PAE G San Jorge

Environmental & Social Review Summary

This Environmental and Social Review Summary is prepared and distributed in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board of Director’s decision. Board dates are estimates only.
Any documentation which is attached to this Environmental and Social Review Summary has been prepared by the project sponsor and authorization has been given for public release. IFC has reviewed this documentation and considers that it is of adequate quality to be released to the public but does not endorse the content.

Project number	28079
Country	Argentina
Sector	Oil, Gas and Mining
Department	Oil, Gas, Mining And Chemicals
Company name	Pan American Energy LLC
Environmental category	B
Status	Active

Date ESRS disclosed	June 16, 2009

Previous Events	Invested: September 11, 2009 Signed: September 1, 2009 Approved: August 28, 2009

View Summary of Proposed Investment (SPI), click here

Overview

Category & Applicable Standards

Key Issues & Mitigation

Community Engagements

Client's Documentation

Overview of IFC's scope of review

The review of this project consisted of a document review, including the project’s technical, environmental and social reports and records; an on-site field visit to assess the operation of the Environmental Health and Safety (EHS) and Social Management System at the facilities in Chubut province in Argentina; and interviews with key personnel of the Company.

The following management elements were assessed:

- Adequacy of the existing Environmental, Health, Safety and Social Management System to satisfy IFC’s Performance Standards requirements;
- Assessment of potential EHS & Social impacts related to PAE’s projects;
- Labor issues and Human Resources policy;
- Health and Safety performance;
- Contractors’ EHS performance;
- Venting and Flaring and GHG emissions;
- Produced water disposal;
- Liquid and solid waste management;
- Drilling procedures including solid waste disposal;
- Emergency Response Plans;
- Community engagement;
- Potential land use and compensation issues;
- Cultural and Archaeological chance-find procedure.

As this project was the subject of a previous investment by IFC the company had already adapted its existing environmental and social management system to satisfy the requirements of IFC’s Performance Standards. This due diligence verified that the project continues to be in compliance with these requirements.

Project description

PAE is the second largest oil and gas producer in Argentina and has blocks located in the four major hydrocarbon basins: Golfo San Jorge, Austral, Neuquina and Northwest. The most significant block in terms of both reserves and production is the Cerro Dragon block in the Golfo San Jorge basin, located in the south of Argentina which is the main subject of this investment.

Loan proceeds will fund the further development of PAE’s assets, Cerro Dragon, Piedra Clavada and Koluel Kaike in the Golfo San Jorge Basin (UG-GSJ) or “the Project”. The Project will partially fund part of the 2009 investment program which includes: drilling of 172 new production wells and 52 injection wells; b) three new projects for secondary recovery and expansion of existing projects; c) expansion of the on-site power generation capacity up to 40 MW; d) expansion of the two crude treatment plants and their pumping systems; e) approximately 80 programmed well interventions.

Key environmental and social issues and mitigation

Key environmental and social issues relating to the project are summarized below along with specific information on how potential impacts will be addressed by the Company. Upon implementation of the mitigation measures described below, the project will comply with environmental and social requirements, namely the laws and regulations of Argentina, IFC’s Policy and Performance Standards on Social and Environmental Sustainability and applicable World Bank/IFC environment, health and safety guidelines.

PS1: Social and Environmental Assessment and Management System

Social and Environmental Management System: PAE has implemented a sound and effective EHS&S Management System (EHS&S-MS) that enables the Company to maintain a remarkable level of control over operational risks. The system was certified under the ISO 14001 standard in 2002, and was recertified in 2005 and 2008.

The EHS&S performance is assessed and improved systematically through an active program of internal and external audits, which has led to continuous refinement of the EHS&S-MS.

Argentina has comprehensive environmental legislation at both the national and provincial level. PAE has a systematic approach to regulatory compliance and its procedures include detailed monitoring to track it.

PAE’s contractors are contractually obliged to comply with EHS&S procedures and to periodically report their performance. Once selected, contractors are trained on PAE’s EHS&S-MS requirements. Contractors’ performance is assessed based on technical, organizational, and EHS&S management performance.

The annual performance bonus given to all employees has a component that assesses EHS performance. This provides a strong message to all employees concerning the level of PAE’s commitment and that EHS performance is one of the strategic goals of the Company.

- Social and Environmental Assessment:
Every oil and gas producer in Argentina must comply with regulatory requirements for environmental and social baseline and environmental impact assessment (EIA) studies before starting the field development phase. After that an annual environmental monitoring report (so-called IMAA), that includes an updated EHS&S Action Plan, is carried out by consultants authorized by the Secretary of Energy. For certain projects an operator must conduct new EIA studies.

