FINAL REPORT OF THE: INDEPENDENT ENVIRONMENTAL & SOCIAL CONSULTANT ENVIRONMENTAL & SOCIAL REVIEW AND AUDIT LUKOIL OVERSEAS SHAH DENIZ - STAGE 2 OF THE SHAH DENIZ PROJECT AZERBAIJAN September 2015 INDEPENDENT ENVIRONMENTAL & SOCIAL CONSULTANT ENVIRONMENTAL & SOCIAL REVIEW AND AUDIT LUKOIL OVERSEAS SHAH DENIZ - STAGE 2 OF THE SHAH DENIZ PROJECT AZERBAIJAN Prepared for: European Bank for Reconstruction and Development Asian Development Bank Black Sea Trade and Development Bank Prepared by: Sustainability Pty Ltd Suite 3, 118 Flora Terrace North Beach, Western Australia, 6020 www.sustainability.net.au +61 (0)8 9246 6666 Team Members: John Miragliotta Project Director – Principal Reviewer Amy Sexton Senior Social Specialist TABLE OF CONTENTS ACRONYMS AND ABBREVIATIONS ........................................................................................ I EXECUTIVE SUMMARY ....................................................................................................... III ENVIRONMENTAL AND SOCIAL MANAGEMENT / STAKEHOLDER ENGAGEMENT ................................ IV RESOURCE EFFICIENCY AND POLLUTION PREVENTION ..................................................................... VI LABOUR AND WORKING CONDITIONS ................................................................................................. VI COMMUNITY HEALTH, SAFETY AND SECURITY .................................................................................... VI INVOLUNTARY RESETTLEMENT ........................................................................................................... VII BIODIVERSITY CONSERVATION AND SUSTAINABLE MANAGEMENT OF LIVING NATURAL RESOURCES ................................................................................................................ VII INDIGENOUS PEOPLES ....................................................................................................................... VIII CULTURAL HERITAGE ......................................................................................................................... VIII CONCLUSION ...................................................................................................................................... VIII REPORT ORGANISATION ...................................................................................................... X 1. INTRODUCTION ........................................................................................................... 1 1.1 PROJECT OVERVIEW ..................................................................................................................... 2 1.2 SCOPE OF WORK ........................................................................................................................... 3 1.3 LENDER POLICIES ......................................................................................................................... 4 1.3.1 Equator Principles and IFC Performance Standards ............................................................... 5 1.3.2 IFC EHS Guidelines ............................................................................................................ 5 1.3.3 EBRD Performance Requirements and Sub-Sectoral Guidelines .............................................. 6 1.3.4 ADB .................................................................................................................................. 6 1.4 SOURCES OF INFORMATION ......................................................................................................... 7 2. SUMMARY PROJECT DESCRIPTION ............................................................................. 7 2.1 SD2 OVERVIEW AND LOCATION ................................................................................................... 9 3. INSTITUTIONAL AND LEGAL FRAMEWORK ............................................................... 12 4. ENVIRONMENT, SOCIAL, HEALTH & SAFETY REVIEW AND AUDIT ........................... 15 5. COMPLIANCE AGAINST LOCAL LEGISLATION ........................................................... 15 6. COMPLIANCE AGAINST IFC PERFORMANCE STANDARDS ......................................... 17 6.1 PERFORMANCE STANDARD 1 – ASSESSMENT AND MANAGEMENT OF ENVIRONMENTAL AND SOCIAL RISKS AND IMPACTS ............................................................... 17 6.1.1 Environmental and Social Assessment ................................................................................ 17 6.1.2 Management Systems ...................................................................................................... 21 6.1.3 Management Programs .................................................................................................... 22 6.1.4 Organisational Capacity and Competency ........................................................................... 23 6.1.5 Emergency Preparedness and Response ............................................................................ 24 6.1.6 Monitoring and Review ..................................................................................................... 24 6.2 PERFORMANCE STANDARD 1 – STAKEHOLDER ENGAGEMENT REQUIREMENTS ...................... 