Schahin Rigs

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	26314
Country	Brazil
Sector	Oil, Gas and Mining
Department	Oil, Gas, Mining And Chemicals
Company name	Black Gold Drilling LLC
Environmental category	B
Status	Active

Date ESRS disclosed	August 17, 2007
Date revised ESRS disclosed	September 6, 2007
Previous Events	Invested: November 5, 2007 Signed: October 25, 2007 Approved: October 15, 2007

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

A review of Schahin existing technical, environmental and social documentation submitted by the company and the Mandated Lead Arrangers of the transaction was conducted as part of the assessment of the project. Additional information about the E&S management of the project was obtained through an interview with Schahin’s Environmental Health and Safety & Social (EHS&S) manager at Schahin’s offices in Sao Paulo. For Yantai Raffles Shipyard (YRS or the Shipyard), information was obtained from a recent EHS audit carried out by an independent consultant, Environmental Resources Management (ERM) at YRS shipyard in China, and through a subsequent interview with ERM.

Project description

Schahin Engenharia S.A. is the flagship company of the Schahin Group, a privately owned Brazilian group engaged in engineering and construction activities, oil & gas services and financial services. The Schahin Group was established in 1966 by the Schahin family.

The company started its operations in the oil & gas industry in 1982 and now provides a diversified range of services, with a specialization in drilling and workover services. In 1985 Schahin started operating a jack-up platform (North Star) with the capacity to drill in shallow waters (up to 60 meters depth). Since then the platform has been consecutively chartered to Petrobras. In 1990 Schahin also started operating a deep waters drill ship, the SC Lancer. Schahin has thus far successfully drilled more than 100 wells in the Atlantic off-shore Brazil.

The project consists of the construction, mobilization and operation (under contracts with Petrobras) of two offshore semi submersible rigs. The two new semi-submersible platforms were designed by Friede & Goldman, a leading designer of offshore drilling vessels. The platforms are designed to drill at water depths of 2,400 meters and 2,000 meters, respectively.

The shipbuilding contracts were awarded to Yantai Raffles Shipyard (YRS) for the construction of the vessels at its yard in Yantai, China. YRS facilities, comprises one of Asia’s largest dry docks. The rigs are expected to be built, mobilized and placed under contracts with Petrobras by 2009 and 2010. The operational base for the new rigs will be Schahin’s base in Macaé. Schahin has operated in Macaé since January 1988. This base provides support for its operations carried out in the Campos Basin, where it currently operates the Drill Ship SC Lancer. Equipment and disposable parts are stored at the base, which also carries out jobs and repairs of parts required for the rigs’ operation.

Key environmental and social issues and mitigation

The company has plans to address these impacts to ensure that upon implementation of the featured mitigation measures described below and in the attached Environmental, Health, Safety and Social Action Plan, the project will comply with environmental and social requirements, namely the law and regulations of Brazil, IFC’s Policy and Performance Standards on Social and Environmental Sustainability and applicable World Bank/IFC environment, health and safety guidelines.

The information about how these potential impacts will be addressed by the project is summarized in the paragraphs that follow.

- PS1: Social and Environmental Assessment and Management System

Schahin has been working as an offshore deep water drilling contractor for Petrobras since 1990 and has demonstrated good environmental, health and safety (EHS) performance.

Its corporate EHS management system was designed according to the following standards: ISO 14001, and OHSAS 18001, and was certified in July 2006. The certification scope did not include the oil & gas business unit. However, relevant operational control procedures and work instructions regarding EHS&S management have already been implemented to satisfy Petrobras standards and Schahin expects to fully implement its oil & gas EHS management system by July 2008 after which it will proceed to certify the same.

Before Schahin can start any offshore drilling activity, Petrobras must obtain an environmental license from the Brazilian Federal Environmental Agency (IBAMA). As part of the licensing process, an Environmental Impact Assessment (EIA) is required and IBAMA demands that environmental and social management practices are included, containing specific management measures such as waste and effluent management procedures, emergency response including spills and training requirements. IBAMA typically inspects the rig prior to issuing the license, to assure that operational control elements on the rig adequately satisfy the environmental agency's standards.

The Services contract with Petrobras does not specify the area where the rigs will be assigned, however is very likely that they will be drilling at the Bacia de Campos, an area where Schahin has been working for many years.

As part of the overall management program every operational base and every vessel has its own EHS objectives and targets plan to address any significant gap found by the internal audit and inspections programs. The plan is recorded in a controlled document that states which are the actions to take and who is responsible for its execution.

The company has a dedicated EHS&S corporate manager and a staff of 50 people that assists and coordinates the implementation of the EHS management system. It is a multi-disciplinary team including, environmental engineers, environmental analysts, safety engineers, occupational health specialists and social specialist. About half of this staff works for the oil & gas division. Schahin’s EHS representatives based offshore monitor performance and provide advice during activities and operations.

