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1 e MERLON INTERNATIONAL LLC EL FAYUM DEVELOPMENT PROJECT EGYPT

2 MERLON INTERNATIONAL LLC EL FAYUM DEVELOPMENT PROJECT EGYPT JUNE 2015 Prepared for: European Bank for Reconstruction and Development. Prepared by: D Appolonia S.p.A. Via San Nazaro, Genova, Italia Doc. No. _Rev0

3 Pag. 3 CONTENTS FIGURES 4 1 INTRODUCTION 6 2 PROJECT DESCRIPTION 7 3 BACKGROUND 8 4 PROJECT DEVELOPMENT PROCESS 9 5 ENVIRONMENTAL HEALTH AND SAFETY ENVIRONMENTAL, HEALTH AND SAFETY MANAGEMENT SYSTEM ENVIRONMENTAL, HEALTH AND SAFETY IMPACTS AND MITIGATION MEASURES 10 6 SOCIAL ASPECTS SOCIAL MANAGEMENT SYSTEM SOCIAL IMPACTS AND MITIGATION MEASURES STAKEHOLDER ENGAGEMENT PLAN 14 7 MONITORING 15

4 Pag. 4 FIGURES FIGURE 2.1: PETROSILAH EL FAYUM CONCESSION EGYPT (IMAGE: 7 FIGURE 2.2: PETROSILAH CONCESSION IN THE FAYUM GOVERNORATE 7

5 Pag. 5 ESSENTIAL GLOSSARY APG EBRD EEAA EGPC EIA ES ESAP ESHS ESMP EU GHG GIP HSE HR IESC IMS JV NTS PPE PR SEP SIA Associated Petroleum Gas European Bank for Reconstruction and Development Egyptian Environmental Affairs Agency Egyptian General Petroleum Corporation Environmental Impact Assessment Environmental and Social Environmental and Social Action Plan Environmental, Social, Health and Safety Environmental Social Management Plan European Union Greenhouse Gas Good International Practice Health, Safety and Environmental Human Resources Independent Environmental and Social Consultant Integrated Management System Joint Venture Non-Technical Summary Personnel Protective Equipment Performance Requirement Stakeholder Engagement Plan Social Impact Assessment

6 Pag. 6 1 INTRODUCTION MERLON INTERNATIONAL LLC EL FAYUM DEVELOPMENT PROJECT EGYPT D Appolonia S.p.A. (D Appolonia) has been retained on behalf of the European Bank for Reconstruction and Development (EBRD) as the Independent Environmental and Social Consultant (IESC) to conduct an Environmental, Social, Health and Safety (ESHS) Audit and Assessment of the Merlon El Fayum oil field concession in Egypt. The concession is managed by Petrosilah (or the Company ), a Joint Venture (JV) between Merlon and the Egyptian General Petroleum Corporation (EGPC). EBRD is considering providing a loan to Merlon for the continued development of the El Fayum oil fields including new wells and production facilities; various environmental, health and safety improvements; and associated petroleum gas (APG) utilisation investments to reduce gas flaring and improve energy efficiency at El Fayum (together the Project ). An ESHS audit of the Company s past, current, and planned activities in Egypt within the El Fayum concession has been undertaken to identify the adequacy of current mitigation measures, identification of additional potential impacts (both positive and negative) and facilitate the implementation of additional mitigation measures as necessary. The ESHS audit and assessment evaluated compliance of Merlon and Petrosilah activities against Egyptian, EBRD Environmental and Social Performance Requirements (PRs), and other relevant standards, including European Union (EU) environmental and social directives and Good Industry Practice (GIP). The detailed findings of the potential ESHS risks associated with the Company s activities and the Project have been outlined in an ESHS assessment report. Additionally, a Stakeholder Engagement Plan and an Environmental and Social Action Plan have been developed which will be implemented by the Project.

