Proceedings of the Special Committee of the Senate on
the Cape Breton
Development Corporation
Issue 3 - Evidence
OTTAWA, Tuesday, November 25, 1997
The Special Senate Committee on the Cape Breton Development Corporation met this day at 4:08 p.m. to study the progress reports of the Cape Breton Development Corporation and related matters.
Senator John G. Bryden (Chairman) in the Chair.
[English]
The Chairman: Before we proceed I would mention that, at an earlier meeting of this committee, a number of requests were initiated by Senator MacDonald, and I believe he wishes to address that.
Senator MacDonald: Mr. Chairman, I received through your office the documents we had requested. I requested the proposal, which Mr. Farrell has submitted. I also requested the minutes of the meeting in which the matter was considered. I also received the letter to you from Mr. Shannon in which he explains that it is imprudent of him to release the minutes of the meeting for the reasons which he sets out. I accept those reasons and I want, through you, Mr. Chairman to thank them for the expeditious manner in which they treated our requests.
The Chairman: Our first witness today is Mr. Steve Farrell from Donkin Resources. I understand, Mr. Farrell, that you appeared before this committee in another incarnation. The basic procedure that we attempt to follow is to allow you the opportunity to make a statement of up to approximately 15 minutes, if you wish. We will then have questions from the senators, moving back and forth between the Conservative senators and the Liberal senators.
Mr. Farrell, please proceed.
Mr. Steve Farrell, President, Donkin Resources Limited: The offshore coal resources north of Cape Perce have been considered for development for nearly 20 years. An offshore drilling program during 1977 to 1979 established the presence of some 1.5 billion tonnes of coal resource in five seams of mineable height. It was considered that mining was feasible in at least three seams. Two tunnels were driven to access the harbour seam, to investigate seam characteristics, and tests were carried out on bulk samples from the harbour seam in 1986. With the development of the Phalen mine, the tunnels were put on maintenance, then eventually allowed to flood. In April 1997 Donkin Resources Limited obtained a letter of intent leading to the purchase of the coal leases should it be feasible to open a mine at Donkin.
Donkin Resources Limited is owned by myself, Doug Burns and Aubrey Rogers. Combined, we have over 100 years of varied experience relating to the mining industry. Since beginning the Donkin project, DRL has studied the existing data that is available, undertaken studies on coal quality, undertaken a preliminary market study, begun working on a preliminary mine plan, and started work on an education and training program.
The Donkin site now consists of a partly fenced-in area, a derelict building, a Quonset hut and a hoist building. The tunnels are flooded and the tunnel entrances are sealed. Devco has written the $80 million investment off to zero value because the future economic benefits of the project are uncertain.
Should DRL be successful and develop the mine, the value to the people of Canada will be about 250 direct jobs, payroll costs of about $15 million annually, payment of municipal taxes, various consumption taxes, and royalties. DRL plans to offer shares to local investors to raise money for the next phase which is a detailed feasibility study.
Should the mine open, the government will receive up to 65 cents on every dollar of profit, as compared with the risk-taking shareholders who will receive 35 cents. DRL and Devco have mutually agreed to contract John T. Boyd of Pittsburgh to evaluate the value of the Donkin resource.
In regard to coal quality, the Harbour seam is characterized by inferior high sulphur coal in the floor and the roof. Mining, leaving floor coal, the run-of-the-mine product would have about 2.6 to 3.7 per cent sulphur. Total washing can remove the sulphur content by between 35 per cent and 65 per cent. Below two per cent sulphur there is a major sacrifice in coal recovery and associated costs. Donkin coal is a good thermal coal with low ash and high heat value. A maximum amount of this coal should be sold unwashed or partially washed.
With regards to markets, due to the tendency for Donkin coal to slag and high amounts of iron oxide in the ash, and high sulphur content, most utilities would have to blend Donkin coal to get their required product. An estimated price for the coal landed in Europe is $1.80 Canadian per giga-joule, which is approximately $55 Canadian per tonne on the ground.
With regards to education and training, Donkin Resources has begun working with the University College of Cape Breton to develop a program which will educate our employees in all aspects of mining. It is DLR's belief that proper education, combined with on-the-job training, will give us a safe and productive workforce.
With regard to preliminary mine plans, SNC Lavalin has been contracted to assess the viability of the proposed mine. Should the project prove viable, DRL has an offer from SNC Lavalin to do all engineering work, the project management, and arrange financing. SNC Lavalin is the largest engineering construction company in Canada and one of the top 10 in the world. They have 1200 employees in mining engineering alone, worldwide. The significance of the SNC Lavalin offer is that DLR will have the people to engineer, to manage, and to finance the project.
Senator MacDonald: I should say that we have some good news and bad news for you today. The good news is that we heard from the unions last Wednesday and they all spoke very highly of you.However, they are, as are all Cape Bretoners I suppose, a little bit afraid of private initiatives. You probably know that they would prefer to see Donkin developed under the auspices of Devco. That is the bad news.
We have now received copy of your proposal for the study and development of Donkin Mine. To whom did you first submit that proposal?
Mr. Farrell: I had a draft proposal, which I submitted the week of March 3 by way of fax to Dave Dingwall's office telling him I wanted to talk to him about a major industrial development with no mention of the Donkin mine. I had hoped to receive comments back but when I did not, I again sent a proposal to Mr. Dingwall's office on March 17. Then, during the week of April 12, I talked to Mr. Shannon, and then we held meetings which led to the letter of intent.
Senator MacDonald: You had no response from Mr. Dingwall the first time you sent the draft?
Mr. Farrell: I had no response until early April or later. In fact I had no response, I called and I was told it was in the process and that people were considering it. The next I heard about it was when I spoke with Joe Shannon in mid-April.
Senator MacDonald: Among the documents we have received is a draft letter to the Minister of Natural Resources signed by yourself, and at the bottom of it there is a handwritten note to Bill McCann, who I gather is Director General, Mineral and Metal Policy Branch of the department. It states:
A copy of this proposal to do a feasibility study on Donkin. The sector shall review this and treat it very seriously, it comes hand delivered from Minister Dingwall.
The letter is signed by Dan Paskoski. He was apparently one of the political staff or exempt staff in Ms MacLellan's office at that time.
The Chairman: Mr. Farrell, have you seen a copy of that letter?
Mr. Farrell: No.
The Chairman: Could we provide a copy?
Senator Murray: While that is being done, Mr. Chairman, the handwritten minute indicates that the Department of Natural Resources, or one of its sections, was to do a review of the DRL proposal. I wanted to ask you if you would, as chairman of this committee, ascertain whether the committee could obtain a copy of the review that the department did.
The Chairman: Certainly, I can enquire and I assume it will be acceptable if it is brought when the minister appears.
Senator MacDonald: Mr. Farrell did you submit this well thought out proposal to the Cape Breton Economic Development Authority?
Mr. Farrell: I never talked to them until after we had a letter of intent. That would have been some time after April 16 or 17.
Senator MacDonald: Devco was informed of that on March 27, the date the staff and Natural Resources Canada received a copy of the draft proposal, but it was not until April 11 that Mr. Shannon, chairman of Devco, received a fax copy and at that time contacted you to arrange a meeting; is that correct?
Mr. Farrell: It was the week ending April 12.
Senator MacDonald: Devco's contact in the department, unknown to us, received this document on that date from the office of the Minister of Natural Resources where it had been stamped as being received on March 21. On April 11, Mr. Shannon, being in receipt of the faxed copy of the proposal, contacted you and arranged a meeting for April 15. Do those dates ring a bell?
On April 14, 1997, the Department of Natural Resources officials faxed a copy of the draft proposal for the study and development of the mine to senior management in Devco. It does not say whether it was sent to the board of directors.
Incidentally, I am reading from the chronology supplied to us by Devco at our request, so if there are any errors here please correct me.
On April 15 Mr. Shannon, Mr. White and Mr. Buchanan met with the three principals, Mr. Farrell and your associates. There was a lengthy discussion on the proposal and points for inclusion in a letter of intent were considered. On April 16 all parties met again to review a draft letter of intent. On April 16, the day that the directors of Devco met, the draft letter was distributed to all members of the board of directors of the Cape Breton Development Corporation.
Of course, you were not at that meeting so you would not know that was the first time they had seen the draft proposal, would you?
Mr. Farrell: No.
Senator MacDonald: Again on April 16, the date of the directors' meeting, a meeting of the board of directors was held, during which one of the items was considered and unanimously approved: the letter of intent from Donkin Resources. On the same day, Donkin Resources Limited was incorporated; is that correct?
Mr. Farrell: Yes.
Senator MacDonald: On April 17, the following day, the Cape Breton Development Corporation issued a press release regarding the letter of intent of Donkin. On the same day, April 17, Enterprise Cape Breton Corporation, a subsidiary of ACOA, received an application from the Cape Breton County Development Authority requesting a $300,000 grant. The announcement on the next day, April 18, by the Honourable David Dingwall made it clear that the money was federal government assistance for a study to determine the commercial viability of opening a new mine at Donkin in association with the Cape Breton County Economic Authority.
Who initiated the discussion between your company, the government, Devco's board of directors, and what relationship does that have to the $300,000 grant from Enterprise Cape Breton?
Mr. Farrell: I went to the Cape Breton Economic Development Authority. They have a strategic economic action plan which was prepared in August of 1994. That plan specifically mentions Donkin, so I anticipated that, if there was a way to get some government assistance to help with this sort of thing, this would be the place to get it.
I can read what it says if you want. I can give you a copy of it.
Senator MacDonald: What are you reading from?
Mr. Farrell: It is the Cape Breton County Economic Development Authority Strategic Economic Action Plan, August 12, 1994, and there is a section on coal on page 26. The part of interest to me which states that, with the livelihood of hundreds of local families depending on a successful coal mining industry, all production and management models should be thoroughly investigated, including the possibility of private sector investment and private sector management of the site. This is in regards to Donkin. With that in mind, I thought this was the proper vehicle to use.
Senator MacDonald: As to the application for the loan, it was indicated in the declaration made by Mr. Kavanaugh that the infusion of $300,000 was absolutely essential to the proposal.