Schahin devotes significant efforts to the training of its staff and actively participates in the establishment of a training school to man the platforms, with the support of Petrobras and the Brazilian government through the Prominp Program. The current training program has identified the training needs for different roles and responsibilities and a basic training package is defined for all of them in the Training Program procedure. The courses encompass: basic safety skills, helicopter safety, vessels safety, firefighting, man overboard rescue, H2S among others.

As a Petrobras contractor, Schahin is contractually obliged to comply with Petrobras’ EHS requirements. Petrobras has a certified ISO 14001 and OHSAS 18001 EHS&S-MS and each contractor’s compliance with their EHS&S procedures is regularly audited. It should also be noted that Petrobras has also signed the U.N. Global Compact and last year joined the Dow Jones Sustainability Index group. Schahin already complies with Petrobras’ requirements through the implementation of their existing procedures.

Petrobras’ Charter Contract and Services Contract with Schahin include specific EHS requirements like:

An EHS management plan to be presented before the start-up of services to Petrobras inspection including:

- a safety engineering and workplace health supervision;
- internal accident prevention committee;
- environmental risk prevention program;
- occupational health and medical surveillance program;
- all EHS licenses required by law;
- a risk identification and assessment analysis; and
- specific emergency response plans.

A waste management plan identifying waste streams, temporary storage, licensed contractors, environmental licenses to store, transport and dispose of, records procedure, certificates of approved disposal.

EHS performance indicators reporting
Incidents and accidents report
Emergency management
EHS training program
Permit to work system
Audit and Inspection Plans

Fines are enforceable in case of failure to comply with agreed EHS performance.

Schahin developed a Manual for Subcontractor’s activities which establish the minimum requirements for EHS. The aspects covered by this manual include: environmental legal requirements, EPP policy, training needs, occupational health management, waste management, storage and handling procedures, contingency planning, hazardous materials management and cross-reference to key operational control procedures of Schahin.

In lieu of a formal grievance mechanism Schahin assigns a social specialist to projects where they may have community issues. The social specialist is required to manage community complaints and requests, and keep an open communication channel with key stakeholders.

Schahin has an internal system of QEHS reporting that cover occupational health and safety performance indicators. These reports show a satisfactory record with sustained improvements in performance.

The rigs will be built under EPC contracts at the Yantai Raffles Shipyard. The shipyard is located in Yantai city, Zhifu island, Shandong province in China and it is specialized in design, manufacture, repair and installation of vessels, offshore platforms and other marine shipping products. It employs some 1600 permanent staff and around 3000 contractor staff at its site. The site is adjacent to the sea and located in a mixed residential, industrial, porting and aquaculture area.

Even though the shipyard is basically a supplier in this project, at the lenders’ request Schahin and YRS agreed to undertake an independent assessment of the EHS management and performance at the shipyard site. The assessment identified a number of areas where the shipyard needed to strengthen its E&S management and has recommended several action items that will be taken by up by the shipyard. ERM will help monitor improvements and will conduct semi-annual site visits and provide technical guidance, as needed.

Key findings of the ERM audit are summarized below:

- The YRS HSE Management System should be improved to more effectively address some environmental aspects and some local legal requirements.
- Complete the implementation of the existing HSE management.
- The existing environmental permits should be reviewed and updated as necessary.
- Site safety management and contractor safety management needs to be improved.
- Develop an environmental monitoring plan for the facilities.
- A community grievance procedure should be established.

The client and the shipyard have agreed on EHS&S actions to properly solve the above identified deficiencies. These actions are included in the attached YRS Action Plan.

Transportation from YRS and delivery to Brazil of the offshore drilling rigs is under the client responsibility. A specific EHS management plan for the maritime transport of the rigs will be developed by the client and is included in the Action Plan.

- PS2: Labor and Working Conditions:

The company has developed a comprehensive set of Human Resources procedures that describe selection and recruitment of personnel practices, personnel contracts, salaries and benefits, medical coverage, life insurance, vacations, maternity benefits, graduate and postgraduate student grants, and discipline practices.

Relationship with the labor union is described in HR procedures including the interaction with union representatives that work at the company, negotiations with the union, procedures during and after a strike and the relationship with Ministry of Work.

Schahin employees and its contractors receive training on all the EHS requirements necessary for offshore activities, and the EHS representative on board, together with the offshore facility manager, are responsible for ensuring implementation of the EHS procedures. Workers are provided with appropriate personal protective equipment (PPE).

The rig units and their associated equipment will be designed with controls in place to ensure that there are no significant risks to personnel health and safety. Rig specifications ensure safe operations in marine environments like those in Brazil. In addition, Schahin is required by law to have in place plans for PPE and an occupational health and medical control program. A plan for setting up of an accident prevention group is also required (the Accident Prevention Internal Commission). This group identifies health and safety risks, identifies awareness and training needs and investigates incidents.