7 Pag. 7 2 PROJECT DESCRIPTION The El Fayum concession is located in the rural area of the Fayum Governorate with a total area of 1847 km 2. It is located approximately 80 km Southwest of Cairo, within the Western desert. Figure 2.1: Petrosilah El Fayum Concession Egypt (Image: The concession currently includes 46 producing wells within 11 development leases, concentrated in the southern part of the concession.. Figure 2.2: Petrosilah Concession in the Fayum Governorate

8 Pag. 8 3 BACKGROUND The El Fayum Governorate is situated in a green natural oasis in the Western Desert. It is surrounded by desert on all sides, except where it borders with the Beni Suef Governorate to the South-East. El Fayum is located at an altitude lower than sea level and is dominated by dry desert climate, with very rare precipitation events, making it one of the world's most arid regions. The area is reportedly characterized by high biodiversity in terms of both fauna and flora and includes three large lakes. Migratory birds are reported to move along the lakes in the area during spring and autumn, and Lake Qarun (see figure 2) and Wadi El-Rayan are natural Egyptian Protectorates under the supervision of the EEAA since El Fayum is the main city of the Governorate, with a population of about 350,000 inhabitants, while the rest of the governorate residents are mainly spread across rural settlements. The El Fayum concession is located among and scattered between many agricultural villages and small communities, and most of the well pads and the Silah main camps are very close to settlements, with the land surrounding the well pads mainly used for agricultural purposes. The main economic source of income of the local population is agriculture along with migrant earnings (from Egypt and abroad). The northern part of the El Fayum concession, which is mostly desert and flat land with no currently identified settlements present, has not yet been exploited but could host some future activities. The concession was awarded in 2004 and first production came in September Reservoirs in the El Fayum concession are oil dominated and there have been no significant gas discoveries. As of June 2015, the daily production rate is about 9,000 barrels of oil a day gross. Total oil production is approximately 9.4 million barrels through May Oil is gathered at the field gathering stations before being trucked to the Tabeen oil receiving station, located approximately 70km from the concession via public roads. Crude title is transferred at Tabeen, and is then pumped to a refinery by a third party. Gas produced is generally flared but is also used for minor power generation via generators. The proposed 2H2015 and 2016 development plan (subject to the EBRD loan) includes: Approximately 20 new wells (most of these wells are planned within existing development leases, with a few wells planned on the exploration acreage) Continued EOR efforts; Related surface facilities (including well tie-ins, waterflood infrastructure sets, new production facilities). Many of the new wells and infrastructure will be developed on existing well pads.

9 Pag. 9 4 PROJECT DEVELOPMENT PROCESS The Merlon El Fayum concession development is classified under Egyptian legislation as category C, thereby requiring a full Environmental Impact Assessment (EIA) to be developed in accordance with the Egyptian Environmental Affairs Agency (EEAA). Egyptian Law 4/1994 sets out that the project developer is required to submit to the EEAA an assessment of environmental impacts of the proposed development, including site suitability to ensure that permissible levels of pollutants are not overstepped, that the total pollution emitted by the Project are within the permissible levels, and that mitigation measures and monitoring plans are in place. In line with legislative requirements, the Company undertakes an EIA for each new development (i.e. each new well). The EIA process does not require the analysis of social impacts. The EIAs, developed by the Company prior to the development of new wells, incorporate the following aspects: Egyptian environmental legislation relevant to the Project; Description of the Project and the existing environment; Assessment of potential environmental impacts connected to the Project; Mitigation Measures; Monitoring; Environmental Management Plan. In addition, and in accordance with Articles 22 and 23 of Law 4/1994, the project developer is also required to keep a written record of environmental impacts of the proposed project (the Environmental Register). Petrosilah EIAs have been developed in line with local legislative requirements and have been subsequently approved by the EEAA. All required permits have been received by the Company prior to well development and Petrosilah maintains and issues an environmental register to the competent authorities in line with requirements. The Project has implemented within the integrated environmental, health and safety management system (IMS) the necessary requirements to satisfy National legislative requirements, and has received all necessary construction and operational permits required for the realisation of oil and gas activities within the concession. As the Project management system is structured to satisfy National requirements, the system has not specifically considered EBRD requirements. Environmental aspects (including emission limits and management requirements), and health and safety requirements are tied to Egyptian Legislation. The Egyptian national environmental requirements on occasion reflect EU legislative limits (i.e. air emissions including SO2, carbon monoxide and lead emissions), however, the majority of the Egyptian emission levels are less stringent than EU requirements. Additionally, based on results provided by the Company, air, noise and dust emission levels are occasionally exceeded (Egyptian levels). The Project does foresee the development of a structured management system in working towards international certification (ISO and OHSAS 18001), which will assist the Project to go beyond local legislative requirements. While not specifically required at the National level, the Company has also undertaken a social impact assessment (SIA) within the Project area in 2009 and updated in November The SIA demonstrates the Company awareness of and commitment towards local communities and brings the Project closer to meeting EBRD requirements. As part of the development of the SIA, a socio-economic survey and public consultations have been carried out by the Project, including one-on-one questionnaire interviews and open groups. Considering the dimensions of the project area and its socio-economic characteristics, the current SIA will need to be expanded upon to effectively assess the Project impacts (both positive and negative). While labour aspects have been sufficiently addressed, additional social aspects will need to be considered and assessed by the Company, including processes such as meaningful consultation, stakeholder engagement and information disclosure, commensurate to the impacts of the Project.