The Chairman: Would you have seen that application, Mr. Farrell?
Mr. Farrell: We made an application, but I do not have a copy of it here.
Senator MacDonald: The application was not made by Donkin. It was made by the chair of the Cape Breton County Development Association, Ray Kavanaugh, and in the Declaration of Applicant, section b, he states:
I certify that financial assistance from ECBC is a significant factor in the decision to proceed with this project.
That application is made after the letter of intent has been signed and your company is incorporated. This is purely a matter of curiosity. We are trying to understand how this developed.
Mr. Farrell: I could only speculate but, from my point of view, there was no point in applying for money until we had the letter of intent. Up to this point everyone assumed that Devco would be looking into the feasibility of opening a mine. At this point we had a letter of intent basically indicating that they were turning this process over to us.
Senator MacDonald: That makes sense because, obviously, Devco did not know that you had $300,000 because you did not have it at that particular time.
Mr. Farrell: That is right, we did not know it either. We did not get a contract from Cape Breton Economic Development Authority until May 30.
The Chairman: Senator MacDonald, you have referred to that application a number of times. Could you have that application distributed to the other senators on the committee?
Senator MacDonald: It is in pieces but I will put it together.
The grant was approved by the Cape Breton Economic Authority, and the purpose of the grant was made clear. Who was to disburse this money?
Senator Murray: Who was the cheque made out to?
Mr. Farrell: There was no cheque. It is based on the amount of work done.
Senator MacDonald: You draw down?
Mr. Farrell: Yes, you draw down. We provided a schedule saying we would follow a certain program and, based on that program, we would receive funds and we would provide reports. It is not complete yet, it is in process, but we will provide a report at the appropriate time and then we draw down some more money.
Senator MacDonald: How much have you drawn down? I understand that you put $100,000 of your own money in.
Mr. Farrell: Yes. I cannot tell you exactly, but I know it is over half, and we probably have commitments for more than the remaining half.
Senator MacDonald: If you run out of money, do you intend to seek additional funds to complete?
Mr. Farrell: We will not run out of money. We made a projection and we are staying fairly close to our numbers.
Is there an attached schedule somewhere in the proposal?
Senator MacDonald: Yes, we have that.
Mr. Farrell: We are now at the preliminary mine plan stage which will not be finished for a year. However, we are ahead of schedule.
Senator MacDonald: The original $400,000 was to identify the potential of the Donkin mine by studying all available data?
Mr. Farrell: Right.
Senator MacDonald: Are you close to finishing that job?
Mr. Farrell: We have studied the data, we have done the market studies, we have done the coal quality analysis, we have just given a contract to SNC Lavelin to verify the preliminary feasibility of the mine, and the next phase is to raise some money to do the detailed work. That is not included in the $400,000 original plan. The plan ends with us making an offering to investors.
Senator MacDonald: Yes, but when you use the word "feasibility," this $400,000 was not intended to be used for a feasibility study.
Mr. Farrell: No, it is preliminary.
Senator MacDonald: On page 5 of your formal proposal you say in paragraph 5:
This proposal offers the federal government an opportunity to utilize assets under its control in a private-public arrangement...
The next paragraph reads:
At a time when governments are divesting themselves of operations that are outside the scope of governing, this proposal provides the opportunity to access private capital to develop the Donkin Mine which otherwise would require a large capital expenditure and long term commitment by the government.
What do you mean by the term, "public-private arrangement"?
Mr. Farrell: We had offered three things in our proposal.
To give you some background, last winter the Power Corporation bought coal from the United States and, since myself and my partners make much of our income from the coal industry, we were quite concerned. We thought Donkin mine should reopen and that would keep the coal industry going. It was fairly obvious to us that the government would not open the mine. They said so on a number of occasions.
We decided to draw up a preliminary plan to see if it would be feasible to reopen the mine and, if so, we would encourage local investors in Nova Scotia to invest in doing a feasibility study. On that basis, we made up this proposal.
Under our proposal, if we did a preliminary study and went on to do a feasibility study and it was found feasible to open a mine which could be a viable operation, Devco could have the opportunity to then buy the whole thing from us.
If they did not want to do that, our proposal was that they could work in partnership with us to run the mine. Alternatively, they could let us run the mine. We offered whatever they wanted; but we wanted to start the process to see if we could open a mine which would be either publicly or privately run.
Senator MacDonald: "Public" means Devco?
Mr. Farrell: That is right.
Senator MacDonald: If I have read your proposal correctly, the amount projected to bring the project to the start of construction, which you call phase 1, is $1.5 million to $2 million, the entire amount to be raised from private parties who have a direct stake in the success or failure of Cape Breton coal mines. Then, should the basic geological data and the coal seam quality obtained in the late 1970s or early 1980s not be complete or be of poor quality, it may be necessary to conduct further exploration before committing large capital expenditures on mine development. That would form part of phase 2 and is projected to cost between $6 million and $8 million. Finally, in order to proceed, you say that your company requests a partnership agreement with the government. To which government are you referring?
Mr. Farrell: The federal government.
Senator Butts: I want to ask Mr. Farrell just what brought about such a change of heart in a year -- from saying that it would not make much sense to open Donkin to the proposal you have put forward today?
Mr. Farrell: I have never said that Donkin could not be opened. The last time we were here we were talking about the two operations Devco had, Prince and Phalen mines. I believe they were talking about running Prince for only one third of a year or one quarter of a year and so, at that time, the emphasis was on keeping Prince as a full-time operation.
The whole matter of the economics of mining also has to be considered. If those two mines are producing, it means that almost all the coal from Donkin must be exported. The studies we have done indicate that we would need to land the coal in Europe for about $55 a tonne or less, which would mean it would be in the boat in Sydney Harbour for somewhere around $42 a tonne.
The labour costs on that would be between $15 and $20 a tonne. Economically, you cannot deliver coal to the boat for $42 if your labour is $15 or $20. That is why Donkin must be a productive mine. It must be styled differently.
The Australians and the Americans are successful mining coal underground today. Devco's style is more European and, in particular, there is a British influence. You have British National Coal Board specifications on this and that; the transportation systems are British; the method of long walls, the roadways, the arched slopes, and so on, are all influenced by the British style. Manpower is structured very much along European lines. In fact, I do not think there is a profitable mine in North America which is structured in the way the Devco mines are structured.
To me, all this means that, if you want to get coal on the world market, you must do what the people who are selling coal now are doing.
Senator Butts: Are you telling me that you will lower production costs by having fewer employees?
Mr. Farrell: "Mining more coal with the same amount of people", is the same way of putting it. You would not need as many people to mine 2 million tonnes of coal.
Senator Butts: Is that why you can do it and Devco cannot?
Mr. Farrell: That is one of the major reasons. People must change.
Senator Butts: Change their attitude?
Mr. Farrell:Yes, basically, that is about the size of it.
Senator Butts: Have you changed your mind on the question of quality which was referred to in the Boyd study?
Mr. Farrell: The quality of Donkin coal?
Senator Butts: Yes.
Mr. Farrell: They kind of dismissed the data out of hand because of its poor quality.
Senator Butts:Are you saying it referred to the quality of the data, not the quality of the coal?
Mr. Farrell: It was the data.
Senator Murray: They also made an economic judgment, but I do not know how well based it was.
Mr. Farrell: I think it was that the condition of the market would preclude opening Donkin.
Senator Butts: There was also some mention of the sulphur content. When Mr. White was here I asked him about selective mining and whether that would be possible in Donkin. In response, he repeated my own word and said that it was "iffy". Are you convinced it can be done?
Mr. Farrell: We have gone "semi-selective" if you want. Selective mining means leaving the inferior coal on the roof and the inferior coal on the floor. I am convinced you can do one of the above, but that it is a little bit "iffy" to leave both because you will have trouble with your horizon when you are running machinery.
Senator Butts: That is what the Boyd study said.
Mr. Farrell: We based our work on either starting at the floor and working off the floor, or working from the roof down. Then a consulting company analyzed the holes, did a running average, and came up with a specification. That is what we used for marketing.
Sulphur is a major problem, but it is not the only problem. I think 50 per cent of the power plants in the world, and most European plants, have fluid gases sulphurization. Sulphur costs you money. You pay a penalty for it, but you can sell the coal.
Senator Butts: Would you expect to sell this on the European market without mixing it with any other coal?
Mr. Farrell: We would have the best chance of selling it to a company which would blend it with a number of coals to meet a customer's requirements.
The Chairman: We learned earlier in the hearings that the Prince mine has been determined to have twice as much coal available to be mined as was expected. It was thought they had about 15 years, so that means they have 25 or 30 years. According to the Boyd study, again, the coal coming out of Donkin has about the same sulphur level as is contained in Prince coal.
It is my understanding from the evidence we have heard, that the unions are advocating the development of the Donkin mine to replace the Phalen mine. However, it would appear to me that Donkin coal would not replace Phalen coal. Is that correct?
Mr. Farrell: It is probably 50 per cent correct. I do not know much about washing coal but as I understand it, in Prince coal, the ash and the coal weigh almost the same. It is difficult to wash the sulphur out because it is close to the ash and you cannot float the coal out of it because it weighs the same as the stone. However, you can separate Donkin coal. It is more similar to Phalen coal than is Prince coal. Nonetheless, if you are washing coal, when you get below two per cent sulphur, you start losing a lot of the product.
Studies have shown you can wash 65 per cent of the sulphur out of coal but it would probably be uneconomic to do it. It would mean throwing away 30 per cent or 40 per cent of your product.
Both coals have the same sulphur content. It is the washability of the two coals which is different.
The Chairman: If you or someone else developed Donkin, and Prince continues to operate, would the coal from Donkin be in competition with the coal from Prince on the international market?
Mr. Farrell: The international market is a huge market so I guess we would be in competition, although I do not know to what degree. I am not sure how well Prince coal is received on the market. I believe only a few shipments of this coal have been sold, so I cannot say how well it has been received. However, I would say Donkin coal would be in competition, but it would not be a make-or-break competition.