As part of its EHS&S -MS, the Company has a procedure to identify and assess the potential EHS&S impacts related to the operation and maintenance activities in the Golfo San Jorge area. For every activity the procedure requires the assessment of potential impacts on the air, water, soil, flora, fauna, natural resources, energy and community. Any impact considered significant is addressed through EHS&S operational procedures, facility design, and/or specific management programs.

- Management Program and Action Plan:
PAE has an annual program and action plan for EHS. The program and plan state who is responsible for the execution of the activities, timetable and key dates for completion and applicable performance indicators and allocation of resources. Every year PAE reviews and updates the objectives and targets of its management plan to keep a sound level of management control on potential EHS risks. Some examples of the objectives of the current plan are: a) the update of the UG-GSJ environmental baseline and the implementation of a GIS to store all relevant information; b) waste minimization plan; c) assessment of oily wastes treatment alternatives; d) erosion control plan (by mapping drainage patterns and by revegetation of slopes); e) minimization of freshwater use; f) footprint minimization (see PS 3 section); g) update of the aspects and impacts registers.

- Organizational Capacity:
Roles and responsibilities in respect to EHS&S management are clearly defined and documented to satisfy ISO 14001 standard. The PAE EHS team is very professional and maintains a proactive interaction at all levels of the organization.

Given the size of the workforce and the geographical extension of the UG-GSJ operations, PAE has appointed a sizeable EHS team of more than 50 people in the field. There are two areas of management namely: (i) Environment and (ii) Occupational Health and Safety (OHS). Environmental management has a manager and 7 environmental coordinators. OHS has one manager, four safety leaders, four physicians and ten paramedics. Both areas of management share a workforce of up to 30 EHS supervisors working in the field. In Buenos Aires there is an EHS corporate group (consisting of 7 professionals) that establishes the standard of work, gives support and monitors the results of field operations and supports new exploration projects and new acquisitions.

- Training:
Since 2000 PAE has deployed a training program for its own personnel and contractors concerning EHS&S procedures and supervision. The Annual HSE Training Program is reviewed periodically and is adapted to the training needs identified in the management system to address non-compliances, inspections and audits and improvement opportunities.

New employees have to attend four main induction courses on environmental management, safety awareness audits (called TOSS), safety management and defensive driving. A third party consultant verifies by a test that all new personnel joining the workforce have learned the basics from the induction courses.

Significantly, in 2008 PAE organized almost 600 EHS training events encompassing more than 30,000 man/hours.

- Community Engagement:
PAE invests in social programs and in a professional team to liaise with the community on social issues. PAE has developed communications plans to keep communities informed throughout the project’s cycle and consultations are carried out with local communities and officials as needed and as required by Argentine law. PAE has a process of open communications with communities and at the corporate level, and the Company also maintains a web site with a range of relevant information.

Thematic meetings on specific social development initiatives are held with different groups on an as needed basis. An information request and grievance process exists for each operation and is handled by the operations manager delegated to the public relations or human resource team as appropriate.

In 2005 PAE launched a corporate program with the objective of promoting of sustainable economic development through supplier development, government capacity building, and access to finance in the project’s geographic area. Among others, PAE has developed a job posting system to help prioritize local employment. In addition PAE’s efforts to develop Small and Medium Enterprises (SMEs) in the Golfo San Jorge area contributed to maximizing local purchases. The SME development program is considered very successful locally and is currently being evaluated for possible expansion into a second phase.

- Monitoring:
The above mentioned IMAA annual report, required by the national energy authorities, is a very thorough monitoring and inspection report performed by an independent third party (expert consultant Company approved by the Secretatiat of Energy). PAE performs an array of monitoring programs following an internal procedure (“PG-12 Monitoreo y Medicion”). The monitoring includes:

- Cathodic protection,
- Corrosion control,
- Pipeline integrity,
- Waste disposal sites,
- Air emissions,
- Soil pollution,
- Noise levels, and
- Groundwater quality.

- Reporting:
Every six months the UG Golfo San Jorge’s senior management reviews the findings of the internal audit program. Additionally, on an annual basis there is an EHS-MS review that includes EHS&S policy compliance, internal audit program results, EHS&S Management Program compliance, training program compliance, legal compliance and management of third party requests.

PAE will submit the Annual Monitoring Review (AMR) to IFC each year, to demonstrate compliance with all environmental and social requirements, namely the laws and regulations of Argentina, IFC’s Policy and Performance Standards on Social and Environmental Sustainability and applicable World Bank/IFC environment, health and safety guidelines.

PS2: Labor and Working Conditions

During 2008, PAE had approximately 760 direct employees and 6,500 contractors in the UG-GSJ operations. Over 99% of them are Argentine nationals. Compliance with national labor laws is contractually required. PAE’s own personnel receive a comprehensive market related benefit package, including a pension plan, health coverage and life insurance.

