investigate & manage claims in Americas Identify and evaluate risk exposures

Loss prevention support RM systems and data mangement Underwriting and compliance info Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. Business Services Conduct risk management due diligence for acquisitions and mergers Identify exposures arising from business activities Determine desired means of managing exposures to risk of loss Obtain insurance required by and in accordance with applicable laws Review contract proposals for consistency with insurance program Review bids to determine project specific insurance and bond needs Provide evidence of insurance coverage or other required documentation to operating groups, customers, regulatory agencies, and courts Execute project insurance and bonding requirements Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved.

Halliburton Risk Management 2005 Insurance Purchasing Philosophy The Company will assess the effects on its business activity of casualty, commercial, operational, financial and environmental risks, applying consistent techniques in the management of those risks. Insurance transfer mechanisms will be employed only in the following circumstances:

catastrophic risks where feasible exposures that can be insured at a cost less than expected losses where required by law or contract Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. Halliburton Risk Management 2005 Global Insurance Placements General Liability 3rd party liability or civil liability Auto Liability Liability resulting from use of vehicles Workers Compensation Statutory requirements Employers Liability Covers liability to employees Cargo Property Fixed facilities Vessels - Hull & Machinery Protection & Indemnity Other Corporate Coverages Fiduciary Liability Crime

Directors & Officers Liability Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. Halliburton Risk Management 2005 2006 Insurance Program Overview $650M $600M $100M $175M Per Schedule $50M 20M/ A$20 M

$5M (WC $2M) $10M Nil $1M $10M $250K $25M $100M Per Shipment $10M Nil Corporate Aircraft Crime Fiduciary K&R

Liability Liability Liability 500K/ $10M A$1M KBR PI Per Schedule D&O $1M Water craft $1M $250K Cargo Well Offshore Onshore

Control Property Property $10K $1M Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. Barracuda / Caratinga Project Insurance Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. Fig 6.2 Fig 6.3 Fig 6.4 Fig 6.5

Fig 6.6 Fig 6.7 Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. Types of Insurance Construction All Risk (CAR) Control of Well (COW) Delay in Start-Up (DSU) Third Party Liability Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. Issues Faced Market Conditions Cost Local regulation requirements Coverage Terms

Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. Policy Form Package of different coverages Welcar New Concepts Valuation Schedule A and B Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. Barracuda & Caratinga Development Project Insurance Structure $175,000,000 FCV: FPSO P-43 $761,500,000 Excess of FPSO P-48 $678,100,000 $150,000,000

Well Control Sublimits Pollution Redrill $10,000,000 - Existing Property $25,000,000 - Engineering/Management/Etc. $25,000,000 Drilling Materials $5,000,000 - Forwarding Charges $10,000,000 - Offshore Cancellation Costs $10,000,000 - Tests/Trials/Search Costs Cargo

Onshore Fabrication $100,000 $250,000 $1,000,000 Yard Towage Subsea $250,000/$50,000 CCC/supplies Section II Section I Builders Risk

$120,000,000 ($666,667 per day, up to 180 days) $25,000,000 Primary policy $5,000,000 C.C.C. $5,000,000 - Standby Charges $50,000 $100,000 $25,000,000 Control of Well

90 Days Section III Delay In Start Up $250,000 Policies For Third Party Liability Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. Finished with Project Insurance ?? Not so fast . Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. Value and Schedule Changes

Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. BARRACUDA / CARATINGA PROJET Values Placement At November 15, 2004 $1,051,395,601 (est. Final Completed Value) $1,011,600,000 $906,434,430 (est. Final Completed Value) $761,600,000 $678,100,000 BARRACUDA P-43 CARATINGA P-48 Policy No. ARS 2759 insuring Schedule B values but not to exceed

each Units Schedule A amount in the aggregate Policy No. ARS 3915 $250,000,000 per occurrence and in the aggregate each unit in excess of Schedule A primary values Policy No. ARS (T.B.A.) $50,000,000 per occurrence and in the aggregate, each unit; in further excess of $250,000,000 Initial Completion Dates 12/03 & 4/04 Revised Completion Dates 4/05 & 6/05, then 9/05 & 11/05 Actual Completion Date March 2006 Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. Halliburton Risk Assessment Process Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. Purpose