35 6.2.1 Stakeholder Engagement .................................................................................................. 35 6.2.2 External Communications and Grievance Mechanisms ......................................................... 38 6.2.3 Ongoing Reporting to Affected Communities ...................................................................... 39 6.3 PERFORMANCE STANDARD 2 – LABOUR AND WORKING CONDITIONS ................................... 46 6.3.1 Working Conditions and Management of Worker Relationships ............................................. 46 Lukoil Overseas Shah Deniz Stage 2 Project Rev3 Environmental and Social Review and Audit September 2015 6.3.2 Protecting the Workforce .................................................................................................. 48 6.3.3 Occupational Health and Safety ......................................................................................... 48 6.3.4 Workers Engaged by Third Parties ..................................................................................... 50 6.3.5 Supply Chain ................................................................................................................... 51 6.4 PERFORMANCE STANDARD 3 – RESOURCE EFFICIENCY AND POLLUTION PREVENTION ............................................................................................................................... 59 6.4.1 Resource Efficiency .......................................................................................................... 59 6.4.2 Pollution Prevention ......................................................................................................... 60 6.5 PERFORMANCE STANDARD 4 - COMMUNITY HEALTH, SAFETY, AND SECURITY ...................... 71 6.5.1 Community Health, Safety, and Security ............................................................................ 71 6.5.2 Security Personnel ........................................................................................................... 74 6.6 PERFORMANCE STANDARD 5 – LAND ACQUISITION AND INVOLUNTARY RESETTLEMENT ........................................................................................................................... 81 6.6.1 General ........................................................................................................................... 81 6.6.2 Displacement .................................................................................................................. 86 6.7 PERFORMANCE STANDARD 6 – BIODIVERSITY CONSERVATION AND SUSTAINABLE MANAGEMENT OF LIVING NATURAL RESOURCES ............................................. 99 6.7.1 General ........................................................................................................................... 99 6.7.2 Protection and Conservation of Biodiversity ....................................................................... 103 6.8 PERFORMANCE STANDARD 7 – INDIGENOUS PEOPLES .......................................................... 116 6.8.1 Scope of Application ........................................................................................................ 116 6.9 PERFORMANCE STANDARD 8 – CULTURAL HERITAGE ............................................................ 117 6.9.1 Protection of Cultural Heritage in Project Design and Execution........................................... 117 7. COMPLIANCE AGAINST IFC EHS GENERAL GUIDELINES ........................................ 125 8. COMPLIANCE AGAINST THE EQUATOR PRINCIPLES ............................................... 129 9. COMPLIANCE AGAINST EBRD PERFORMANCE REQUIREMENTS ............................. 135 9.1 PR 1: TRAINING ........................................................................................................................ 135 9.2 PR 2: WAGES, BENEFITS AND CONDITIONS OF WORK ........................................................... 136 9.3 PR 4: ENVIRONMENT AND NATURAL RESOURCE ISSUES ........................................................ 136 9.4 PR 5: LOSS OF AMENITIES ........................................................................................................ 136 9.5 PR 8: INTANGIBLE CULTURAL HERITAGE ................................................................................ 136 9.6 PR 10: CORPORATE FINANCE ................................................................................................... 136 10. COMPLIANCE AGAINST EBRD SUB-SECTORAL ENVIRONMENTAL AND SOCIAL GUIDELINES: PETROLEUM AND COAL PRODUCTS ..................................... 153 11. COMPLIANCE AGAINST ADB SAFEGUARD POLICY STATEMENTS ............................ 163 11.1 SAFEGUARD POLICY STATEMENT ............................................................................................. 163 11.2 INVOLUNTARY RESETTLEMENT SAFEGUARDS ......................................................................... 163 11.3 GENDER AND DEVELOPMENT POLICY ...................................................................................... 178 11.4 INCORPORATION OF SOCIAL DIMENSIONS INTO ADB OPERATIONS .................................... 179 11.5 PUBLIC COMMUNICATIONS POLICY ........................................................................................ 