The Chairman: Are you saying there would be room for both?
Mr. Farrell: Yes.
Senator Murray: Mr. Farrell, you have $400,000 -- $300,000 from ECBC and $100,000 contributed by you and your partners. On page 1 of your proposal you list what you intend to do to carry out your assessment. I just want to take you through those quickly in the context of the money you have available.
First of all in reviewing, as you say, all existing information and studies about Donkin, et cetera, most of them in the control of the government and its agencies, am I correct in assuming that work will be funded from the $400,000?
Mr. Farrell: Yes.
Senator Murray:Second, you say you will engage the services of qualified engineers to carry out the necessary studies to determine the extent, location and quality of the coal seams for the purposes of developing a plan, et cetera. I presume that work will be, or is being, funded from the 400,000.
Mr. Farrell: No. This is for preliminary work. This $400,000 will be spent on determining whether it is viable enough to study.
Senator Murray: Another intention is to identify and contact potential markets for sale of the type and quality of coal available in the seams. Is that work being funded from the $400,000?
Mr. Farrell: Just as a preliminary.
Senator Murray: What does that mean?
Mr. Farrell: We had a company survey the market on a broad basis to see where we could possibly sell this coal.
Senator Murray: You have not identified any market or contacted anyone?
Mr. Farrell: We have, but not to the extent of achieving the confidence level you would need to start a mine.
Senator Murray: Who did that work, Mr. Farrell?
Mr. Farrell: A company by the name of Phoenix Fuels in the U.K.
Senator Murray: In your statement today you refer to an education and training program which you have subcontracted to the University College of Cape Breton. Is that work being funded from the $400,000?
Mr. Farrell: No.
Senator Murray: Where is that money coming from?
Mr. Farrell: It is coming from ourselves. We have not subcontracted, we are working together with them.
Senator Murray: You have put in $100,000; the ECBC has put in $300,000; and that adds up to $400,000. Is the funding for this education and training program coming from another pot?
Mr. Farrell: No, we are developing the program. No one is enrolled in the program yet. We are currently working on the framework of a program.
Senator Murray: Are you paying UCBC?
Mr. Farrell: No, they are developing the course along with us. They will give the course, and when they do that, they will be rewarded.
Senator Murray: Is there no money involved in the course preparation?
Mr. Farrell: No, only time and effort.
Senator Murray: Mr. Farrell, I am not sure I heard you correctly when, in your opening statement you said you were entering into a contract with John T. Boyd for an evaluation of the Donkin mine. Did you say that you and Devco, jointly contracted?
Mr. Farrell: No.
Senator Murray: Would you mind reading the sentence again, please?
Mr. Farrell: DRL and Devco have mutually agreed to contract John T. Boyd Company of Pittsburgh to evaluate the value of the Donkin resources.
Senator Murray: They do not work for nothing. Is the funding for that coming out of the $400,000?
Mr. Farrell: We have agreed to do it, but they do not have a contract yet.
Senator Murray: What exactly have you agreed to with Devco? Who will pay?
Mr. Farrell: We will pay for this.
Senator Murray: Who is "we"?
Mr. Farrell: DRL.
Senator Murray: From the $400,000?
Mr. Farrell: I was not envisioning that, but it may.
Senator Murray: Why did you need to jointly contract with Devco to have that done?
Mr. Farrell: We mutually agreed.
Senator Murray: You mutually agreed.
Mr. Farrell: On the company.
Senator Murray: Will Devco not be putting any money into that?
Mr. Farrell: No, what I am saying there is that we have to put a value on the resource. Someone has to do that.
Senator Murray: You have agreed with Devco that John T. Boyd Company should do that, and that you will pay them, but not from the $400,000. Is that a fair statement?
Mr. Farrell: We have agreed to use John T. Boyd Company.
Senator Murray: But the money is not coming from the $400,000; or it is?
Mr. Farrell: We have $100,000 and more in there now.
Senator Murray: I understand that, but is the money for the proposed John T. Boyd study included in that?
Mr. Farrell: I do not know that yet. I have not spoken with my accountant about that. We do not know where the money will come from.
Senator Murray: You also made a statement about contracting with SNC Lavelin for a study of the viability of the mine. Have you entered into that agreement with them?
Mr. Farrell: Yes, I have sent them a purchase order.
Senator Murray: I will not ask you how much that will cost, but is that money coming from the $400,000?
Mr. Farrell: Yes, 100 per cent of it.
Senator Murray: Three-quarters of the $400,000 is government money and one-quarter, $100,000 is yours; so the $400,000 will be funding the work of SNC Lavalin.
In your opening statement you said that the government, or was it Devco, would get 65 cents on each dollar of profit versus 35 cents for DRL.
Mr. Farrell: Yes, the government. If a company makes money, the government tax rate is 45 per cent.
Senator Murray: Is there a profit sharing agreement between you and Devco?
Mr. Farrell: No. The government will take 65 cents on every dollar. That is based on 45 per cent corporation tax, and then the tax paid on dividends.
Senator Murray: I appreciate that, Mr. Farrell. What I was really getting at is whether you reached some agreement with Devco.
Mr. Farrell: No, we have no agreement.
Senator Murray: You had 60 days, according to the letter of intent, to reach some kind of agreement. Did you ever reach an agreement?
Mr. Farrell: The time-frame keeps being extended.
Senator Murray: Why must they keep extending it?
Mr. Farrell: We have Senate hearings and various other things going on.
Senator Murray: I am sorry to be taking up so much of your valuable time.
I am again looking at your draft proposal. Again and again I hear about private-public partnership, public-private arrangements, public-private initiatives, et cetera. However, in your draft proposal you talk about the options that would be open upon completion of phase 1 or phase 2, and you state that the government and/or the corporation can acquire all rights to the results of the studies. I presume by "corporation" you mean Devco?
Mr. Farrell: Yes.
Senator Murray: Then you state that the partnership can continue as formed and proceed to develop and operate. What partnership are you referring to?
Mr. Farrell: We were envisioning a partnership arrangement. When we made the proposal we thought we would have a partnership arrangement.
Senator Murray: Well not to put too fine a point on it, Mr. Farrell, the partnership at the moment in terms of cold hard cash is three-quarters government money and one-quarter private money. Is that the proportion that you would be thinking of in terms of the future partnership?
Mr. Farrell: No, because this $400,000 is for the initial phase. Before you have a feasible mine plan and you are ready to start a mine, you would have expended much more money than $400,000.
Senator Murray: What kind of partnership did you envision? Did you envision it being 50-50 or something more or something less?
Mr. Farrell: We were going to negotiate that. I cannot negotiate it here.
Senator Murray: On page 7 you state that all data will be analyzed and, should the basic geological data and coal seam quality obtained in the late 1970s or early 1980s not be complete or be of poor quality, it may be necessary to conduct further exploration before committing large capital expenditures on mine development. The additional exploration will form part of phase 2 and is projected to cost an additional $6.5 million to $8 million.
You could produce coal during this phase, could you not?
Mr. Farrell: There was some question about the quality of the bore holes. Somewhere in the range of 60 per cent to 65 per cent of the cores were missing. They were not recovered. We thought we might have to pump the mine out, go underground, and take a coal sample. We would probably have to drive a mile underground for that sample. During this phase we could test our selective mining plans and get more data on washability and so on, but that was only if we were not happy with the data we had.
Senator Murray: I see that, Mr. Farrell, but what we are talking about here is the possibility of putting another $6.5 million to $8 million into additional exploration. I am not an expert in these matters. I want to know whether, during this additional exploration, you can produce coal?
Mr. Farrell: Yes, you would produce some coal.
Senator Murray: How much?
Mr. Farrell: I can give you an approximate number.
Senator Murray: Good. It is fairly low cost too, is it not?
Mr. Farrell: No, the cost would be very high because all the infrastructure would be in place to support only one machine.
Senator Murray: Would it be much more costly than the coal you would be producing in phase 3?
Mr. Farrell: Yes. The number I had in mind at that time was somewhere between 50,000 and 75,000 tonnes. This would involve two tunnels a mile long.
Senator Murray: Are you effectively saying that you would be producing the coal at a loss?
Mr. Farrell: Yes. We thought we would need an additional $6.5 million or $8 million. However, these are rough numbers.
Senator Murray: Mr. Chairman, I hope somebody will follow up on Senator Butts' questions because I think a vital part of the discussion is why Donkin can be a paying proposition, according to Mr. Farrell, under a private company and could not be under a Crown corporation.
Senator Moore: I put that very question to the witnesses from the union. Perhaps, Mr. Farrell, you would like to address that.
Mr. Farrell: Certainly. The average Australian long-wall mine produces, on average, 7,000 tonnes a man year. U.S. mines are a little more productive. They have mines that produce in the range of 20,000 tonnes a man year. I do not have an average figure for them but I do have some data on their best mines. Their best mines produce 20,000 tonnes a man year. I am talking about long-wall mines which are similar to the mines in Cape Breton. I visited some recently in the United States. We drove four and-a-half miles underground to the long wall. They have a total of 116 employees totally, everywhere, and they mine 2.2 million tonnes a year, U.S. That would be, say, 2 million Canadian tonnes.
This is the competition. They are successful because of the way they do business. Their transportation systems are good; their mining systems are good; and they use multiple entries. However, in Cape Breton we use a European system, and I believe that our system of mining must change if we are to be productive.
During one week in June, the best long wall in the U.K. produced 8,000 tonnes a day. The best in Cape Breton would produce 10,000, so in comparison they are doing quite well. They use the same kind of equipment.
The Chairman: This is quite interesting. When they are in full operation, do you know how many tonnes per man year Devco produces out of Phalen or Prince?
Mr. Farrell: I think they are projecting around 3.2 million tonnes a year with 1500 employees. It would be about 2,000 to 2,500 tonnes.
Senator Moore: What did you say the Great Britain experience was?
Mr. Farrell: I am just going by some magazines that I read, but the best long wall was producing 8,000 tonnes a day.
Senator Moore: We have been discussing production in terms of tonnes per man year, so could you give us the figures on that basis?
