HSE MANAGEMENT OF CONTRACTS STANDARD

Standard Overview

Mandatory

HSE Management of Contracts

Purpose To ensure that Contracts consistently and effectively cover the management of HSE Risks, and to deliver effective management of HSE Risks during contracted activities. HSE Management of Contracts is part of Sakhalin Energys broader Contracts & Procurement process, as 2 documented in the Contracts & Procurement Procedures Manual (CPPM). This Standard identifies key requirements, which are detailed in the CPPM HSE Management of Contracts procedure. Who is this for?

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Directors; All staff using contracted services or involved in Contract management process (including Tender Boards, Contract Owners, Contract Holders, Contract Engineers, Company Site Representatives, and Managers, Supervisors and HSE representatives using contracted services or involved in contracting activities);

What situations are covered? This document applies to all Sakhalin Energy Contracts. Requirements Directors are Accountable for implementing items 1 to 5: 1. 2. 3. 4. 5. Require Contractors to manage HSE in line with the Sakhalin Energy HSE Policy. Optimise the overall contracting strategy (numbers, type, risks) to reduce the overall HSE risks. Regularly review the HSE Risk, performance and management of all contracted activities. When necessary, define and document actions for improvement. Promote the sharing of HSE good practices between Sakhalin Energy staff and contractors. For each Contract, appoint a Contract Owner, Contract Holder and Contract Engineer who are competent to manage the Contract throughout the contracting process and have sufficient resources and support.

Staff using contracted services or involved in Contract management process are Accountable for 3 implementing those items from 6 to 15 that are applicable to them : 6. Identify HSE Hazards associated with the Contract Scope of Work and apply the following risk-based criteria to determine the level of Contract specific HSE control that the company will apply, by assigning to each Contract: a. Contract HSE Criticality: Contract is HSE Critical if ANY Hazards are assessed as medium or high on the Risk Assessment Matrix (RAM, refer RAM Specification). Contract is non-HSE Critical if ALL Hazards are assessed as low on the RAM. b. Contract HSE Mode: Mode 1: The contractor provides people and tools for the execution of the work under the supervision, instruction and HSE Management System of the company. The contractor has a Management System to provide assurance that the personnel for whom he is responsible are

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Italicized terms in this document are included in the Sakhalin Energy HSE Glossary. Underlined items in this document refer to Sakhalin Energy Controlled Documents. Detailed roles and responsibilities are described in the CPPM.

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HSE MANAGEMENT OF CONTRACTS STANDARD

Standard Overview

Mandatory

qualified and healthy for the work, that safe transport is provided to and from point of mobilisation and that the tools and machinery it is providing are properly maintained and suitable for the work. Mode 2: The contractor executes (all) aspects of the job under its own HSE Management System, provides the necessary instructions and supervision and verifies the proper functioning of its HSE Management System. The company is responsible for verifying the overall effectiveness of the HSE Management System controls put in place by the contractor, and assuring that both the companys and the contractors HSE Management System are appropriately compatible. Mode 3: Contractor operates within its own HSE Management System that has no interfaces with the Company HSE Management System and is not required to report HSE performance data including incidents to Company. However, this does not exclude the possibility that the Company may wish to guide and influence HSE performance under the Contract. Examples of Mode 3 Contractors are suppliers (e.g. telephones), technical service providers (e.g. electricity), advisory service providers (e.g. recruitment agency). For Mode 3 Contractors, the Criticality is not relevant. The term HSE Critical Contracts refers only to Mode 1 and Mode 2. Multiple Modes: When a Contractor has activities in different Modes, the Contract will automatically be classified as Mode 2 if there is any Mode 2 activity; in the situation that there is a combination of Mode 1 and Mode 3 activity, the Contract will automatically be classified Mode 1.

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Ensure the Contract includes the appropriate standardised HSE Contract Clauses for the Mode and Criticality, to clearly communicate Company HSE requirements. Any deviations shall be formally approved. Identify potentially eligible contractors. For Mode 2 HSE Critical Contracts the following is required: a. If valid HSE Stoplight Banding is not available, establish it using the HSE pre-qualification questionnaire that assesses the HSE management system and past performance of the contractor. There are three possible outcomes red (not qualified), amber (qualified with restrictions), and or green banding (qualified without restrictions). b. Contractors with Red HSE Stoplight Banding shall only be invited on instruction of Tender Board after due consideration of the Companys ability to adequately manage and control related Risks. Define Contract scope in sufficient detail to ensure the HSE requirements, hazards and controls are clearly communicated to Tenderers. These shall include required and company-provided controls, standards and procedures, performance indicators, incentive and/or penalty criteria.

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10. For HSE Critical Contracts, Tenderers shall complete their own assessment of HSE risks based on their experience with the Scope of Work and document all controls, as appropriate to the level of risk, in the HSE Management Plan and submit this as part of the Tender. a. The HSE Management Plan is the most important HSE implementation tool for the Contract execution. The HSE Management Plan shall document the Hazards identified for the Contract and then build the necessary Controls around them, all the time concentrating on reducing the risk to a reasonable level and in line with the Managing Risk Standard. The HSE Management Plan shall cover all Contract phases from mobilisation through execution, demobilisation and site restoration. 11. For Mode 1 and Mode 2 Contracts, evaluate Tenderer HSE proposals and give appropriate weighting to HSE elements in the Technical Bid Evaluation. For a Mode 2 HSE Critical Contract, evaluation should include the Tenders draft HSE Management Plan. 12. Prior to final Contractor selection, for Mode 2 HSE Critical Contracts: a. Finalise and agree HSE performance standards and incentive scheme and penalty criteria with the preferred contractor, and clearly state these in Contract documentation. b. Define the level of Company monitoring based on the capability of the Contractor company, and the Contract Mode and Criticality. 13. Prior to authorizing work to commence, verify that relevant HSE requirements, as defined in the Contract, have been satisfied. In particular, for a HSE Critical Contract: a. Approve the HSE Management Plan.

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HSE MANAGEMENT OF CONTRACTS STANDARD

Standard Overview

Mandatory

b. Verify that all personnel have been informed of the HSE requirements of the Contract, including that Contractor personnel are given an HSE induction on the HSE risks, controls to manage those risks, and applicable HSE requirements; c. Verify that adequate resources and support are provided to implement all controls; d. Verify that tools / equipment that the Contractor will use are suitable for the job and safe to use; e. Verify that the Contractor will assess the ability of potential subcontractors to meet Contract requirements, and only award the subcontract if satisfied that the subcontractor will meet these requirements. 14. During Contract execution, monitor and regularly assess the HSE performance of Mode 1 and Mode 2 Contracts and make adjustments as appropriate. In particular, for an HSE Critical Contract: a. Verify that all parties effectively manage the HSE requirements of the contracts in accordance with the HSE Management of Contracts Assurance Specification. b. Confirm that action is taken by the appropriate parties to improve performance where requirements are not met; c. Review and adjust the level of monitoring by Company to help the Contractor achieve the HSE performance agreed in the Contract; d. Recognize good HSE performance; e. Apply consequence management; f. For Mode 2 HSE Critical Contracts: Review yearly, and as appropriate, the Contractor HSE Stoplight Banding. Review yearly, and in case of scope change, the Contract HSE Management Plan. 15. At the end of Contract, assess the Contractors overall HSE performance and determine their suitability for consideration for future contracts by reviewing Contractor HSE Stoplight Banding.

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Document 0000-S-90-04-O-0013-00-E Appendix 1, Revision 01 Custodian:

Valid from 28.05.2010 to 28.05.2015 Printed copy uncontrolled p3 of 3

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