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

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 pr

Monday, March 4, 2013

Houston, TX 1:00–5:30 p.m.

UNDERSTANDING THE OIL AND GAS INDUSTRY AND ITS RISKS

Bruce M Laubacher

Vice President ACE Excess Casualty

Trey Whitley, P.E.

Vice President and Principal G2 Partners, LLC

John Paul Wiggin

Senior Mgmt Consultant G2 Partners, LLC

The first step in setting up an insurance program is identifying the risks that must bemanaged and insured One of the keys to identifying the risks and designing a good in-surance program is an understanding of the industry, how it works, and the unique vo-cabulary that goes with it This primer will help anyone who is new to oil and gas riskmanagement and insurance understand how oil and gas is found, wells are drilled, andproduction is maintained Additionally, you will know the risks associated with eachstep of the exploration, production, and servicing process Your new knowledge will im-prove your ability to communicate with clients or underwriters and enhance your un-derstanding of how to properly insure the risks associated with oil and gas explorationand 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 com-bine to provide tailored solutions for your unique business needs

Bill Farnan | Managing Director, Gallagher Energy

1900 West Loop South Suite 1600 Houston, TX 77027

Gallagher ranked #1 in overall

client satisfaction among the five

largest brokers in Greenwich

Associates 2012 Large Corporate

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also named one of the :RUOGnV

Most Ethical Companies for 2012

by The Ethisphere Institute

t In-Depth Risk Review

t Enterprise Risk Management

Programs

t Comprehensive Risk Analysis

t Detailed Risk Mapping

713-358-7888 William_Farnan@ajg.com

www.ajg.com/energy

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Vance Fairchild President and Managing Principal

G2 Partners, LLC

Mr Fairchild serves as president and managing principal of G2 Partners, LLC, leading G2’s gic direction, business service lines, and client development and identifying and forging key part-nering relationships, largely focused on the development of G2’s environmentally distressed as-set business Mr Fairchild has 20-plus years’ professional experience, having worked across theentire environmental market spectrum

strate-Mr Fairchild has worked on permitting capital pipeline and compression projects and managingsoil, sediments, surfaces, and groundwater remediation and operational and emergency re-sponse of pipeline disruptions He also successfully led the financial recovery of environmentalexpenses through commercial general liability insurance and the Federal Energy RegulatoryCommission of hundreds of millions of dollars

Mr Fairchild has extensive experience in the acquisition of environmentally impaired industrialreal estate, fully liquidated liability assumption, and cost-effective mitigation, land re-entitle-ment, and profitable monetization of real property for highest and best use, including creativeecological and beneficial reuse

Mr Fairchild has led several as-is real estate acquisitions and successful remediation, regulatoryclosure, and asset divestitures totaling $150 million of contract and real estate value and has pro-vided principal oversight for the execution of many tens of millions of dollars more of liabilitytransfer, assessment and remediation, facilities demolition, and related environmental servicescontracts at many sites across the United States At some of these sites, the highest and best usefor 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 openspace, and other beneficial natural resource use) By implementing sustainable and balanced de-velopment, with the extensive use of “green” remediation approaches and technologies, includ-ing 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” forthe collective benefit of sellers, buyers, and developers and, in the process, builds and sustainsgrassroots community, public, and regulatory support for the proposed efficient, timely, andcost-effective cleanup and restoration/reuse of prior industrial operations

Most recently, Mr Fairchild has been managing pipeline data improvement and regulatory pliance initiatives supporting natural gas transmission and gas utility companies These projectsinclude resolving pipeline attribute information, integrating in-line inspection data, and improv-ing data quality for determining maximum allowable operating pressure

com-John A Jacobi, P.E., J.D.

Vice President, Pipeline Systems Compliance and Operations Services

A former Presidential Exchange Executive, Mr Jacobi received his Bachelor of Science in ical engineering (with Honors) from Rose-Hulman Institute of Technology, his Master of Science inindustrial engineering from Texas A&M University, and his Juris Doctorate from the University ofMissouri - Kansas City

mechan-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 ACEExcess Casualty energy product portfolio within the regions of Houston, Southwest (Dallas), LosAngeles, and San Francisco

Mr Laubacher has served in the insurance industry for more than 36 years Since 1981, he hasmainly been involved in primary umbrella and excess casualty underwriting Mr Laubacher joinedACE 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