Mr. Farrell: I do not have the total mine output, but an American long wall will easily be double that amount.
Senator Murray: The output per man shift at Devco in 1996 was 10 tonnes per man shift; and in 1997 it was 8.9 tonnes per man shift, according to their annual report.
Mr. Farrell: There are 230 working days in the year.
Senator Moore: Did you say that the production per man, per year in Devco is 10,000 tonnes?
Senator Murray: Per man shift it was 10 tonnes in 1996; and 8.9 tonnes in 1997.
Senator Moore: In the course of your opening remarks, Mr. Farrell, you mentioned SNC Lavelin as being a project manager providing engineering advice, financial advice and I assume obtaining finances. Have you entered into an agreement or letter of intent with them for these services, or are you, so far, just dealing with the contract respecting the preliminary feasibility study?
Mr. Farrell: We are dealing with preliminary feasibility, but we have an offer from them to do the rest.
Senator Moore: Have they asked to be involved?
Mr. Farrell: Yes.
Senator Moore: This committee met in March of 1997 and we are now in November of the same year. During that time you and your company have been working on this project. Has the Senate's interest in this and the meeting of this committee been helpful to you or harmful to you in terms of your efforts, in terms of your potential to raise funds to do what you would like to see done if the feasibility studies are positive?
Mr. Farrell: We have talked to people other than SNC Lavalin, and they all raise questions concerning, first, productivity; second, unions; and, third, politics.
Senator Murray: What is the response?
Mr. Farrell: Yes, yes, and yes.
Senator Buchanan: Mr. Farrell, I am sure you will recall the energy report being put together back in 1979, 1980. You was part of the project team, along with people like Coady Marsh and Bill Shaw. I am sure you will recall that we brought the drill ship in to delineate the seams of the Sydney Coalfields at Donkin, and that the recommendations at that time were to proceed with the service work and then, eventually, to proceed with the two tunnels. As you mentioned, the cost was upwards of $80 million, particularly when you add the $6 million to $8 million for the preparatory work in the drill ship.
As I recall it, and I checked some of these numbers with Bill Shaw, some of the seams that would be mined are the Harbour seam, the Hub, and Lloyd's Cove. There are some very thick seams in there, with some being about 12 feet.
I want to tackle the question of the sulphur content. As I understand it, the floor and roof not only have a high sulphur content, but they produce pretty dirty coal, and that the centre of some of those seams have an average sulphur content of between 1 per cent and 2 per cent; is that correct?
Mr. Farrell: I believe it is closer to 2.4 per cent. There is a big block in the Harbour seam where the centre averages 2 per cent to 2.5 per cent.
Senator Buchanan: I understand the roof and the floor are about 4 per cent which pushes the average sulphur content up.
Mr. Farrell: That is right.
Senator Buchanan: As I recall at the time, and I refreshed my own memory by taking a look at all the reports, there was no question back then that the development of the Donkin mine was feasible, but that further study would be required to get it under way. Many studies were done in the 1980s before drilling those tunnels. You will recall that Devco was not very interested in the Donkin mine, and they still are not; and what we did was bring in Consolidated Coal to take a look at it. They were lucky to get out of Glace Bay with their lives as you may recall.
Consolidated Coal was relatively sure that the Donkin mine could be a stand-alone mine, without the overhead costs of Devco, and they were prepared to take an in-depth look at it until the opposition in Cape Breton became so intense that they decided they did not want to go ahead, as did the provincial and federal governments. I think we have come a little way from that situation today although there is still opposition, as you know, to privatization of the mines.
Are you convinced that Devco is not prepared to develop the Donkin mine?
Mr. Farrell: Yes, I am convinced. I am convinced that they will not open the Donkin mine because the big factor is the price of coal. You must load the coal for between $40 and $45 a tonne in Sydney Harbour and, unless there were a major change in techniques, I do not believe it can be done. It can be done but you must change your methods of work.
Senator Buchanan: If you are saying that Devco cannot do it or will not do it because of cost, do you believe that your group can do it?
Mr. Farrell: Yes, I believe we can. We would model on the American and Australian systems.
Senator Buchanan: How much recoverable coal is there in the Donkin area?
Mr. Farrell: That is a good question because recently we have experienced rock/gas outbursts. They started in No. 26 colliery, and it looked like Lingan was going to have them but it never did. Now there is talk of that happening at Phalen. They all occurred around the -700-metre elevation, and that is found at Donkin. However, I am not convinced that will happen.
Senator Buchanan: What is your opinion on the possible negative or positive impact of Sable gas being transported by pipeline to industrial Cape Breton? What impact do you think that will have on the coal mining industry?
Mr. Farrell: I do not know what the price of gas will be, but I believe Devco sells coal to Lingan for about $2.40 a giga-joule, so if natural gas is in the same price range -- and I think natural gas may not be as efficient as coal -- it would be attractive to use natural gas.
I am not sure how the price of gas is set. It could be seasonal. I believe the price fluctuates. I am concerned that, if the price is around $2 to $2.50, it will be a threat.
Senator MacDonald: You mentioned, Mr. Farrell, three factors people consider: productivity, unions and politics. I would like to add a fourth, and that is, return on investment for those people who would invest in this endeavour. The only time I have ever heard politics mentioned is when the UMW criticized the way in which directors of Devco were appointed. They considered it to be political patronage.
Is there any way you can make money off this in a quick and dirty way?
Mr. Farrell: No. The coal seam is uniform, unlike a goal mine where you have a high grade section. The quality is spread throughout the mine. The quality improves generally to the north and the east, but there will not be a pocket of really good coal that you could mine and sell for a marvellous price.
Senator MacDonald: At our meeting with Mr. Drake, I was left with the impression that a very valuable mine could be opened. Perhaps they were talking about selective mining.They said that, if you worked on a phased-in basis, you could open a mine at Donkin which would produce a million tonnes worth approximately $120 million a year.
Senator Buchanan: That is going back to the report of the Montreal engineering company, Kilborn.
Senator MacDonald: Steve Drake certainly quoted it, as did you, Senator Buchanan.
Senator Buchanan: Yes, from that report.
Mr. Farrell: You must have a good return on investment. I am sure you know what mutual funds are paying, so I would imagine you would need to offer a higher return for an investment in a coal mine before people would be interested in mining. You would have to offer investors about a 20-per-cent return on investment.
Senator MacDonald: What can you do with $120 million?
Mr. Farrell: That would probably be the capital cost for the first five years of a two-million-tonne-a-year mine.
Senator MacDonald: Would it be profitable?
Mr. Farrell: I think it would, yes.
Senator MacDonald: Is that only if you invest $120 million and you produce a million tonnes?
Mr. Farrell: It is very confusing because some reports show the capital cost over 20 years as a lump-sum figure, say, $450 million. However, after a period of five years the mine will start to develop its own capital.
Senator Buchanan: Mr. Farrell, are you aware of the fact that, under the Nova Scotia Natural Resources Act, and the leases that Devco have, before Devco is permitted to transfer any lease, or any lease of any natural resource in Nova Scotia, including coal, the consent of the provincial government is required?
Mr. Farrell: Yes.
Senator Buchanan: It is my understanding from Premier MacLellan that the province has not granted its consent to a transfer of leases as yet. He has said that, in his opinion, Donkin is the future of Devco and he must give very serious consideration about whether those leases should be transferred. Are you aware of all that?
Mr. Farrell: Yes, I have heard this. In the mining industry, people go out and stake claims, either physically in the field or on a map in an office, and they do so much work on the claim. They then end their interest in the claim and sell it, say, to an exploration company, who in turn sells their interest to a mining company. That is how it is done. To me, for Devco to sell their leases to us, is no different from how business is done in every other province in Canada.
It would be a serious step backwards for the mining industry if the government would not transfer a lease that someone has worked on and wants to sell.
Senator Buchanan: I agree.
Mr. Farrell: Certainly, it is a big part of Devco's future. Currently, they have two mines. If Phalen is closed, that leaves Prince, and the coal from that mine must be blended with something, but I am not sure if the Donkin coal is suitable to blend with it or not. In any event, if we were running the mine we would be only too willing to sell coal to them to blend with Prince coal. That is what mining is all about, selling the product.
Senator Butts: Mr. Farrell, first, does your agreement with Devco include a promise not to sell your coal in Nova Scotia?
Mr. Farrell: Yes.
Senator Butts: Second, does it include the use of Devco wash plants and international piers?
Mr. Farrell: We proposed that, but on a competitive basis. If they can offer us the best deal, then we will use them.
Senator Butts: Are you compelled to use their facilities?
Mr. Farrell: It would make no sense to build a pier if we could use the Devco pier.
The type of wash plant we would use would cost in excess of $20 million. The yards for storing the coal and blending it are all available at the Victoria Junction Wash Plant owned by Devco. They have a railroad which could be extended into our site. This would be a big plus in the transportation end, as would use of the international pier.
Senator Butts: Am I correct that that is not used by Devco very much just now?
Mr. Farrell: I do not think they have any plans to export coal.
Senator Butts: Do you have any concerns relating to the water that will be pumped out of Donkin, the water that was used to flood it in 1988?
Mr. Farrell: That water was leaking into the tunnel approximately a kilometre from the surface. It was good water. As a matter of fact, I think you could drink it. Before flooding, a study was done to try to predict what the effect of flooding would be, and I believe the conclusion was that it would not affect the steel in the tunnel because it would not be acidic.
Senator Butts: Is it dissolving the sulphur?
Mr. Farrell: No. It only intersects a few seams and the seams are only three and four feet thick.
Senator Butts: Some engineers say the flooding Donkin was the biggest mistake ever made. I am sure you remember that some time ago effluent from a mine killed every fish within a certain radius of the mine.
Mr. Farrell: That involved draining many old workings. This is just two tunnels.
Senator Butts: This is only since 1988.
Mr. Farrell: Yes, and hopefully there is no acid generation.
Senator Murray: On page 3 of the draft proposal you point out that there would be Nova Scotia regulatory approval of the mine operation. In other words, you would be out from under federal regulations. Is that the case?