10 Pag ENVIRONMENTAL HEALTH AND SAFETY 5.1 ENVIRONMENTAL, HEALTH AND SAFETY MANAGEMENT SYSTEM The risks and impacts identified during the EIA process are to feed into the Company developed Health Safety and Environment (HSE) Integrated Management System (IMS), which is soon to be implemented by Petrosilah. The IMS requires that all activities and processes of the Company need to be in line with all applicable laws, rules and relevant standards applicable to the Project, and that all hazards and emergencies associated with the business are assessed, and mitigations defined in specific procedures and implemented to comply with the HSE Policy. The HSE Policy, as part of the IMS, outlines the protection of the health and safety for all employees, contractors, visitors and neighbouring communities involved in its business as the main Company commitment. In conformance with these principles, Petrosilah is committed to the development and utilisation of a HSE management system, to the benchmarking of its processes against national legislative requirements, and to the continuous improvement of its HSE processes and systems through hazard identification and corrective actions. The Policy spells out the intent of achieving an injury and accident free workplace endorsing the concept of safety is everyone s responsibility (which allows employees to stop work in the presence of any HSE related risk) and implementing emergency response and contingency plans for all locations. As the Petrosilah Policy is aligned to meet national requirements, the Policy will be expanded to incorporate benchmarking of its processes not only against Egyptian regulations but also against GIP and international standards (EBRD Performance requirements). An integral requirement of the Policy will be the commitment of contractors to achieve compliance against the same principles. The current version of the Petrosilah HSE IMS has been formulated in compliance with elements of the HSE IMS of the Merlon International Exploration and Production Division Manual and reflects the Company Policy. The IMS contains the necessary fundamentals of a structured management system including a range of Environmental and Social Management Plans (ESMPs), and provides a foundation for the Company to build upon during current and future expansion operations. It indicates specific management responsibilities, procedures and practices to be followed during Project operations and requires JV management to define the HSE Policy presenting the strategic HSE objectives of the Company. Where the Project management system can be strengthened to incorporate EBRD requirements (including social aspects such as organisational capacity and training, cumulative impacts and monitoring), these actions have been incorporated in the ESAP, which the Company is committed to implementing as part of the EBRD loan agreement. An overview of the current Project HSE impacts, benefits and proposed mitigation and management measures have been outlined below. 5.2 ENVIRONMENTAL, HEALTH AND SAFETY IMPACTS AND MITIGATION MEASURES The Project developed EIAs provide a general El Fayum concession overview and summary of the foreseen and potential impacts as a result of project construction and operation. Future EIA studies will include site specific well-pad information to ensure that specific risks, impacts and mitigations are sufficient and tailored to each specific site. Predicted environmental impacts will include all industry-specific impacts and are to be evaluated with a consistent methodology. Regarding the planned continued development, the current Project plan seeks to minimize the Project footprint as far as possible by drilling new development wells within existing well pads. Air emissions, if inadequately controlled and managed, can lead to an increase in the concentration of airborne contaminants, some of which are known to be hazardous to human health and detrimental for existing ecosystems. Additionally, Greenhouse Gases (GHG) are the main contributors to climate change and are associated with an increase in the average surface temperature of the Earth. In order to minimise potential air emission impacts, the Project has identified and developed a mitigating strategy which foresees redirecting flare gas (a major contributor of Project total air emissions) to gas generators, thus reducing flaring and diesel fuel consumption. The Project will also commence regular reporting of GHG emissions from the (mobile/stationary) sources relative to the Project operations in order to track and quantify emissions and report to the EBRD on an annual basis.