181 12. HIGH LEVEL COMPLIANCE ASSESSMENT OF ASSOCIATED INFRASTRUCTURE.................................................................................................... 183 12.1 INTRODUCTION ......................................................................................................................... 183 APPENDIX A: DOCUMENT LIST ........................................................................................................... 198 APPENDIX B: IFC EHS GUIDELINES COMPLIANCE ASSESSMENT TABLE........................................... 202 Lukoil Overseas Shah Deniz Stage 2 Project Rev3 Environmental and Social Review and Audit September 2015 TABLES Table 6-1 Compliance Evaluation – Assessment and Management of Environmental and Social Risks and Impacts............................................................................................................ 26 Table 6-2 Compliance Evaluation – Stakeholder Engagement and Development ................................... 40 Table 6-3 Compliance Evaluation – Labour and Working Conditions .................................................... 52 Table 6-4 Compliance Evaluation – Resource Efficiency and Pollution prevention .................................. 67 Table 6-5 Compliance Evaluation – Community Health, Safety, and Security ........................................ 75 Table 6-6 Fishing Livelihoods Management Planning Engagement Activities ......................................... 84 Table 6-7 Compliance Evaluation – Land Acquisition and Involuntary Resettlement .............................. 87 Table 6-8 Compliance Evaluation – Biodiversity Conservation and Sustainable Management of Living Natural Resources ................................................................................................. 109 Table 6-9 Compliance Evaluation – Cultural Heritage ........................................................................ 120 Table 8-1 Compliance Evaluation – Equator Principles ....................................................................... 130 Table 9-1 Compliance Evaluation – EBRD Performance Requirements................................................. 137 Table 10-1 Compliance Evaluation – EBRD Sub-Sectoral Environmental and Social Guidelines: Petroleum and Coal Products ........................................................................................... 155 Table 11-1 Fishing Livelihoods Management Planning Engagement Activities ........................................ 166 Table 11-2 Corrective action plan...................................................................................................... 168 Table 11-3 Compliance Evaluation – ADB Involuntary Resettlement Safeguards .................................... 169 Table 11-4 Compliance Evaluation – ADB Gender and Development Policy Assessment .......................... 178 Table 11-5 Compliance Evaluation – Incorporation of Social Dimensions into ADB Operations ................ 180 Table 11-6 Assessment of ADB Public Communications Policy .............................................................. 181 Table 12-1 High Level Compliance Evaluation – Associated Infrastructure ............................................ 184 FIGURES Figure 1.1 Overview of the SD2 Project ............................................................................................... 2 Figure 2.1 Location of the Shah Deniz Contract Area and Existing Shah Deniz and ACG Oil and Gas Offshore Facilities ........................................................................................................ 9 Figure 2.2 Scope for the SD2 Project ................................................................................................. 11 Figure 5.2 Legal Hierachy for SD2 Project .......................................................................................... 16 Lukoil Overseas Shah Deniz Stage 2 Project Rev3 Environmental and Social Review and Audit September 2015 ACRONYMS AND ABBREVIATIONS ADB Asian Development Bank ATA Amec-Tekfen-Azfen bcma billion cubic meters per annum BDJF Baku Deepwater Jacket Factory BOP Blow Out Preventer BSTDB Black Sea Trade and Development Bank BTC Baku-Tbilisi-Ceyhan CAP Corrective Action Plan CDF Community Development Framework CDP Community Development Plan CERP Community Emergency Response Plan CFC Chlorofluorocarbon CHMP Cultural Heritage Management Plan CHMMP Cultural Heritage Management and Monitoring Plan CHSS Community, Health, Safety, and Security CSR Corporate Social Responsibility EBRD European Bank for Reconstruction and Development ECAs Export Credit Agencies EHS Environment, Health and Safety EIA Environmental Impact Assessment EIW Early Infrastructure Works EMP Environmental Management Plan EPs Equator Principles EPS Environmental Protection Standards ERMP Employee Relations Management Plan ES Environmental and Social ESAP Environmental and Social Action Plan ESHS Environmental, Social, and Health and Safety ESIA Environmental and Social Impact Assessment ESMP Environmental and Social Management Plan ESMS Environmental and Social Management System ESR Environmental and Social Review ETN Environmental