Mr. Farrell: That is right.
Senator Murray: You regard that as an advantage, I take it?
Mr. Farrell: I think it is a plus, yes.
Senator Murray: Finally, Mr. Farrell, I just wish to say that those of us who are concerned about this transaction mean no reflection whatever on your sincerity or certainly not on your background and expertise in this field. We are concerned on behalf of the shareholder, namely, the taxpayer of Canada, about disposing of this asset in this way, and we are concerned also because we are in politics and political life and believe that the government, through Devco, has some social responsibility in Cape Breton and that is why we are pursuing this subject.
Please tell us where you see this leading. Today you have told us that everything is in the preliminary stages. You are reviewing the existing information. You are in the preliminary stages of studying the extent, location and quality of the coal seams. The identification of markets has not been done to the extent that you could possibly be comfortable with it if you were going to open a mine, and you have not even reached an agreement with Devco for which 60 days was provided last April.
Where is all this leading? Where will you be six months from now?
Mr. Farrell: If we thought from what we have learned so far that it would not be feasible, we would stop spending money. Our own money is involved here, and we respect that as much as we respect the government's money.
If the federal government and Devco do not put money into the Donkin mine, I think they should release this asset to that private industry can to do it.
Senator Murray: You would pay for it of course?
Mr. Farrell: Oh yes, we will pay the fair market value for it.
Senator Murray: What do you think that might be?
Mr. Farrell: I do not know yet.
Senator Murray: Would you agree that, since the government has put $80 million into it, that a fair price would start there?
Mr. Farrell: No, I do not agree with that at all.
The Chairman: I do not think we would ask you to start the negotiation here, Senator Murray.
Before we wrap up, I would expand on Senator Murray's comments. We are concerned about the proper use of this resource. If it can be exploited and benefit the private sector and the community we want to know that.
On behalf of the committee I would thank you for appearing before us today.
I would ask Mr. Livingstone to come forward, please.
Mr. Livingstone has been invited to appear before the committee and he has graciously agreed to do so with the principle objective of informing the committee on the Sable gas and its impact on the coal industry, on Devco and, in particular, on Nova Scotia and Cape Breton.
Mr. Livingstone, perhaps you would proceed with your presentation.
Mr. James I. Livingstone, President and CEO, K2 Energy Corp.: Mr. Chairman, senators, I am very pleased to have the opportunity to appear before the Senate committee. My comments this afternoon will deal with the Sable Offshore Energy Project and the effects it will have on industrial Cape Breton and the coal mining industry in Cape Breton.
My background is rather unique, in that I have been involved in producing oil in the Beaufort Sea, off the East Coast of Canada, Western Canada and now the United States. I have over 20 years experience in the oil and gas industry. To my knowledge, I am the only oilman ever asked to chair a federal environmental review panel.
I am currently employed as the President and Chief Executive Officer of K2 Energy Corporation of Calgary, a junior oil and gas company listed on the Toronto Stock Exchange. Prior to K2 Energy, I was the president and CEO of Nova Scotia Resources Limited from 1993 until the board of directors and myself were fired in 1995. Having been born, raised and educated in Sydney, Nova Scotia, I am very concerned about what natural gas can do to the coal mining industry and the economy of Cape Breton.
Mr. Chairman, I fully support the development of Sable Island gas, but not with the current deal negotiated by the SOEP partners in the Province of Nova Scotia. I also strongly object to the public review carried out by the joint public review panel and their final report which was released last month. This panel conducted a public process, but not a proper public review.
This committee would probably be best served by me keeping my presentation short and answering questions from committee members. However, let me describe what parts of the SOEP deal I do not like.
First, the royalty regime is a poor deal. Nova Scotians take substantial risks but get very little of the reward. For the first three years of production, the Province of Nova Scotia gets one per cent of gross revenues, then two per cent of gross revenues until all project costs -- which include $2 billion in capital cost, $ 130 million a year in operating costs, prior investment costs of between $ 600 million and $ 950 million in royalties -- have been recovered. In addition to recovering close to $3 billion in costs, the SOEP partners must have a simple rate of return of the interest on the Government of Canada long-term bonds, plus five per cent.
To get five per cent of gross revenue, the SOEP proponents must have a return of 12.5 per cent, plus the interest rate on Government of Canada long-term ten-year bonds. To get 30 per cent of net revenue, not gross revenue, the same deal applies. All project costs are recovered, plus the interest rate on Government of Canada long-term ten-year bonds, and a 45 per cent return. Net revenues are defined as gross revenues less capital and operating costs.
Nova Scotians have no guarantee of a supply of gas. All the gas, including the Nova Scotia Resources Limited seven per cent, is committed to the Maritime and Northeast pipeline. Nova Scotians have given up for nothing their 50 per cent ownership of the offshore pipeline. At present, 100 per cent of the offshore pipeline is owned by foreign oil companies.
Between $1 billion to $2 billion of taxpayers' money went to pay for the finding of this gas through the petroleum incentive program. This is not reflected in the royalty regime.
Cape Breton does not get a gas pipeline across the Strait of Canso. The only pipeline will be a gas liquids line to Point Tupper to export the liquids out of the province. Nova Scotian companies must be internationally competitive in order to obtain fabrication contracts, service or supply contracts.
What does this mean to Cape Breton and the coal mining industry? First of all, there will be peanuts in royalty revenue to deal with the massive unemployment gas could cause in the coal mining industry. Second, Cape Bretoners cannot be internationally competitive in fabricating contracts, supply or service contracts. To be internationally competitive, you must have supplied these goods and services on a previous project.
Cape Breton does not get a chance to develop a petro-chemical complex as the liquids will be exported out of the province. Cape Breton does not get a gas pipeline under the Strait of Canso when the special equipment is in the area to lay the gas liquids line. The opportunity to develop an iron carbide or direct reduction iron plant in Cape Breton is lost as a supply of natural gas is required for those plants.
Industrial Cape Breton will not receive any of the benefits from this project as shown by the SOEP benefits plan. The Halifax-Dartmouth area will receive between 70 to 80 per cent of the benefits this project generates for the Province of Nova Scotia.
Mr. Chairman, I would like to spend a few minutes to tell the members of your committee how and why this joint public review panel failed the people of Cape Breton and, particularly, those employed directly or indirectly in the coal mining industry.
I speak from experience, Mr. Chairman, as someone who has chaired two public review panels. Some of you may remember the headlines in The Globe and Mail on July 2, 1990, when I recommended that the gulf drilling program in the Beaufort Sea be rejected. The joint public review panel, chaired by Mr. Robert Fournier, who was born, raised and educated in the United States, showed a serious bias against the people of Cape Breton. When I was asked by the various people in Nova Scotia to formally intervene in the public hearings, I submitted my notice to intervene on the final day, January 8, 1997. One of the issues I asked to be dealt with was the employment impact on the Cape Breton coal mining industry as a result of Sable gas being developed. The panel ignored my request.
When I submitted my formal intervention in April, I again requested that the panel deal with the negative impacts Sable gas will have on the Cape Breton mining industry. Once again the panel ignored my request. My final argument to the panel, submitted on July 4, 1997, advised the panel of the following:
The negative impacts on the coal mining industry in Cape Breton are real, they are measurable, and they have to be dealt with. These are people who feed their families, and provide a very valuable economic contribution to the economy and the social fabric of this province. This panel cannot ignore that; these miners have rights under legislation, both federally and provincially. Not only are the miners affected by the Sable Gas project, but the whole of industrial Cape Breton is.
Once again, the panel refused to deal with the adverse environmental effects of this project. The Canadian Environmental Assessment Act requires that this be done. The socio-economic review panel which looked at the development of Sable gas in 1983, required as their number one recommendation that a socio-economic statement be prepared on the benefits of switching from coal to gas for the production of thermal energy.
Mr. Chairman, I will let the Federal Court decide whether this joint public review panel fulfilled the requirements of the Canadian Environmental Assessment Act.
I would like now to talk about what natural gas can do for Cape Breton and the Cape Breton Development Corporation, Devco.
Everyone knows what happened in Britain, where the coal industry employed 1.2 million workers in the mid-1970s and now only 20,000 miners are employed. North Sea gas had a tremendous impact on Britain's coal mining industry. The coal industry in Germany faces the same future, as it now costs $210 a tonne U.S. to mine a tonne of German coal.
Provided Cape Breton can produce good quality coal at competitive prices, a new future can be made for Devco and the Cape Breton coal miners. Here are some of the key elements I would recommend for a new strategy for Cape Breton coal and Devco.
Devco should be allowed to construct a natural gas pipeline to Cape Breton that comes out the back door of the Country Harbour Gas Plant and which is exempt from the main line pipeline transmission tolls.
Devco would become a generator of electricity from both gas and coal. Nova Scotia Power would be the transporter of electricity, like other power companies in Alberta and the United States. The burning of natural gas will help reduce the CO2 emissions of coal burning.
To avoid a gas monopoly for power generation, coal should be maintained as an alternate to gas.
Devco should be given the gas distribution rights for Cape Breton Island.
Devco, with its coal pier infrastructure, should partner with the private sector to build a direct reduced iron or an iron carbide plant. Using iron ore from Labrador and Sable gas, Cape Breton could become a major player in this market.
I would also recommend that the Province of Nova Scotia give to Devco their seven per cent of the gas offshore Nova Scotia, currently owned by Nova Scotia Resources Limited.
Finally, both senior management and the board of directors should be upgraded with well-known and highly respected international business people. Good management and directors recognize the need to diversify as the world economy changes.
Mr. Chairman, to summarize: Cape Breton can and should become the most competitive electrical generator within the Maritimes. Having the capability to generate electricity from both coal and gas would allow Cape Breton the economic tools to fully develop its economy and participate in the North American free trade market.
Unfortunately, SOEP as it stands now, could destroy the Cape Breton coal industry and the economy of industrial Cape Breton. New England will significantly benefit from Sable gas, but Cape Breton, Quebec and Ontario will be denied that opportunity.