Ensuring safety of all workers is a strong cultural value of the Company. There have been no fatalities in PAE’s operations since 2006. Lost time injuries frequency has also been relatively low since 2005. A careful analysis of accidents and their causes is systematically carried out. After this analysis it was ascertained that the most common injuries were to hands and fingers. Therefore a campaign was run to address training, safety signage and specific supervision and this significantly reduced the number and severity of these types of injuries.

Driving safety is one of the most critical sources of risks since approximately 3,500 vehicles transit daily in the UG Golfo San Jorge. Thus PAE has implemented several management plans and measures including: driver competency assessment, vehicle safety inspection, mapping of unsafe conditions along main roads, monitoring of driving behavior by tacographs, daily transportation of personnel by buses (to minimize the number of vehicles travelling every day), trip management for non-routine trips, and spot checks of vehicle speed inside the field.

A program called SOC (safety observation conversation) has been implemented, and is essentially a visual inspection of worksites with a focus on four elements: people, performance, processes and planning. This safety tool combines not only the observation of workers’ behavior but also the effectiveness of the process and the procedures. The SOC program provides a holistic approach to safety awareness and performance improvement.

EHS performance is regularly assessed during monthly operations meetings, and every department and sector has its own performance goals.

In the UG GSJ every operations manager holds quarterly meetings with contractors to review the last quarter and to inspect different operational workfronts to assess EHS performance.

The bidding procedure for new contracts that entail significant HSE risks requires the bidders to present their offer in 3 individual envelopes: technical offer, EHS offer and the financial offer. Only those bidders that qualify by their technical and EHS proposals are selected to a second round for opening the financial envelope.

The contract itself contains an annex with all the EHS requirements. These requirements are different depending on the level of EHS risks inherent to the kind of service to be provided.

In the UG Golfo San Jorge, the Company has appointed four physicians (one in Comodoro Rivadavia, two in Cerro Dragon and one in Koluel Kaike) to implement its occupational health plan. Components of the health plan are emergency assistance, bromatological assessment, and stress and fatigue tests and management.

Because of the expansion of the secondary recovery system there are some areas showing a measurable increase of H2S in the associated gas. H2S is a poisonous gas in concentrations above 10 ppm. Areas showing measurable content of H2S require special operational control procedures and regular monitoring. The Company has promptly issued a procedure for managing working conditions in the presence of H2S and has developed a specific contingency plan for emergency situations caused by high levels of H2S.

PS3: Pollution Prevention and Abatement

- Pollution prevention:

All produced water at Cerro Dragon is treated and re-used for secondary oil recovery by re-injecting it into the reservoir at 1500 to 2500 meters below surface. Other minor wastewater streams, such as oily waters or used oil, are recycled at the crude treatment plant. Grey and black water is handled separately by septic tank systems.

The Company has a “state of the art” solid waste management procedure that handles different types of disposal options for different types of waste. The Company has an incineration facility to handle organic and other burnable wastes. The oily soils recovered from spill remediation, and wastes from tank bottom residues, are stored in appropriate repositories inside the oilfield which are lined with clay layers, as approved by local authorities. This waste is treated and mixed with sand and gravel and disposed of as road capping. A new bio-remediation process will be applied to significantly reduce the volume of wastes to be treated. The treatment applied allows lowering the hydrocarbon content to 1%.

Chemicals and hazardous substances are properly managed applying HSMS datasheet system recommendations and by keeping records of consumption and disposal. All chemical dosing points are properly designed to contain any spill.

Cerro Dragon has a network of 180 phreatimeters. Based on hydrogeological studies, the likelihood of freshwater aquifers down to 200 meters depth is very low. The phreatimeters are regularly monitored and once a year the Company takes samples to verify water quality. To date no meaningful oil content has been identified. In some places water is found at more than 30 meters depth but it always consists of brine and therefore its potential use is limited. A similar situation is found in Koluel Kaike. In Piedra Clavada the Company will commence a hydrogeological study this year. The geological/geomorphological conditions in this oilfield are similiar to the other oilfields.

Drilling muds are water based. The Company uses traditional drilling pits in the UG-GSJ however it has dramatically improved the drilling procedure by reducing the size of the pit to a minimum, thus reducing the need for freshwater (up to a 30% reduction) and also by recycling the spent muds.