Technical Note FFD Full Field Development FGR Flare Gas Recovery FID Final Investment Decision GHG Greenhouse Gas GIIP Good International Industry Practice GOO Global Operations Office HCFC Hydrochlorofluorocarbon H&S Health and Safety HR Human Resource HSES Health, Safety, Environmental and Social HSE Health, Safety and Environmental HUC Hook-Up and Commissioning HWTF Hazardous Waste Treatment Facility IBA Important Bird Area IESC Independent Environmental and Social Consultant IFC International Finance Corporation ILO International Labour Organisation Lukoil Overseas Shah Deniz Stage 2 Project Rev3 Environmental and Social Review and Audit September 2015 Page i IP Indigenous Peoples ISD Inherently Safer Design JV Joint Venture KBA Key Bird Area KPI Key Performance Indicator LARP Land Acquisition and Resettlement Procedures LOMS Local Operating Management System LOSD Lukoil Overseas Shah Deniz LTMOBM Low Toxicity Mineral Oil Based Muds MEG monoethylene glycol MMP Management and Monitoring Plan MOP Mutual Operations Plan MP Management Plan MSDS Material Safety Data Sheet NGO Non-Governmental Organisation NO2 Nitrogen Dioxide Nitrous Oxide Nitrous Oxide NORM Naturally Occurring Radioactive Material OHS Occupational, Health and Safety OMS Operating Management System The Convention for the Protection of the Marine Environment of the OSPAR North-East Atlantic OSRP Oil Spill Response Plan PAHs Polycyclic Aromatic Hydrocarbons PPE Personal Protective Equipment PSA Production Sharing Agreement PS Performance Standard PR Performance Requirement RfP Request for Proposal RAP Resettlement Action Plan SCP Southern Caucasus Pipeline SCPx SCP Expansion SD Shah Deniz SDB SD Bravo SDB-PR SDB Production and Risers SDB-QU SDB Quarters and Utilities SEE State Ecological Expertise SEP Stakeholder Engagement Plan SMP Social Management Plan SOCAR State Oil Company of the Azerbaijan Republic SOP Standard Operating Procedure SPS Safeguard Policy Statement SSF MP Small-Scale Fishing Management Plan ST Sangachal Terminal Sustainability Sustainability Pty Ltd TAP Trans Adriatic Pipeline TANAP Trans Anatolian Pipeline TKAZ Tekfen Azfen Alliance (construction contractor) TSP Total Suspended Particle VOC Volatile organic compounds Lukoil Overseas Shah Deniz Stage 2 Project Rev3 Environmental and Social Review and Audit September 2015 Page ii EXECUTIVE SUMMARY This report summarises the environmental and social review (ESR) and audit for the Lukoil Overseas Shah Deniz (LOSD) for Stage 2 of the Shah Deniz (SD2) Project in Azerbaijan. The Project involves all the aspects of the upstream Stage 2 operations, including two new bridge-linked offshore platforms; 26 gas producing wells which will be drilled with two semi-submersible rigs; 500km of subsea pipelines to link the wells with the onshore terminal; upgrades to the offshore construction facilities; and expansion of the Sangachal Terminal (ST) to accommodate the new gas processing and compression facilities. The European Bank for Reconstruction and Development (EBRD) is leading the Environmental and Social Review for possible financing of the SD2 Project on behalf of a group of lenders (the Lender Group) including the Black Sea Trade and Development Bank (BSTDB), Asian Development Bank (ADB) and other possible commercial banks. Sustainability Pty Ltd (Sustainability) was engaged as the Independent Environmental and Social Consultant (IESC) and presents this environmental and social review and audit report as the findings from the assessment of the Project’s compliance with the Lender Groups’ environmental and social performance standards, requirements and policies. The Lender Group is considering finance to LOSD, a 10% shareholder of the Shah Deniz JV. Therefore, this ESR review does not address whether the Project will go ahead, but rather whether to provide financing to LOSD for their portion of the Project. The SD2 Project is currently under the early phase of construction and will be operated by BP’s Azerbaijan-Georgia-Turkey (AGT) Region. The ESR and audit includes a review of (1) publicly available environmental and social documentation and (2) information provided by BP as part of the review, which is not available in the public domain. This included review of the Environmental and Social Impact Assessment (ESIA) documentation for the SD2 Project and associated facilities; documents provided by LOSD to support the evidence requested from the IESC and the outcomes of a site visit to the Shah Deniz (SD) Project HSE team in Leatherhead UK, BP’s SD2 Project team in Baku and a site visit to the onshore ST expansion component of the SD2 Project at Sangachal. The review and audit findings identified a comprehensive environmental and social impact assessment process has been undertaken for the SD2 Project, which is the latest assessment for the SD Project that was initially subject to ESIA for Stage 1 in 2002. The 2014 ESIA for SD2 has been developed from a body of knowledge gained from operation of the Stage 1 Project since 2006 and the associated environmental and social monitoring and management programmes that have continued since the initial ESIA studies. The operational knowledge gained from the SD Project, together with