Mr. Chairman, and members of your committee, I want to remind you of what the Canada-Nova Scotia Offshore Petroleum Resources Accord, signed August 26, 1986, stated:
(a) to achieve the early development of petroleum resources in the offshore area for the benefit of Canada as a whole and Nova Scotia in particular.
(b) to recognize the right of Nova Scotia to be the principal beneficiary of the petroleum resources in the offshore area, consistent with the requirement for a strong and united Canada.
The last time I looked, Cape Breton and the coal miners living there were part of Nova Scotia; not Quebec, and not New England. They are a part of Canada. Why these two areas have been denied Sable natural gas is beyond me. I find it very strange that Mobil, Shell and Imperial Oil can tell Canadians where Sable gas will be sold.
Mr. Chairman, that concludes my presentation.
Senator Buchanan: I want to start off by absolutely and totally agreeing with the two clauses you read from the Canada-Nova Scotia Offshore Petroleum Resources Accord, and you would not expect me to do otherwise because, as you know, I signed it.
Mr. Livingstone: That is correct.
Senator Buchanan: It was also in the 1982 accord and Prime Minister Trudeau signed it.
We will confine ourselves to Cape Breton, the Strait of Canso area, and industrial Cape Breton. As you know a Cape Breton alliance committee has been set up, made up of business people, labour people, people from the University College of Cape Breton, the clergy, the board of trade, the economic development agency, to specifically take a look at the positive and/or negative effects of Sable Island gas on industrial Cape Breton. This is with particular reference to the fact that Cape Breton could become non-competitive as far as the Halifax-Dartmouth area is concerned.
As you will recall, one of the items we negotiated in the 1980s was that there would be a pipeline across the Strait of Canso to Point Tupper where the big wharf and facilities of the former Gulf refinery were. As I recall, I do not think we did negotiate or demand that there be a pipeline into industrial Cape Breton. The idea then was that the pipeline would go across to Point Tupper and the gas liquids would be used in a petro-chemical industry. It was not a request, it was a demand by the provincial government that those liquids would stay in Nova Scotia, stay in that area. I think you already mentioned that you agree with that idea.
Mr. Livingstone: That is correct.
Senator Buchanan: One of the points that we negotiated in the agreements back then was that Nova Scotia could own, or have an option to own up to 50 per cent of all pipelines offshore and onshore to the New Brunswick border within the jurisdiction of Nova Scotia as delineated in the offshore agreement of 1982 and 1986.
What do you say about the decision by the provincial government two years ago to ignore that right, and to proceed to give that 50 per cent to Mobil Oil, Shell, et cetera?
Mr. Livingstone: I think it was a terrible decision, Senator Buchanan, because of a number of things. First, they received no value for it. They did not use it as a card to extract some other concession, such as a pipeline across the Strait or the liquids being guaranteed there. Second, as a representative of a Canadian oil company it is never good to see something being 100 per cent owned by the majors. How do the small, junior companies in, say, Alberta compete if they want to build their own pipeline? If it had to be sold I would have preferred to have seen it sold to a company such as Nova, IPL or Trans-Canada Pipelines.
Senator Buchanan: But sold for some value to Nova Scotia?
Mr. Livingstone: Definitely.
Senator Buchanan: At the present time there is no return to Nova Scotia.
Mr. Livingstone: They receive nothing.
Senator Buchanan: I have been told that one of the reasons the panel did not become involved in the issue of pipelines to Cape Breton was because their mandate was to make selections based on limiting environmental impacts.Their mandate did not include the consideration of whether there would be negative or positive impacts on Nova Scotia, including industrial Cape Breton and, for that matter, the Halifax-Dartmouth area. Is that the case?
Mr. Livingstone: No. The simplest thing would have been to honour the pipeline that was approved by the NEB in 1983 that runs from Glace Bay to Montreal and to have dealt with strictly the offshore part of it. You already have a pipeline that was approved by the NEB in the early 1980s that goes from Glace Bay to Montreal. I am puzzled by all of this.
Senator Buchanan: Is that the old TQ & M?
Mr. Livingstone: Correct.
Senator Buchanan: One of the major concerns that has been expressed is that, if there were a natural gas pipeline from the Strait of Canso into industrial Cape Breton that could mean the end of coal mining in Cape Breton because natural gas would replace coal. The arguments are that natural gas does not create the same environmental problems as coal -- which I do not believe of course -- and that natural gas could be more efficient. I have heard both sides of this. I have heard that natural gas would not be as efficient as coal, and I have heard that the price of natural gas would make it not as cost effective as coal.
Mr. Livingstone: If that is the case, why are coal generating stations in New England changing to Sable gas?
Senator Buchanan: I am glad to hear you say that because, if that is the case why is it that 70 per cent of electrical generation in Alberta is still comes from coal?
Mr. Livingstone: I believe it is closer to 90 per cent.
Until two years ago, by law, we were not allowed to burn gas in the Province of Alberta. It had to be coal. We have low sulphur coal and open pit mines in Alberta. The cost of producing a tonne of coal in Alberta is pretty cheap. Our generating stations are located very close to the mines.
Senator Buchanan: Ours are not too far too far from Donkin. David Manning, who is the president of the Canadian Petroleum Products Association, told our committee last week that burning coal is more cost effective than natural gas, even though natural gas is right there in Alberta. Are you saying the same would not apply to Cape Breton?
Mr. Livingstone: I know what the price of a tonne of coal is in Cape Breton, but I think the future of Cape Breton, as I said in my brief, is that it should use both.
Senator Buchanan: Do you mean mix natural gas and coal in the burning?
Mr. Livingstone: Generate separately.
Senator Buchanan: In different plants?
Mr. Livingstone: Exactly.
Senator Buchanan: Are you suggesting that, say, Lingan 1 and 2 be natural gas, and Lingan 3 and 4 be coal?
Mr. Livingstone: I think you must first consider the Strait area. I believe the biggest pulp mill there will change to a cogeneration facility. They have filed documents at the hearing, and testified that they can take up to 40 million cubic metres a day of gas in a cogeneration facility. They also use electricity. That situation will change. It will impact on Cape Breton.
Senator Buchanan: As I understand it, Power Corporation will apply to be a distributor in Nova Scotia and, if they are successful, they will convert Tuft's Cove from oil to natural gas. Alternatively, if they are not chosen to be a distributor, and if they get the right price, they will go ahead with the conversion. Environmentally, that would have a positive effect on the Halifax-Dartmouth area.
The concern that has been expressed in Cape Breton, by the UMW and by others, is that, when and if that happens, Tuft's Cove will have substantially reduced its generating capacity because of the heavy oil they burn and the environmental problems it creates in Dartmouth particularly. The concern is that, if they start to burn natural gas, they will immediately increase their generating capacity at Tuft's Cove, which will automatically start to reduce their generating capacity in Lingan and possibly Point Aconi. However, it may not affect Point Aconi because it is a specialized plant with a fluidized bed. The UMW's concern is that the amount of coal sold to the Power Corporation by Devco will be reduced because the generating capacity of the Lingans will be reduced. They say the same situation will prevail in greater proportions if one all of the Lingans are converted to natural gas.
Mr. Livingstone: If you ship gas to the Halifax-Dartmouth area why would you not take that gas out the back door of the plant or over the Strait of Canso and generate it there? According to the toll that has been approved on this pipeline, you will pay 50 cents or 60 cents whether you move that gas one mile from the gas plant in Country Harbour or all the way down to Boston. Cape Breton has a tremendous advantage by taking a pipeline, which is about 40 miles from Country Harbour, underneath the Strait, and generating electricity at the Strait for all of Nova Scotia.
Senator Buchanan: That is an interesting concept, but what will happen to the approximately 2,000 miners and the 3,000 or 4,000 indirect jobs in industrial Cape Breton? If you multiply by three to include their families, you will see that approximately 20,000 people will be affected by the closure of coal mines.
Mr. Livingstone: I think you also have to consider the benefits of reducing CO2 emissions which would result from burning natural gas as opposed to coal.
Senator Buchanan: Are you aware of the fact that in industrial Cape Breton the amount of CO2 generated by our generating plants is less than 0.1 per cent of the entire Canadian CO2?
Mr. Livingstone: I am afraid that figure may be on a per capita basis.
The Chairman: In fairness, Senator Buchanan, we did hear that we are up to almost the maximum allowable level at the moment.
Senator Buchanan: That is according to the Canada-U.S. agreement signed in 1988. However, that situation has changed with the coming on stream of the fluidized bed plant a few years ago. The amount of SO2 has been reduced by 90 per cent. If we do not bring on any new generating plants -- which the Power Corporation is not prepared to do with coal -- then that level should remain where it is.
In the 1980s and into the 1990s consideration was being given to natural gas being brought ashore near Country Harbour and piped into an area where the Power Corporation would build new generating plants using natural gas, and exporting that through the interprovincial transmission into the New England power pool. I do not know if that is still a consideration.
Mr. Livingstone: I think the Province of New Brunswick out-negotiated the Province of Nova Scotia.
Senator Buchanan: They did not out-negotiate us in the 1980s.
Senator MacDonald: I must say that I do not like the tone of your presentation. You tell us what is wrong with the review, or the so-called review, but you do not tell us how it happened or why Canadians did not get involved. I do not agree with your assessment of Mr. Fournier when you say he was born, raised and educated in the United States and shows a serious bias against the people of Cape Breton. I do not appreciate a remark like that. I think it takes away from your general presentation.
What does "TQ & M" mean?
Mr. Livingstone: Trans Quebec & Maritimes.
Senator MacDonald: They were one of the proponents, were they not?
Mr. Livingstone: Their application was refused. They were not permitted to be heard.
Senator MacDonald: Why?
Mr. Livingstone: You would need to ask the panel for their reasons.
Senator Buchanan: I can answer the question. I was there.
Senator MacDonald: Were they not the latecomers?
Senator Buchanan: No, not back then.
Mr. Livingstone: What do you mean by "latecomers"?
Senator MacDonald: There was one application that did not make the cut, was there not?
Senator Buchanan: You mean the present application?