In-J.D Kern Vice President and Principal

G2 Partners, LLC

Mr Kern focuses on developing and delivering solutions to complex environmental health,

safe-ty, and asset integrity issues facing the integrated oil and gas industry (upstream to stream) He also serves on development teams for large capital projects where he focuses on de-veloping strategies, plans/schedules to achieve regulatory approvals and permits and identifying,quantifying, and mitigating key project risks Mr Kern also oversees pipeline systems integrityprojects for the midstream oil and gas and pipeline industries focusing on meeting the growingchallenges of ensuring that safety and integrity performance satisfies corporate governance, reg-ulatory, and operational expectations

down-Mr Kern has supported projects that have ranged from the development of liquefied natural gasimport terminals to removal of pump stations on an Alaskan pipeline He has also led G2 Part-ners’ 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 timingrisks associated with assets and developing corresponding risk allocation provisions/manage-ment solutions Mr Kern guides his clients through environmental risk transfer transactions thatfacilitate closure of mergers and acquisitions; resolve indemnifications and other multi-party in-terdependencies; provide cost-certain solution to highly variable liabilities; and create a meansfor companies to monetize discontinued operations/surplus properties Mr Kern has assisted hisclients (integrated oil and gas sectors, upstream–downstream) in successfully consummating nu-merous successful mergers and acquisitions worth billions of dollars involving the health andsafety evaluation, management, and integration of hundreds millions of dollars of environmentalliabilities

Prior to forming G2 Partners, LLC, Mr Kern served as a senior executive for a publically traded gineering company for 9 years where he led the successful development and management of ex-

en-it strategy (environmental risk transfer and distressed real estate acquisen-ition transactions—fullassumption of environmental obligations) transactions valued at $80 million Critical client assetsincluded: gas processing plants and compressor stations, pipelines, refined product storage ter-minals, and manufacturing facilities

Mr Kern has a Bachelor of Science degree in petroleum engineering from Colorado School ofMines

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 "bluegrasscountry" Kentucky She began her insurance career in Nashville, Tennessee, in 1975 working forContinental Insurance Company and then transitioned to what is now Willis Brokerage Ms Stumand her family made their way to Oklahoma City in 1991 where she was employed as an accountexecutive at HRH of Oklahoma, now Willis of Oklahoma, where she administered the Devon ac-count She was recruited by Devon Energy as an insurance manager in the spring of 2000 shortlyafter Devon had merged with PennzEnergy in the fall of 1999 She has witnessed the growth ofDevon from a mere 200 employees to in excess of 5,000 today She was instrumental in the place-ment of brokerage services and insurance programs for the United States, Canada, and the Gulf ofMexico, 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 ministration of property, casualty and surety insurance programs, contract review from purchaseand sale agreements to joint operating agreement, master service agreements, drilling contracts,lease agreements, etc Additional responsibilities include a steady stream of committee participa-tion 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 ministration for the new Devon Energy Center situated in downtown Oklahoma City The end re-sult of this $850 million construction project was a 22 percent work comp loss ratio over the life

ad-of the project, with no fatalities There were a total ad-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 RIMSchapter in Oklahoma City, a member of the National Association of Professional Women, co-edu-cational member of the Houston Energy Risk Managers Association, an active member of theNorth TX Energy Risk Managers Association, and a Certified Insurance Counselor

Brian Twellman Director The Claro Group

Mr Twellman is a director and one of the original members of The Claro Group He is part of thefirm’s Global Disputes, Claims and Investigations Consulting practice, which is dedicated to thepreparation and resolution of major insurance claims and financial disputes For over 14 years,

Mr Twellman has assisted clients and their counsel with quantifying and understanding complexfinancial and economic issues He is a specialist in creating probabilistic decision models (e.g.,decision-trees, Monte Carlo analysis, etc.) to support client management decisions and forecasts

in the quantification of major event risks, uncertain future liabilities, and evaluation of policyholders’ property and casualty insurance claims Prior to The Claro Group, Mr Twellman was part

of the economic and financial consulting firm of LECG and the Financial Advisory Services sulting practice at Arthur Andersen

con-Trey Whitley, P.E.