the understanding gained on the environmental and social aspects of the Project have informed the identification, scoping and assessment of impacts for the 2014 SD2 ESIA. In general, the ESIA provides a systematic and detailed assessment of the significant environmental and social aspects of the SD2 Project. Baseline environmental and social data are comprehensive, being developed from monitoring programmes refined over a 10-year period. The impact assessment methodology is sound and consistent with Good International Industry Practice (GIIP). The impact assessment scoping process used for the SD2 ESIA has applied past Project experience to identify those environmental and social aspects that are likely to be significant for SD2. This process allows the SD Project Operator to design the SD2 Project such that significant impacts are avoided where possible or substantially mitigate those impacts using proven methods and technology. The scope of the Environmental and Social Review and audit of the SD2 Project included a review against Lender Group environmental and social performance standards, requirements and policies that differ from the environmental and social criteria and impact assessment and management methodologies applied to the SD Project through both statutory requirements and Operator (BP) standards. These differences are recognised by the Independent Environmental and Social Consultant (IESC) with the review and audit findings discussed within the context of the intent or objective of the Lender Group requirements and policies rather than a systematic Lukoil Overseas Shah Deniz Stage 2 Project Rev3 Environmental and Social Review and Audit September 2015 Page iii procedural assessment of compliance that may otherwise apply in the case of an ESIA being developed with the objective of meeting Lender Group environmental and social criteria. The ESR and audit findings also recognised that LOSD, as the party seeking finance from the Lender Group, is not the Operator of the SD Project and has limited ability to influence the Project’s environmental and social performance. LOSD is also limited in its ability to facilitate the Project’s demonstration of environmental and social performance in compliance with Lender Group policies and standards. To that end, the IESC findings recognise that compliance with Lender Group obligations is assessed on the basis of information that may be incomplete and with limited access to the Operator or its contractors. Where incomplete or limited information was available to evaluate compliance with Lender Group standards and policies, the IESC considered past performance and practices applied at the SD Project and applied professional judgements based on knowledge of BP’s practices, policies and management systems applied globally. Furthermore, additional specific information regarding initial IESC findings was supplemented from meetings with the SD2 Operator on 25 June 2015. This additional information assisted in demonstrating compliance with Lender standards and policies for specific issues that were not fully documented in the disclosed ESIA. Specifically this information pertained to the stakeholder engagement process with affected communities; the disclosure of environmental and social management plans; evidence of implementation of the grievance mechanism, and; the implementation of compensation measures for fishermen who’s livelihood are potentially impacted by the nearshore and onshore pipeline construction activities in Sangachal Bay. These information gaps were subject to further review of BP’s operational records and internal documents which provide further clarification and evidence of compliance with the relevant environmental and social standards applied in this review. The summary below provides a brief overview of the core aspects of the SD2 Project that were subject to detailed review and focuses on those issues where evidence of Project compliance with Lender polices and standards was obtained outside of the publicly disclosed information. The summary also includes recommendations for additional actions to ensure full compliance with the relevant standards or Good International Industry Practice. These recommendations are made with the acknowledgement that LOSD, as the party seeking finance from the Lender Group, is not the operator of the SD Project and has limited ability to influence the Project’s environmental and social performance. ENVIRONMENTAL AND SOCIAL MANAGEMENT / STAKEHOLDER ENGAGEMENT IFC Performance Standard 1: Assessment and Management of Environmental and Social Risks and Impacts / EBRD PR 1: Environmental and Social Appraisal and Management / EBRD PR 10: Information Disclosure and Stakeholder Engagement / EBRD Sub-sectoral Guidelines / Equator Principles 2 – 6 / ADB Safeguards Policy Statement Identification of Potentially Impacted Communities The Project has implemented a Stakeholder Engagement Plan, which describes the process for the meaningful engagement with all identified Project stakeholders including potentially affected and vulnerable people. The plan is informed by a comprehensive social and socio-economic survey undertaken of the communities at Sangachal in 