Senator MacDonald: Yes.
Mr. Livingstone: I do not know what you mean by "the cut".
Senator MacDonald: I just find it unbelievable that we could have been, as Nova Scotians, so incredibly stupid, so impoverished, that we would have the wool pulled over our eyes by these big foreign companies that you referred to. I am trying to find out what happened. You say that TQ & M were not heard. If they had had something to say they would have heard them.
Mr. Livingstone: No, they applied to the panel. and the panel ruled that they would not entertain their application. Another company from the United States consideration of a sub-sea pipeline, and they were ruled out. I believe both of them are in the process of filing an action in the Federal Court.
The Chairman: I did not follow this particularly closely, but it is my understanding that, when the panel was preparing to receive applications, there was a period of time in which proponents could make applications; and the one that was finally approved was made during that period of time; and the hearings went on. It is also my understanding that TQ & M, while they may not have been as late as the wondrous project from Texas that came in at the very last minute, asked that the decision by the panel be delayed in order to give them more time to make representations. The panel refused to do that and carried out its agenda on the basis of what it had given notice of to the entire populous. That is my understanding.
Senator Buchanan: Mr. Chairman, I believe we should be referring to Trans-Maritime Pipeline, not to TQ & M. Trans Quebec & Maritime was in the forefront in the early 1980s. The reason their application was not approved then was that no environmental assessment had been done and also, at the time, the federal government refused to subsidize any further lines from Quebec City down. That is why the NEB turned it down as did the federal cabinet. The present situation refers to Trans-Maritime Pipeline who came in late.
Mr. Livingstone: I do not know what the hurry is, Mr. Chairman, in getting the approval. This process is stalled right now in the United States. The Federal Energy and Regulatory Commission has returned their application as being deficient. There is no ruling coming out of the United States on their portion of the pipeline built in the United States.
Getting back to your question, Senator MacDonald, yes, many people who are familiar with the oil business are curious as to why we would give up 50 per cent ownership in a pipeline for nothing; why we would agree to a royalty deal of one per cent; why Nova Scotians should take the risk on the reserves; and why we are allowing pre-development costs of between $600 million to $950 million. $1.6 billion of taxpayers' money has already gone into that gas. When I consider the accord that was signed in 1986, I cannot agree with the decisions made by Bob Fournier. There are more qualified people in Canada who could have chaired such a panel. A decision of such importance to Nova Scotia and to Canada should not have been taken by three university professors.
The Chairman: Mr. Livingstone, you are in the oil business, or your company is in the oil business; is that correct?
Mr. Livingstone: That is correct.
The Chairman: Do you or your company directly or indirectly have any affiliation with any of the proponents here?
Mr. Livingstone: No.
The Chairman: And you do not act as a consultant or in any capacity in relation to any of the proponents here?
Mr. Livingstone: None whatsoever.
Senator Murray: Mr. Livingstone. help me understand the present status of this matter. I seem to recall that, when the present premier of Nova Scotia, Mr. MacLellan, was seeking the leadership of the Liberal Party in that province, he very clearly expressed his opposition to the policy of the previous government, the Savage government. Mr. MacLellan went so far as to appear before the panel himself on one of its last sitting days and some of the reasons he invoked are the same considerations you have raised. Am I correct in saying that?
Mr. Livingstone: Yes, some of them were the same.
Senator Murray: Am I correct in saying that, at the end of the day, regardless of what the National Energy Board decides, the Government of Nova Scotia has the power to approve or not approve the development of that resource?
Mr. Livingstone: They have a sign-off. There is co-management of the offshore.
Senator Murray: If they do not think it is in the interests of Nova Scotia they still have the opportunity to say no, is that correct?
Mr. Livingstone: That is my understanding of the legislation.
Senator Buchanan: That is the offshore accord legislation.
Senator Murray: Apart from your critique of the deal, you have outlined what I would describe as a vision of the future for Cape Breton. On the face of it, it is quite appealing, it is quite attractive, but we have no way of knowing just how this will work or, indeed, what the economic realities are; and I think it would be unfair to ask you to have all of that detail.
As to the idea that Devco should be allowed to construct a natural gas pipeline to Cape Breton that comes out of the back door of the Country Harbour plant and which is exempt from the main line pipeline transmission tolls, how would you bring that about? How would you justify exempting them from the transmission tolls?
Mr. Livingstone: It would not go through the main line transmission, the pipeline to Boston. They refer to "postage stamp" rates. When you put a stamp on a letter in Sydney, Nova Scotia, it is the same price to send it to Glace Bay as it is to Vancouver. Whether you go a mile on the transmission line or you go all the way to Boston, you pay the same price. By taking it out the back door of the plant, you do not go into the main transmission line; therefore, your costs of getting the gas to the Strait are very low.
Senator Murray: Do you have a ballpark of what it would cost? The federal government would have to lay out the capital costs of this pipeline.
Mr. Livingstone: Not necessarily. There is money left in the Canada-Nova Scotia Offshore Development Fund. Approximately $10 million or $15 million of the money remains unspent. That could be used.
Senator Murray: Would that cover it?
Mr. Livingstone: It should. Mobile is laying a line at the same time. Any good corporate citizen would just charge you the cost of laying the pipe.
Senator Murray: In you brief at page 4, you state:
DEVCO becomes a generator of electricity from both gas and coal. Nova Scotia Power would be the transporter of electricity, like other power companies in Alberta and the United States.
How would you bring that about? The reality is that Nova Scotia Power is the generator of power from coal. They own a couple of plants in Cape Breton, one in Trenton and others here and there. Would you tell them to get out of that or buy from them? What would you do?
Mr. Livingstone: Nova Scotians would like to see healthy competition in the power generation market. The power corporation is a private corporation listed in the TSE. What is wrong with Devco building a cogeneration facility at the Strait of Canso?
Senator Murray: Using coal?
Mr. Livingstone: No, they would use gas at the Strait.
Senator Murray: In the competitive environment, could both companies make money at this?
Mr. Livingstone: According to the application, the gas will be used by the pulp mills in New England. They will all convert to it.
Senator Murray: What would it cost Devco to build a plant of this kind?
Mr. Livingstone: A cogeneration plant would cost about $50 million.
Senator Murray: Devco would be given the gas distribution rights for Cape Breton Island. In whose power is that decision?
Mr. Livingstone: The provincial government.
Senator Murray: You go on to say in your brief that:
DEVCO with its coal pier infrastructure, partner with the private sector to build a direct reduced iron or iron carbide plant. Using iron ore from Labrador and Sable gas, Cape Breton could become a major player in this market.
I have two questions. First, do you have a ballpark number as to what the capital outlay for such a plant would be? Second, do you have good reason to believe that there is a market for a new plant based in Cape Breton? Do you have any idea of any studies that exist to indicate that this could be a money-making operation?
Mr. Livingstone: Yes. You have to see what is happening in the steel industry in the world, particularly in North America. The steel-making industry has gone to scrap melt. It has driven up the price of scrap. These two processes that I outline refer to iron concentrate replacing scrap. You can replace up to 30 per cent of your scrap with this product. The product requires two ingredients: iron ore, which is available in Labrador; and natural gas.
Right now, Nucor, the number one steel company in the world when it comes to scrap melt, built a plant in the Republic of Trinidad. I believe the Japanese are building one in Corpus Christi, Texas, for $1.6 billion. I was working with the mayor of Shelby, Montana, looking at bringing iron ore all the way from Labrador into Montana. I think Sydney, Nova Scotia, has a tremendous shot at it and that this represents a great opportunity. The infrastructure is at the coal pier; it is close to Labrador; and it should be pursued.
Senator Murray: You mentioned $1.6 billion that the Japanese will spend on building a plant of this kind. Is that the order of magnitude we are talking about here in terms of capital investment?
Mr. Livingstone: It depends how big you want it to be. That particular one will fuel the Nucor steelworks in Arkansas. The steel mills were brought to Arkansas by Mr. Clinton when he was governor by guaranteeing them 15 years in electrical rights under two cents per kilowatt hour.
Senator Murray: Again, I refer to your brief where you state that:
The Province of Nova Scotia give to Devco their 7 per cent of the gas offshore Nova Scotia, currently owned by Nova Scotia Resources Limited.
Why would they do that, Mr. Livingstone?
Mr. Livingstone: Nova Scotia Resources is getting out of the business. The company has been up for sale for two years.
Senator Murray: Would they just give their 7 per cent share to Devco?
Mr. Livingstone: Why not? It will create employment and help Devco. What will they get for it on the market?
Senator Murray: I do not know.
Senator Moore: That is a good question. What is it worth?
Mr. Livingstone: They tried selling it, and they could not get their price. When I was the president two years ago, I put a price of $20 million on it. Of course, the closer you get to developing a gas infrastructure and an offshore project, the higher the price.
Senator MacDonald: Who are the partners in SOEP?
Mr. Livingstone: Mobile Oil has a majority, close to 50 per cent; Shell is second; and I believe Imperial Oil and Nova Scotia Resources have 7 per cent.
Senator MacDonald: Is it sabre-rattling for any of these companies to say, "Make up your mind or we will pull out?"
Mr. Livingstone: I chair two public panels. If I were chairing any one of those panels and an oil company representative said that to me, the hearing would be over. It is as simple as that.
They have publicly stated that the pre-development costs are $600 million. I think you could put those offshore gas leases up for sale and you would get more than $600 million for them today.
Senator Moore: Following on Senator Murray's questions about the agreement and the possibility of changes by Premier MacLellan, being a Nova Scotian I view this as an opportunity for Nova Scotia to become at least a bit of a have province from having been a have-not province. It is certainly an opportunity for the next generation.
If the Province of Nova Scotia were to demand some changes in the agreement to ensure good economic benefits for the province, given your knowledge of the industry and your past service in Nova Scotia, what do you think would be the response of SOEP?
Mr. Livingstone: Are you asking what would happen if the province wanted to renegotiate the deal?
Senator Moore: What would happen if they demanded that some changes be made?