Vice President and Principal

G2 Partners, LLC

Most recently, Mr Whitley has been responsible for staffing and managing data improvementinitiatives supporting utilities and natural gas pipeline operators These projects include resolvingpipeline attribute information, integrating in-line inspection data, associating records, and im-proving data quality to support maximum allowable operating pressure verification

For 10 years, Mr Whitley was a senior program manager at a publicly traded engineering and riskmanagement firm, responsible for the technical and financial performance of 13 fixed-price lia-bility transfer projects with over $160 million of known remediation obligations He led diverseteams of project managers, technical experts, and strategic subcontractors in identifying, evalu-ating, and implementing cost-effective site closure strategies Mr Whitley uses the “owner’smentality” acquired in successfully managing liability transfer projects to rigorously advocate hisclients’ interests when dealing with affected stakeholders and ensuring goal alignment

Previously, Mr Whitley worked as a thermal and environmental engineer in the aerospace try and as a project engineer for a company specializing in biological remediation and wastewa-ter treatment

indus-Mr Whitley has a B.S in agricultural engineering from Texas A&M University and an M.S in ronmental engineering from the University of Houston He is a Licensed Professional Engineer inTexas and Kansas

envi-John Paul Wiggin Senior Management Consultant

G2 Partners, LLC

Mr Wiggin’s practice area is focused on supporting client success in developing and deploying erations performance assurance systems and integrated operations strategies

op-Prior to his current role as practice lead, he spent 27 years in corporate management assignments

in the energy, aerospace, and consulting services sectors

Mr Wiggin began his career with Exxon Corporation, spending 13 years in a variety of domesticand international project management assignments

He left Exxon to join Lockheed Martin Corporation, where his corporate energy, environmental,safety, and health organization transformed the corporation from an average government servic-

es contractor to a benchmarked industry leader

After leaving Lockheed Martin, Mr Wiggin spent 4 years with TRC Companies, Inc., as a seniorvice president responsible for supporting acquisition and post-acquisition integration of the firmsacquired in the corporation’s active mergers and acquisitions program He formed the CorporateCompliance Office responsible for SOx compliance and was the executive sponsor for develop-ment of the company’s international management consulting practice

Mr Wiggin earned a Bachelor of Science in civil engineering (with honors) from Louisiana TechUniversity He has completed executive management programs at Exxon and Lockheed Martinand graduate studies in strategic operations management at the University of Maryland

Overview of the Oil & Gas

Industry and Its Risks

IRMI Workshop

Houston

March 4, 2013 JOHN A JACOBI, P.E., J.D TREY WHITLEY, P E

2

Our Principals and Senior Managers all have many years of experience solving complex problems for the energy industry Our core areas of expertise are represented by the service areas summarized below:

G2 Partners has provided a broad range of environmental services on thousands of projects across the country and around the world for a diverse group of clients.

Our transaction support services cover all aspects of

a project and/or transaction planning, development, and implementation, creating a competitive advantage for our

Our partners work routinely with senior corporate officers across multiple industries

on special advisory assignments.

Pipeline Data and

Records

Compliance

Environmental and Water Resources

M&A Transactions and Project Development

Strategic Consulting

Introduction to G2 Partners, LLC

Pipeline Systems Integrity

Gas System

6

• More than 210 natural gas pipeline systems

• 305,000 miles of transmission pipelines

• More than 1,400 compressor stations

• More than 11,000 delivery points, 5,000 receipt points,

and 1,400 interconnection points

• 24 hubs or market centers that provide additional

interconnections

• 400 underground gas storage facilities

• 49 locations where natural gas can be

imported/exported via pipelines

• 8 LNG (liquefied natural gas) import facilities and 100

LNG peaking facilities

Source: US Energy Information Administration (EIA)

7

9

Production Operation Piping and equipment used for production and preparation for transportation or delivery of [gas]

including the following:

Extraction and recovery, lifting, stabilization, treatment, separation, production processing, storage and measurement of [gas]; and or

including the following:

Associated production compression, gas lift, gas

injection, or fuel gas supply.

(API Recommended Practice 80)

11

Gas Gathering Line

A pipeline that transports gas from a current production facility to a transmission line or main

(49 CFR 192.3)

Gathering starts where production ends and ends

when transmission starts

The devil is in the details!!

Onshore Gas Gathering NOT regulated in Class 1

(Rural) Areas

13

Liquid Gathering Line

Gathering line means a pipeline 219.1 mm (8 5/8 in)

or less nominal outside diameter that transports

petroleum from a production facility.

(49 CFR 195.2)

The devil is in the details!!