2011 and the detailed modelling of air and noise emissions associated with the construction and operational phases of the Project. The engagement processes and the ESIA are focussed on communities surrounding the Sangachal Terminal. The construction phase shipyards in Azerbaijan used for fabrication of the offshore Shah Deniz Bravo (SDB) jackets and topside are subjected to a narrower assessment of potential impacts in the SD2 ESIA (Chapter 5.6), which is limited to noise and non-Greenhouse Gas (GHG) air emissions. The ESIA provided limited detail of the land requirements, land use or potential environmental and social impacts associated with the expansion. Further supplementary information provided to the IESC identified that the expansion of the ATA Lukoil Overseas Shah Deniz Stage 2 Project Rev3 Environmental and Social Review and Audit September 2015 Page iv fabrication yard by the third party operator of the facility had occurred over a number of years and involved expansion on land that had previously been used for oil production. The nearest residential premises were located more than 1km from the ATA yard expansion and none were located within the area of expansion. Records provided by the SD2 operator indicate that the residences in the vicinity of the SD2 yard had been considered in the ESIA scoping that identified potential nuisance impacts associated with air quality and noise. Both air quality and noise aspects associated with the ATA yard are assessed in the Project ESIA and contractors have implemented relevant management plans for the construction phase. The SD2 construction phase contactor management processes, including the requirement for contractor-specific environmental and social management plans and grievance management processes, are considered to be sufficient to identify any unforeseen impacts to nearby communities from the third party operated construction yards. Management systems and plans The IESC notes that the Project has various management plans (MPs) in place for its existing SD operations, and that construction phase management and monitoring programmes favour impact and risk avoidance. These plans include measurable targets and indicators and assign clear roles and responsibilities for time-bound implementation. The social impact management planning for the Project relies on both SD2 construction/contractor management planning and BP’s Regional Community and External Affairs team who implement on-going consultation with potentially affected communities in the vicinity of the Sangachal Terminal. The BP Regional consultation processes with potentially affected communities include scheduled and planned community meetings and informal communications through a network of community liaison officers who are located within these communities. The IESC reviewed records of engagement with communities surrounding the Sangachal terminal dating back to 2010 that demonstrate regular and meaningful engagement with these communities. The community engagement records include meetings held jointly by BP and the main construction contractor for SD2, TKAZ; whereby issues of local employment, training, public safety and the grievance process were discussed with potentially impacted communities. Records of engagement with communities surrounding the terminal also included presentation of findings of ESIA reports for SD2, early infrastructure works and a Health Impact Assessment. The IESC notes that the environmental and social management plans documented for the SD2 construction phase have not been publicly disclosed during the SD2 ESIA process and are not currently available to the general public which indicates a deficiency in conformance to Lender Group requirements. . Although the SD2 Operator has not disclosed the actual social and environmental management plans that detail how impacts are proposed to be managed and mitigated, there is sufficient evidence to suggest that the on- going community engagement processes in place for the SD Project include a structured and systematic engagement process with local communities that communicates potential impacts and how the Project proposed to manage and mitigate these impacts. Furthermore, the Operator has communicated and presented the results of various studies and monitoring data regarding dust, noise and health impacts to the communities surrounding the terminal. The intent of Lender standards in regards to the disclosure of environmental and social management plans can therefore be demonstrated through the record of engagement with affected communities in regard to these management and mitigation measures. It is recommended that the SD2 Operator publicly disclose documented environmental and social management plans where these plans contain the details and commitments to manage or mitigate potentially significant environmental and social impacts of the Project. The IESC reviewed records of community grievances provided by the Shah Deniz Project Operator through a General Complaints Log. The Operator advised that the log captures records of formal complaints received Lukoil Overseas Shah Deniz Stage 2 Project Rev3 Environmental and Social Review and Audit September 2015 Page v