To develop and implement a plan that will enable the Company to demonstrate its activities to assess its business risk exposures and the effectiveness with which those risks are managed. Risks are defined as any events the occurrence of which has the potential for significant impact to the Company. Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. Why implement a formal risk assessment process at Halliburton? To satisfy NYSE corporate governance rules and Sarbanes Oxley internal controls requirements that dictate Halliburton have a formal approach for identification, evaluation and management of risks faced by the Company. Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. What have we done to develop and put a Halliburton risk assessment process in

place? A team was formed to establish a system for: - Identification and categorization of risk exposures - Determination of executive responsibility for each risk category - Assessment of specific risks impact on Company success - Ascertain controls in place for management of the risks - Develop documentation and reports to demonstrate functioning of the process Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. Basic Risk Categories Strategic Factors that may interfere with the execution of Halliburtons strategies and objectives such as reputation risks, adverse publicity, investor and analyst confidence and general and industry economic conditions. Financial - Risks associated with Halliburton's capital

structure, liquidity, margin erosion, tax burden, foreign exchange volatility and credit risks. Legal & Regulatory - Traditional liability and regulatory compliance, as well as the vulnerability of intellectual capital and effectiveness of business transactions. Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. Basic Risk Categories, contd . Human Capital Critical areas such as employee selection, retention and turnover, compensation, executive effectiveness, depth and succession planning. Political The affect of domestic and international politics, in addition to traditional nationalization, confiscation and trade disruption risks. Operational & Project Business-specific exposures such as contract performance, project and business entity management, customer relations, environmental damage and crisis management. Technology - Product and process obsolescence, systems security

and effectiveness and network liability. Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. Management Responsibility for Risk Exposures Category Responsible Executive Position Strategic Risks Corporate CEO Financial Risks Corporate CFO Legal & Regulatory Risks

Corporate General Counsel Human Capital Risks HR VPs (ESG & KBR) Political Risks Corporate General Counsel Operational & Project Risks Corporate COO (fka Group CEOs) Technology Risks CIO/VP Tech (ESG) CTO/Dir IT (KBR) Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved.

Risk Ranking Scoring System Significance: This rating is based on the potential negative impact to the Company if a single significant adverse event or situation or a continuing series of connected events occurred within a specific risk exposure. The score is based on the largest monetary impact realistically possible for a particular event. 1 2 3 4 5 Less than $.01 per share ($5mm)

Between $.01 and $.10 per share ($5 - $50mm) Between $.10 and $.25 per share ($50 - $125mm) Between $.25 and $1.00 per share ($125 - $500mm) More than $1.00 per share ($500mm) Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. Risk Ranking Scoring System, contd Likelihood: This rating is the quantification of how often a loss will occur within a specific risk exposure. The score here is based on how often it is thought that an event of the most significance within the particular risk exposure will happen. 1 Extremely rare, not expected to occur once in 20 years 2 Rare, may occur once in 10 years 3 Periodic will probably happen in the next 5 years 4 Recurrent, almost certain to happen in the next 2 years 5 Frequent, multiple times per year Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. Top Ten Risks Absolute Basis

Corporate Level Risk Absolute Consequence Absolute Likelihood Severity 1 Mass Toxic Tort Liability >$500 million Recurrent Extreme

2 Damage to Reputation/Image >$500 million Recurrent Extreme 3 Unfavorable Public Relations >$500 million Recurrent Extreme 4

Unsuccessful Projects >$500 million Recurrent Extreme 5 Failure to Maintain Adequate Internal Financial Controls >$500 million Periodic High 6