U.S Department of Transportation

Pipeline and Hazardous Materials

Safety Administration

14

15

A Liquid High Consequence area (195.450) means:

(1) A commercially navigable waterway, which

means a waterway where a substantial likelihood

of commercial navigation exists;

(2) A high population area, which means an

urbanized area, as defined and delineated by the Census Bureau, that contains 50,000 or more people and has a population density of at least 1,000 people per square mile;

Definitions

16

A Liquid High consequence area (195.450) means:

(3) An other populated area, which means a place,

as defined and delineated by the Census Bureau, that contains a concentrated population, such as an incorporated or unincorporated city, town, village,

or other designated residential or commercial area; (4) An unusually sensitive area, as defined in

\ 195.6.

17

A Gas High consequence area (192.903) means: (1) An area defined as-

(i) A Class 3 location under \ 192.5; or

(ii) A Class 4 location under \ 192.5; or

(iii) Any area in a Class 1 or Class 2 location where the potential impact radius is greater than 660 feet (200 meters), and the area within a potential impact circle contains 20 or more buildings intended for human occupancy; or

(iv) Any area in a Class 1 or Class 2 location where the potential impact circle contains an identified site.

19

Gas Class Locations:

A Class 1 location is offshore or has 10 or fewer buildings intended for human occupancy within

220 yards in any one-mile segment

A Class 2 location is any class location unit that has more than 10 but fewer than 46 buildings intended for human occupancy.

Definitions

20

Gas Class Locations:

A Class 3 location has 46 or more buildings

intended for human occupancy or any area where the pipeline lies within 100 yards of building or a small, well-defined outside area (such as a

playground, recreation area, outdoor theater, or other place of public assembly) that is occupied

by 20 or more persons on at least 5 days a week for 10 weeks in any 12-month period (The days and weeks need not be consecutive.)

21

Gas Class Locations:

A Class 4 location is any pipeline where buildings with four or more stories above ground are

prevalent

(PHMSA does not define “prevalent” nor does it specify the number (or percent) of buildings with four or more stories that make up a Class 4

location If there is a question, it is probably

Class 4.)

Definitions

22

Gas Transmission Lines (192.3)

Transmission line means a pipeline, other than a gathering line, that: (1) Transports gas from a gathering line or storage facility to a gas

distribution center, storage facility, or large volume customer that is not down-stream from a gas distribution center; (2) operates at a hoop stress of

20 percent or more of SMYS; or (3) transports gas

within a storage field.

foreign commerce.

Definitions

24

Gas Distribution Lines (192.3)

Distribution Line means a pipeline other than a

gathering or transmission line.

25

• FRACKING – Current Rules were not designed to address production in populated areas

• Current rules contain editorial flaws

• Operator “misuse” of ambiguous language in RP

80 has allowed some circumvention of intended regulation in populated areas (RP 80 was not created for regulatory purposes)

Risk Basis

26

The 2006 rulemaking was based on the premise that gathering lines were small diameter/low energy lines

– Eliminated political boundaries

as method for determining

which gathering was regulated

– Used Class location criteria

(Class 2, 3, & 4)

• PHMSA modify 49 CFR Part 192.8 and 192.9 to

establish regulatory requirements for gathering lines in Class 1 areas operating above 20%

SMYS to be regulated as Type A gathering lines

NAPSR Resolutions

30

• PHMSA modify 49 CFR Part 192.8 and 192.9 to

establish regulatory requirements for all

gathering lines in Class 1 areas to be subject to

49 CFR Part 192.614 and 192.707 in order to minimize damage from 3rd party excavation; and

• PHMSA modify 49 CFR Part 192.8 and 192.9 to

clarify its intent to establish a risk based

regulation for the section of piping identified as incidental gathering in API RP 80 (‘10)

Gas Pipeline ANPRM

31

• 76 FR 53086 et seq.; August 15, 2011; Docket No PHMSA-2011-0023

• Comment period closed January 20, 2011

• Had a whole section just on Gas Gathering

• History of 192.8 and 192.9 included in ANPRM

Gas Pipeline ANPRM

32

1 Part 191 Reporting for ALL gathering lines?

2 New definition for gathering lines? (shale)

3 Any Problems with API RP 80?

4 Special rules for large-diameter high-pressure lines in rural areas? Incidental gathering

extension?

5 Special rules for landfill gas?

6 Enhanced internal corrosion requirements?

7 Gas IMP for gathering lines?

8 Cost/benefit for any changes?