11 Pag. 11 Regarding waste, the IMS (soon to be implemented) presents a thorough compendium of data and management procedures for waste and hazardous materials/substances storage, transportation, and handling within the production and development sites at El Fayum Concession. It also defines specific procedures for waste minimisation, in terms of both volume and toxicity. Eventual shortcomings observed on-site will be adequately managed once the IMS is implemented and effectively applied, including adequate monitoring/auditing of specific contractors activities and procedures. Inappropriate waste management at Project sites could lead to the contamination of surface water, and potentially percolate into the soil and the aquifer beneath. Project waste management is ensured by authorized contractors for both hazardous and non-hazardous waste, except for the contaminated metal drums (in total 15,000) stored in the central warehouse, which currently presents a potential environmental and health and safety risk. In order to mitigate this, the Company will appoint a licensed hazardous waste operator to collect the contaminated barrels and investigate possible recycling opportunities. Waste generation is recorded in an environmental register, but no waste generated by contractors is currently accounted for. This will be amended and contractors waste production will be included in future Environmental Registers. Temporary waste storage areas and wastewater pits at Project drilling sites will need to be adequately lined and secondary containment implemented as necessary. In addition, secondary containment will be implemented in hazardous materials storage areas, especially in the storage area of the warehouse. The Petrosilah HSE Section Head periodically visits the waste water treatment plant which receives the water produced in association with oil extraction to ensure that proper treatment is carried out before effluent discharges. Landfills used as final disposal of waste produced by the Project will also be inspected to verify their capacity considering the foreseen development activities. The annual Environmental Register includes hazardous waste and industrial/sewage wastewater production, flared gas, hazardous material and average fuel consumption. Indicative parameters (including timeframe of data collection, types of emissions, number of samples and locations, mitigations implemented and follow-up) will be included in the next Environmental Register to more effectively characterize emissions in line with international guidelines. The Company will include in the IMS detailed emission monitoring plans and results-reporting procedures. Concerning Health and Safety on site, the Company prescribes the use of PPE in selected areas (defined by signage) where operations pose potential health and safety hazards for workers. The adequacy of the PPE zones needs to be assessed by the Project through spot noise measurements at the drilling rig sites to ensure that PPE is sufficient for the risks to workers. HSE walkovers are undertaken at all Project sites to assess the status of key sources of potential impacts (drilling rigs and vehicles) and HSE handover documents are drafted based on gathered information. The inclusion of a more comprehensive set of potential HS risks sources in HSE walkovers and associated reports will further ensure the health and safety of both Petrosilah workers and their contractors. OHS tool-box meetings are held at each change of shift in drilling locations, but no log file of the discussed topics is currently kept. The Company will ensure that topics of the meetings are recorded in log files and periodically reported to the HSE-management. The IMS contains the basic elements needed to adequately deal with Project issues, and increased commitment and H&S activities by Company management (e.g., training programs, more comprehensive HS walkovers) will ensure that sufficient resources are dedicated to minimising the potential ESHS risks and to ensure that HS requirements in the field are being implemented (including the use and availability of PPE, restricted access to sites, and provision of adequate safety equipment). HSE accident events are recorded in the Accident and Incident Summary Report prepared and updated by the Company HSE department. This report includes the causes, actions taken, and safety recommendations to avoid future reoccurrence. Based on these recommendations, different measures have been implemented, and the Company has developed a Road Safety Procedure as part of the IMS. Continuous efforts will be made to reduce as much as possible all accidents and incidents involving workers and local communities, in particular road events. Emergency drills have commenced in early 2015, and are scheduled on a monthly basis. The Company will implement additional proactive mitigation measures (including driver awareness and training, monitoring of road conditions and route selection, associated with GPS tracking systems on each Project vehicle) to prevent as far as possible the ongoing incidents and undertake root cause analysis to ensure that the majority of accidents causal factors are removed from the problem fault sequence. The Company will include follow-up statistical analysis to assess the effectiveness of mitigation measures implemented as a result of the incidents.