Legal Mistakes in Business Transactions >$500 million Periodic High 7 Shareholder Class Action and Derivative Liability >$500 million Periodic High 8

Loss of Investor/Analyst Confidence >$500 million Periodic High 9 Adverse Action by Competition >$500 million Periodic High 10

General Economic Slowdown >$500 million Periodic High For External Distribution. 2004 Halliburton. All Rights Reserved. Top Ten Risks Controlled Basis Corporate Level Name Controlled Consequence Controlled Likelihood

Controlled Risk 1 Unsuccessful Projects $125-$500 million Recurrent Extreme 2 Damage to Reputation/Image >$500 million Periodic

High 3 Adverse Action by Competition >$500 million Periodic High 4 General Economic Slowdown >$500 million Periodic High

5 Inaccurate Budget/Business Planning $125-$500 million Periodic High 6 Failure to Maintain Adequate Internal Financial Controls >$500 million Rare High

7 Loss of Investor/Analyst Confidence >$500 million Rare High 8 Unavailability of Catastrophic Insurance Coverage >$500 million Rare High

9 Inadequate Planning in M&A Implementation >$500 million Rare High 10 Retained Risk from Divestitures >$500 million Rare High

For External Distribution. 2004 Halliburton. All Rights Reserved. ESG Operational Risks Sample Comparison Chart and Specific Risk Register Information Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. Top 5 ESG Absolute/Controlled Risks Risk Severity Controlled Risk 1 Ineffective Crisis Management Extreme

High 2 Procurement Failures Extreme Moderate 3 Severe Weather High High 4 JV Management Failure High Moderate 5 Security Breach

High High For External Distribution. 2004 Halliburton. All Rights Reserved. 1. Ineffective Crisis Management or Business Continuity Planning Description: Adverse cost impact or loss of business resulting from slow or inadequate response to catastrophic events. Controls: Maintain current crisis management and recovery plans System for constant information update to anticipate events or respond immediately Absolute With Controls

Significance 5 5 Likelihood 4 2 Gross Total Score 20 10 Adjusted Classification Extreme

High For External Distribution. 2004 Halliburton. All Rights Reserved. 2. Procurement Failures: Description: Financial impact of insufficient or delayed resources for performance of business activities. Controls: Procurement capabilities Business forecasting Training and assignment of personnel Absolute With Controls Significance

4 3 Likelihood 5 4 Gross Total Score 20 12 Adjusted Classification Extreme Moderate

For External Distribution. 2004 Halliburton. All Rights Reserved. 3. Severe Weather Description: Delays causing inability to meet contract requirements and damage to work or company facilities. Controls: Planning foreseeable weather into schedules Insurance against catastrophic weather events Absolute With Controls Significance 3

2 Likelihood 5 5 Gross Total Score 15 10 Adjusted Classification High High For External Distribution. 2004 Halliburton. All Rights Reserved.

4. Joint Venture Management Failure Description: Financial losses from unsuccessful business performance. Improper accounting leading to misstatements in accounts. Controls: Specific process for approval of and formation of joint ventures Management oversight Internal audit for compliance with company procedures Absolute With Controls Significance 3

3 Likelihood 5 3 Gross Total Score 15 9 Adjusted Classification High Moderate For External Distribution. 2004 Halliburton. All Rights Reserved.

5. Security Breach Description: Loss of data, intellectual property, or financial assets due to unauthorized access to company facilities or IT systems. Controls: IT procedures Physical security plan Internal Audit process. With Controls Absolute Significance 5 5

Likelihood 2 2 Gross Total Score 10 10 Adjusted Classification High High For External Distribution. 2004 Halliburton. All Rights Reserved.

How will the risk assessment process at Halliburton function in the future? Maintain system Validate and update identification and evaluation Expand scope to other tiers of management Develop more detail control analysis Utilize as tool to assist management implementation of new controls and risk avoidance strategies. Confidential Internal Halliburton Use Only. 2004 Halliburton. All Rights Reserved. Q&A

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