Mr. Livingstone: They would probably gain some respect. They would have to bring in good people to negotiate the deal. Oil companies are constantly in negotiations. In my opinion, they should consider negotiations to get that pipeline back to 50 per cent, and removing the international competitiveness on the contracts.
Senator Moore: You said that to be internationally competitive, you would have to supply these goods and services under a previous project. What does that mean?
Mr. Livingstone: Someone has to pay for the learning curve. How many people in Cape Breton or Nova Scotia have ever seen a jacket or some of the high pressure equipment that would be in use? Some of the best welders come from Cape Breton, but it takes time to learn to deal with new materials and new specifications. Governments can negotiate that cost of that training. The cost can be made up on the benefits side in that, on the next project, in the Gulf of Mexico or wherever, you can say that you have experience building a particular type of jacket or module, on time and on budget. The Mexican government will not let you learn on their project. That is how Scotland became what it is today. They took a hard-line approach on benefits whereas we did not, so we are not internationally competitive. If you think you can compete with Korea in manufacturing modules, I am afraid you are sadly mistaken.
Senator Moore: Is it too late to do some of the things you are suggesting here?
Mr. Livingstone: It is not too late. The federal government will have to sign off on this project and so will the province.
I am for it. I am an oil man myself. I signed a 50 year deal with the Blackfoot Indians in Montana, where the royalty rate is 35 per cent of gross revenue. They do not take the risk on whether or not I am profitable. They want it up front. It is the same in Alberta and Saskatchewan. If you want to take the resource out, then you pay the piper at the beginning. You can work with oil companies. There is a lot of money out there. However, the deal Nova Scotians got was not a good deal and it must be re-examined.
Senator Moore: Is there any perception among your colleagues as to what type of deal this is, on a scale from 1 to 10?
Mr. Livingstone: Most people think it is a tremendous deal for the shareholders of Mobil, Shell and Imperial Oil. That is as far as I will go.
Senator MacDonald: If the so-called "SOEP deal" collapsed now, do you think there would be an influx of companies coming forward with a deal which you would like to see? Would they be standing in line?
Mr. Livingstone: I would not say they would be standing in line if the deal were to collapse. We have legislation which deals with significant discovery licences. It came about because when we went to the Beaufort Sea we made billion-dollar commitments in developing specialized equipment and technology. We asked the federal government if we could keep what we found forever, and told them that we might not be able to develop our fields for 10 or 20 years. The Government of Canada granted us significant discovery licences which allowed us to hold that oil and gas forever without having to develop it or spend money on it.
The companies on the East Coast got the same deal. Even if this deal collapses, the same people will retain ownership of those leases. They can hold them forever. The only way to change that would be to legislate away significant discovery licences. To my knowledge, Canada is one of the few countries in the world that has them. If you have a concession agreement and you do not develop it, usually it goes back to the government.
Most people do not know the statistics. Between 70 and 80 per cent of the world's oil today is managed by Crown corporations.
Senator Murray: Then who has the upper hand in a hypothetical renegotiation? They can hold the leases forever, as you say, because of the significant discovery legislation. The Nova Scotia government and Ottawa have the power of life or death over its development in the near future; is that correct?
Mr. Livingstone: Yes.
Senator Murray: Is it a stand-off, or does one side or the other have the upper hand in bringing about a renegotiation?
Mr. Livingstone: You cannot bring about a renegotiation unless the current process is stopped for some reason, such as a court challenge which resulted in overturning the legislation.
Senator Murray: What about the case of a simple decision by the Government of Nova Scotia that it will not permit the deal to go ahead on the present basis and it wanting to renegotiate?
Mr. Livingstone: That is what happened with Hibernia. You would make it plain that the deal is not satisfactory, and you would start negotiating again.
With the greenhouse emissions problem, this gas will only become more valuable. The competition for the marketplace in New England for this gas is the Gulf of Mexico or Western Canada. The problem is that you are at the end of the pipeline. You may not get your gas into New England. This way, it is a dedicated line.
The situation has changed. The more I think about it, the more I realize that this gas could be used in Canada. The situation with Ontario Hydro has changed the picture. As a Canadian, I am concerned, and I do not think there is a magic calendar that stipulates that we must start in 1999. It has been delayed in the United States, so it could be extended another year.
Ontario Hydro is now moving to a deregulated market. We now have an opportunity to develop a resource in the Maritimes, particularly in Nova Scotia and more particularly in Cape Breton, and it has not been studied. I tried to make an intervention at the NEB hearing. It is tough when you spend your own money to attend a National Energy Board hearing and you are ruled out of order. They would not listen to suggestions about an iron carbide plant. It is particularly frustrating when the chairman of an NEB panel tells a young man from Sydney, Nova Scotia that he is trying their patience in attempting to make a case for studying the impact of this project on the mining industry in Cape Breton. It is not right.
As I said earlier, I chaired two public hearings. The purpose of these hearings is not to walk into a room with 50 lawyers and intimidate people; it is to get the public input and to determine the impact on Cape Breton Island.
On the other side of the coin we have the Power Corporation. Whether or not their suggestion is that we use coal, someone else can come in and install NUG units, which stands for "non-utility generation". For $50 million you can certainly speed up the generation of electricity.
Senator Butts: Is it not true, Mr. Livingstone, that the five-member panel you referred to, although it was chaired by an American, had three members from the NEB?
Mr. Livingstone: No. There were two full-time NEB members, and Mr. Fournier was added as a third.
Senator Butts: The chairman of the NEB told us this morning that three of the five were members of the NEB. When I asked about this, he did not lead me to believe that they would hold another hearing on this same issue, or that they were ready to change. He was very straightforward in telling us that the majority of NEB members made that decision.
After the comments we have heard over the last few days, I have some difficulty with the suggestion that Devco should take on all of the responsibility for coal and natural gas.
Is it possible that we could have a worthwhile study of the relative impacts of natural gas and coal with regard to employment, environment, costs and so on? That would be valuable to Cape Breton. You make a good case in saying that we should let Devco forget about coal and go to natural gas, but I am not sure about the relative costs or the environmental effects, and I certainly have grave doubts about the employment question.
Senator MacDonald: Mr. Livingstone, what is the position of Nova Scotia Power which is a privately owned company? I am sure that everyone in Nova Scotia would love to have natural gas in their homes. What position did Nova Scotia Power take? Whose side were they on?
Mr. Livingstone: Like the Government of Nova Scotia, they kept changing their minds on the tolling issue. They could not decide whether they would support point-to-point tolling where you just pay for the cost of the pipe, or whether they preferred the postage stamp rate. At the last hour, a deal was made under which they would get a discounted postage stamp rate. Nova Scotia Power did not like it.
I read that Nova Scotia Power is prepared to take about 90 million cubic metres a day of natural gas from Tuft's Cove and Trenton. The Trenton portion would cause a loss in sales of about 1 million tonnes of coal to Devco.
Power corporations are becoming transporters of electricity only. We deregulated the pipeline industry in this country and pipeline companies transport gas and oil. That is their role. Other companies find the resource. Alberta will be completely deregulated by the end of the year. That means that if a company in Florida wants to sell electricity to the city of Calgary for a fraction of a cent cheaper, that is where Calgary will buy it from.
I am in the oil business. We have a tremendous hidden subsidy in our industry which comes in the form of flow-through shares. Canadian taxpayers pay for that subsidy. It is not well known, but hundreds of millions of dollars every year go through the oil industry in flow-through shares. What we flow through to the people who buy them is the cost of drilling wells. In return, they get a tax credit and shares in the company.
The federal guidelines on flow-through shares now apply to electrical generation. There is no risk in a utility that is generating electricity as there is in drilling an oil well or in the mining industry. That will raise money on Bay Street.
Devco's problem would not be related to raising the money to do this; it would be related to negotiating the best deal in order to get the tools that Cape Breton needs. Then you decide whether you want to privatize Devco or leave it as a private corporation. Algoma Steel, which is run by the employees, does a fine job.
Senator Butts: In all fairness to the joint panel, the last five or six of their recommendations dealt with the fact that they had no submissions from Cape Breton, that no one came to talk about job training or the petrochemical industry.
Mr. Livingstone: Do you know why?
Senator Butts: I do not know why. I am just saying, in all fairness, that they did include that in their report.
Mr. Livingstone: The notice in the paper for people to submit interventions regarding this project ran from December 18 to January 8. Many people missed it because it ran over the Christmas period.
When I was with Gulf Oil, we went to the communities in the north and told people what we are doing and how they could apply to make representations at hearings. The onus is on the proponent. Yes, Cape Bretoners missed it, but someone should have been on the ball and notified them.
Senator Butts: Yes. The leaders in Cape Breton should have been on the ball.
The Chairman: Cape Bretoners may have missed it, but I do not think they are shrinking violets. The people who have attended our hearings generally do not miss things that will affect their livelihood. It is unlikely that people like Steven Drake would not step forward. There must be some other explanation.
Senator Butts: Cape Breton was in the midst of municipal elections, and the government in power was in the midst of a leadership campaign.
Senator Moore: Mr. Livingstone, on the positive side of your report you had various ideas for economic development in Cape Breton which would, of course, impact on the rest of the province. Did you put these ideas to the joint panel?
Mr. Livingstone: I was ruled out of order by the chairman.
Senator Moore: Did you go there with a written submission as you came here today?
Mr. Livingstone: Yes. I have included it in the package I have given to you.
Senator Moore: Was your written submission to that joint panel included in its minutes or did it form part of its official record?
Mr. Livingstone: Yes.
Senator Moore: I have a copy of the report. Recommendation 22 refers to what Senator Butts mentioned regarding no representations from Nova Scotians about economic opportunities. I found that absolutely incredible. Having heard you here today, I am wondering about the credibility of that statement.
Mr. Livingstone: In the package I brought for senators, I have included my notice of intervention, a copy of my formal intervention in April, and a copy of my final arguments. You can see where I raised that issue.
I also appeared at the hearing and cross-examined the representatives of the Province of Nova Scotia for two hours.
The Chairman: Thank you very much, Mr. Livingstone.
There being no further business, the committee will adjourn.
The committee adjourned.