12 Pag. 12 Regarding biodiversity, the Fayum Governorate has been identified as an important area for biodiversity, possessing important representative ecosystems with unique flora and fauna; in particular, the Petrosilah Concession boarders a natural protectorate area. As no baseline data surveys have been undertaken in the past, and considering the potential for impacts on biodiversity, the Project will undertake a biodiversity risk and impact assessment, including baseline study, on habitats and migratory corridors from current and future Project operations to bring the Project in line with EBRD PR6 requirements. The biodiversity risk assessment has the scope to identify the likelihood and the significance and severity of impacts proportionate to Project activities and determine the potential mitigation actions and avoidance strategies. These actions will be included in the IMS within a dedicated plan/procedure.

13 Pag SOCIAL ASPECTS 6.1 SOCIAL MANAGEMENT SYSTEM As Project activities are undertaken in close proximity to local communities, the potential for social impacts, both positive and negative, are an inevitable aspect of the Company operations. The Project looks to employ locally and appreciates that social impacts need to be addressed to ensure successful operations and an ongoing relationship with local stakeholders. To date, no social baseline is available, and social aspects are not incorporated in the IMS. The Company will include in its IMS all social aspects in line with EBRD PRs to enable the Project to achieve sound social performance, enhance its reputation/brand and ultimately reduce the risks deriving from social instability which if improperly managed could impact Company activities. Specific plans and procedures to be developed include the Stakeholder Engagement Plan, livelihood Restoration Plan, Security Policy, and Chance Find Procedure. The Petrosilah HSE Policy, currently aligned to meet national requirements, will also be amended to cover specific social aspects such as labour and working conditions and stakeholder engagement. As outlined previously, the Company has developed two SIAs, which will be used as a starting point and foundation to build and expand upon to incorporate the above mentioned social aspects and plans, particularly in view of the planned expansion operations. The Company will integrate the SIA with the missing information as outlined in the ESAP, in order to have a document commensurate with and proportionate to the direct and indirect potential impacts for all the stages of the Project (construction, operation and decommissioning), in accordance with EBRD PR1 requirements. In the event that new future developments will extend beyond existing well pads, the Company will integrate the SIA with the assessment of risks and impacts of the newly affected territories. 6.2 SOCIAL IMPACTS AND MITIGATION MEASURES A Social Manager and local Community Liaison Officer will be appointed as part of the Social team and required to define and implement the Social Management System, and to activate, monitor and update the stakeholder engagement strategy as defined in the SEP. Labour management and working conditions are in line with national legislation, as they are strictly regulated by the commitment framework defined by EGPC for all oil and gas sector companies. A HR Policy is in place, and incorporates the international labour principles, in line with EBRD Performance Requirements. An informal workers grievance procedure is available for Petrosilah employees, which the Company will formalise into a structured grievance mechanism and incorporate it in the IMS, including management procedures, reporting and evaluation of the grievances received. As the Petrosilah concession is located in an agricultural area scattered with several villages, the potential exists for security issues involving/ affecting workers and the local communities. The Company currently relies on a security contractor, who employs affected land owners as watchmen at the Project facilities. In addition, the Company has signed a contract with the Ministry of the Interior to employ armed policemen at the Silah 1 Gathering Station and drilling and workover rig sites. For this reason, the Company will develop a Security Policy as part of the IMS. In particular, the Company will clearly define its approach in the use of force and dispute resolution, and ensure that security personnel are trained (in particular those watchmen hired among affected land owners) and aware of the Company security approach in line with EBRD requirements. The Company criteria for the selection of the watchmen will be formalized and disclosed. Regarding community health and safety issues, additional measures as outlined in the Project ESAP will be implemented to ensure that Project impacts are reduced. Noise level compliance with Egyptian legislation will be assessed at the most sensitive points of reception beyond those community property boundaries which are found in close proximity to drilling sites. Noise and vibration levels will also be an object of assessment along access roads at dwellings of the closest residential areas. Regarding land acquisition, resettlement and economic displacement, Project activities have not resulted in any physical displacement. The procedure for land acquisition foresees the payment to the land owner of an annual rent for the acquired land and compensation for the loss of crops to the land owner or users for the first year. The procedure follows the national requirements and is generally in line with EBRD PR 5.