Schahin has received several recognitions from Petrobras for its commitment and continual improvement of safety performance that are summarized below:

- October 2001 – SC Lancer reaches the highest score in terms of safety conditions, operation planning, inspections, training and environment preserving;
- April 2002 – Schahin SHP1 (Hydraulic Rig – number I) team received an award for 4 years without any lost time injuries.
- January 2004 – Awarded prize for reducing to zero the number of accidents and days on-board without working incidents in 2003 – (Drill Ship SC Lancer, North Star Platform and 4 Hydraulic Rigs).
- March 2006 – Awarded prize for zero accidents during 2005 (SC Lancer).
- June 2007 the workover unit SPH-I (located in the state of Ceara), which has been operating for Petrobras since 1984, received an award for 8 years without accidents, rendering a new safety record.

Regarding occupational heath the company carries out pre-occupational medical exams, medical monitoring program for own personnel, and ergonomic surveys. The client has programs for preventive medicine on issues like hypertension, visual health, diabetes, hearth diseases, oral health, and cancer.

- PS3: Pollution Prevention and Abatement

Low levels of routine air emissions will be generated during offshore drilling activities but will be of a relatively short duration and will result in minimal impact.

A waste management plan for all hazardous and non-hazardous wastes generated offshore has been developed. Food wastes (only the organic fraction) are processed at the vessel before disposal of overboard. Excluding drilling wastes and waste waters, all other wastes generated on the rigs offshore will be transported to shore for disposal by licensed and approved waste management contractors (according to the local regulation NBR 10004). Drilling muds are recycled during drilling activities. Spent muds and drilled cuttings treatment and disposal procedures will follow Petrobras requirements which were previously approved by the IBAMA. For water based muds in offshore environmentally sensitive areas no overboard disposal of muds and cuttings is usually allowed if the water depth is shallower than 1,000 meters. In all other areas overboard discharge of water-based muds and cuttings is allowed provided that toxicity testing demonstrates no harm to the marine environment. Cuttings are often washed to remove any mud content before disposal overboard. For drilling projects that need to use non-water based drilling muds, the cuttings must be treated under specified conditions to remove the drilling fluid to an acceptable and approved concentration before its disposal overboard. Every solid waste containing oil is classified as hazardous waste and is treated on-shore by an contractor approved by the environmental authority.

Water quality monitoring is usually undertaken by Petrobras as agreed with IBAMA. All offshore discharges will meet the toxicity testing and discharge requirements contained in the IFC Oil and Gas (Offshore) Guidelines, as well as MARPOL requirements. A marine sanitation device for sewage treatment prior to discharge is installed on each drilling rig. Several monitoring programs (including waste waters, drainage water, sewage, noise, and toxicity tests among other environmental parameters) are consistently applied by Schahin for its offshore drilling operations in accordance with Petrobras requirements.

The drill ship SC Lancer obtained in 2005 a certification after the International Management Code for the Safe Operation of Ships and for Pollution Prevention (ISM Code) issued by Bureau Veritas, which is a well-known standard on safety and pollution prevention management for marine vessels.

The company has established emergency response plans for its offshore operations that contain the procedures to follow in the event of an offshore emergency. These emergency response plans will be adapted to apply to the new rigs. Emergency response arrangements cover natural hazards, man overboard, fire and explosion, emergency evacuation, H2S or natural gas releases, well blowouts as well as the response to spills onboard. Response to spills at sea follows operator’s contingency plans. The rigs will be equipped with H2S and natural gas detectors, fire fighting system, motor boat for man overboard rescue, autonomous breath equipment and escape routes clearly signalized.

Potential impacts related to the delivery of the rigs from the shipyard in China to Schahin’s base in Macae (Brazil) will be regulated by standard operational practices and the risks are relatively low. The company will prepare an EHS management plan specific for this phase addressing the requirements of MARPOL 73/78, ISPS code for ship safety, the Brazilian regulations related to pollution control and emergency preparedness and Petrobras’ EHS procedures. In this way the company will ensure that all EHS risks are avoided or minimized.

- PS4: Community Health, Safety and Security

The operational base camp at Macae has specific procedures to manage hazardous substances and fuels stored. The base has its own emergency response plan. No significant risks for the community were identified for the offshore operations of the rigs. Coordination with port authorities and regular supervision of the vessels condition and operational procedures will help to maintain a low level of interference with other marine activities.

- PS6: Biodiversity Conservation and Sustainable Natural Resource Management

Operations in potentially sensitive locations are identified during the EIA process carried out for each drilling program. Projects in environmentally sensitive areas are subject to additional environmental management measures and monitoring programs that are approved by IBAMA. Specific EHS management plan should be developed for the off-shore drilling projects and are consequently enforced by IBAMA and contractually requested by Petrobras. Schahin has good experience in operating in environmentally sensitive areas.

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