PAE has implemented a procedure to promptly undertake remediation of soils contaminated by small spills. Any incident is recorded in a database describing location, extension and causes. There are 2 contractors who are responsible for soil remediation and who have access to the database, to make entries and to plan the logistics for restoration. Once the incident has been remediated the contractor updates the database. The database is also used to identify: areas or activities that are more prone to incidents, most frequent causes, volumes of soil remediated, etc. This assists in the allocation of resources and enables plans to be developed to reduce the frequency of spills. At present approximately 20,000 m3 of oily soils are stored in special disposal sites in UG-GSJ. PAE is assessing the use of bio-remediation alternatives such as “biopiles” to treat these oily soils.

A new mud treatment plant will commence operations soon. The plant has been designed to treat workover fluids and fluids recovered from spills. The facility will be able to treat up to 350 m3/day. The solids will be recovered and stored in the oily soils storage area, and liquids recovered without oil will be recycled. The system will use demulsifiers, flocculants and ultracentrifuge units for the processing of the muds.

Footprint:
As an oilfield that has been in production for the last 50 years, the extent of the footprint has become a significant environmental issue. The Company has implemented different strategies to reduce the footprint, such as reducing the number of new well locations up to 30% when local conditions allow. PAE also has a program for re-vegetation of soil talus which would otherwise be subject to erosion. During the field trip it was observed that old seismic access roads were ploughed to improve re-vegetation, erosion control measures were implemented on slopes, including revegetation.

Energy efficiency:
Energy efficiency is another priority being addressed in the design of new facilities. The use of combine cycle turbines, the development of wind farm for power generation, and the use of heated fluids to pre-heat incoming fluids at crude treatment plants are good examples of energy efficiency measures being investigated for possible implementation in the midterm. These measures will reduce power consumption and cut emissions as well. Approximately 2 MMm3 of natural gas a day are used for internal purposes (50% for on-site power generation and 50% for compressors and heaters).

Green House Gases (GHG):
There is no permanent venting or flaring of natural gas for production purposes, since all the associated gas is captured , treated and used internally or sold. Current levels of GHG emissions in UG-GSJ are measured and reported regularly and in 2008 totaled approximately 1,8 MM of CO2 equivalent per year. PAE is committed to the minimization of GHG emissions and is currently developing a GHG management strategy. Since 2003 the rate between hydrocarbon produced (in MBOE) vs. the GHG equivalent emissions (in tons of CO2 equivalent) has decreased by approximately 15%. Real reductions of CO2 equivalent in 2008 totaled 35,443 tons.

Emergency Preparedness and Response:
The Company has appropriate emergency response plans for different emergency scenarios. Periodic drills enable PAE to assess the suitability of the plans and to amend them as necessary. Contingency plans for treatment plants, major pipelines and chemical storage were updated 2 years ago to include improvements identified during emergency drills and to adapt to some changes in the facilities layout.

PS4: Community Health, Safety and Security

- Community Health:
PAE is one of the sponsors of a health training program at the Regional Hospital of Comodoro Rivadavia and other dependent medical centers, which consists of training medical staff so as to reduce infant mortality index in the Comodoro Rivadavia area. In addition, PAE has also continued to assist with the Hospital’s infrastructure improvements.

- Infrastructure and Equipment Safety:
There are no communities situated close to the facilities. However, since some roads have public access and certain landowner’s facilities are located in the area of operations, most of Cerro Dragon’s facilities have a comprehensive safety signage system and fencing to minimize risks to the public.

Security:
PAE employs non-armed guards for its facilities contracted through a security provider. Occasionally PAE asks for support from the local police to provide security in the event of major security risks.

PS5: Land Acquisition and Involuntary Resettlement

PAE developed procedures for land use and acquisition in compliance with Argentine law. PAE works to completely avoid physical relocation and to reach mutually-agreeable fair market value compensation for use or acquisition of land based on willing-buyer/ willing-seller negotiations, which are properly documented. Impacts on land owners/ land users activities, pasture land and other assets (e.g. fencing) is limited and compensations are based on replacement value. Wherever possible, owners are allowed to continue using the land for grazing.

PS8: Cultural Heritage

At the northwest corner of the Cerro Dragon concession area there is a provincial reserve called “Reserva Natural Bosque Petrificado Sarmiento” (Sarmiento Petrified Forest Reserve) that contains petrified logs approximately 65 million years old. The reserve has scientific, paleontological and cultural interest and significance. Currently there are no oil and gas production activities in the reserve’s core area and PAE is committed to implement all necessary measures to avoid or minimize any potential impact on the reserve area.

In May 2007, in Valle Hermoso there was a finding of ancient mammal remains from the Quaternary age (including a Megatherium fossil, a large bearlike creature). The Company applied its chance finds procedure and notified the local authorities. PAE provided logistical support for the remains’ rescue and the fossil is now being exhibited in the Regional Museum Desiderio Torres in Colonia Sarmiento (Chubut province).

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