14 Pag. 14 The Project will undertake a baseline study of the land property (including data on the living conditions of the affected households), to be updated every time a new acquisition is required, which will be supported by a registry for each land plot, recording the compensation determined, paid and the people affected. As no documented land acquisition procedure exists, the Company will formalize the land acquisition procedure in an internal document to be disclosed to affected people, in compliance with EBRD PR 5. The procedure will include, among others, a monitoring system of the livelihood restoration process and a scheme to verify if the compensation is effectively provided by the land owners to the land users, if any. Apart from national requirements concerning cultural heritage chance finds, no Project procedure currently exists and no findings have been recorded in the concession. In order to further protect cultural heritage, future EIAs and SIAs needed for the planned expansion developments will include specific cultural heritage screening and impact assessment. Additionally, the Company will ensure that provisions for managing chance finds are in place, developing and implementing a Chance Find Procedure. Regarding information disclosure and stakeholder engagement, the Company organizes periodic meetings and consults mainly with institutional stakeholders, which are to be recorded. Some community development projects have been financed even though a thorough identification of stakeholders and Project affected parties is yet to be undertaken. In order to address these aspects, the Company will carry out a stakeholder identification process (which will become the basis of the Company SEP, see Section 6.3), and once identified, stakeholders will be consulted and actively involved in the definition of the Community Development Plan. Additionally, a community grievance mechanism will be implemented, which is required to collect community/stakeholders and affected land owners/users issues and concerns (including community concerns and compensation and related issues raised by affected households). The flow of information towards local communities will be increased by the Company, including the development of a dedicated website to share information regarding ongoing and future operations, risks and potential impacts on community H&S, control measures put in place by the Company, points of contact for community grievances, SEP and community development activities. 6.3 STAKEHOLDER ENGAGEMENT PLAN Stakeholder engagement activities and the development of the SIA have been realized by the Company as stand-alone activities. In order to ensure that the Project adopts a structured approach and coordinated process, the SEP and ESAP have been developed. The Company will endorse, manage and periodically update the SEP (at least annually) to summarise results achieved i.e. to record consultations undertaken, issues raised, actions taken; to describe lessons learned and any changes to the consultation process; and to outline the schedule for on-going and future interactions. As outlined in the SEP, Petrosilah will implement a grievance mechanism to allow stakeholders to bring concerns to the Company s attention. Grievances will be monitored, assessed, and follow-up actions will be undertaken in order to avoid future reoccurrence. All these activities will be coordinated and realized by a dedicated and well defined social management structure. The SEP will assist Petrosilah in establishing and maintaining a constructive relationship with affected people and other interested parties over the life of Project operations in order to obtain and maintain the social license to operate and broad public support.

15 Pag MONITORING Within the current IMS, adequate monitoring and reporting activities are included regarding the main activities and operations that may have a significant adverse effect on the HSE performance of the Company. The approval and integration of the IMS in Project operations will go a long way in ensuring that the processes outlined are effectively implemented. Once the IMS is adopted, the Company will ensure that not only the management team members but also all Company employees and contractors are aware and have a good understanding of all appropriate aspects of the HSE IMS. Monitoring of various ES aspects not currently undertaken (including air emissions, contractors activities, flare gas, overall OHS performance, lost time incidents, social performance), will be addressed by the Project. To effectively quantify environmental emissions included in the Project environmental register, and to bring such a register and monitoring procedure in line with international guidelines, these emission monitoring aspects will be incorporated in Project procedures (the IMS). The ESAP contains actions and measures to improve E&S performance and monitoring/reporting to bring Petrosilah s operations in line with the EBRD s environmental and social requirements. The ESAP also serves to ensure that the future expansion Project will be in compliance with these requirements. The ESAP is appended to the EBRD loan agreement, and as such the Company will take ownership of the document to ensure that actions are implemented in line with the agreed ESAP timeline. Ongoing reporting of the ESAP status is to be provided to the EBRD by the Company. The Company will also ensure that sufficient resources are made available to the HSE department for IMS implementation and adequate monitoring/reporting performance via dedicated ESMPs of targets and performance indicators which can be tracked over time and used for further statistical analysis to improve and update the ESMPs as needed.