Proceedings of the Special Senate Committee on
the Cape Breton
Development Corporation
Issue 2 - Evidence - Afternoon Session
OTTAWA, Tuesday, May 28, 1996
The Special Senate Committee on the Cape Breton Development Corporation met this day, at 3:30 p.m., to continue its study on the annual report and corporate plan of the Cape Breton Development Corporation and related matters.
Senator Bill Rompkey (Chairman) in the Chair.
[English]
The Chairman: I welcome the United Mine Workers of America, the Canadian Union of Public Employees and the Canadian Auto Workers to our hearings. We thank you for coming. We would like each of you to make a presentation, after which we will open the session to questioning.
Mr. Steven Drake, President, District 26, United Mine Workers of America: Mr. Chairman, my colleague and union brother is John McLeod, International Board Member for the United Mine Workers of America.
On behalf of the UMWA, I wish to thank you for the opportunity to speak here today. I commend everyone for participating in this hearing, especially Senator Murray who I understand initiated this program.
We are here to seek a sober second opinion from the Senate and, essentially, to put on the public record the employee solution process which we have put forward, as well as to offer the expertise of 1,600 coal miners who collectively have more than 40,000 years of experience in solving mining problems.
In September of 1983, the UMWA approached George Khattar, Devco's chairman of the board, with a proposal for an honest attempt at cooperation. We have had a long history of labour management problems in the Cape Breton Development Corporation. We suggested that it would take some small steps to regain the trust of employees after such a long and troubled history. We also proposed to Mr. Khattar and the board of directors a cooperative effort to explore the Donkin mine project for a positive future for the corporation.
We found Mr. Khattar to be very cooperative with the unions. However, upper management, especially Mr. Ernie Boutilier, the president, was very unenthusiastic about the proposal at the time, particulary the proposal regarding the Donkin project.
From September of 1993 until June-July of 1995, when Mr. Joe Shannon was appointed president and chairman of the Devco board, Devco was basically running as it always had been. There was poor focus, extreme lack of accountability and questionable or creative accounting practices.
When Mr. Shannon took over, there was immediate concern among many employees of the Cape Breton Development Corporation regarding his agenda, because, as everyone is aware, Mr. Shannon had been with the cooperation in 1984-85. His first term as president was short, as was mentioned yesterday by Senator MacDonald. His term was marked by a very controversial decision which led to a certain amount of mistrust of Mr. Shannon. I refer to his decision to switch from rail transport for Prince mine coal to a trucking contract. It is my understanding that Mr. Shannon's company, Seaboard, still owns the lion's share of the Prince mine coal contract.
In 1995, the red flags went up with the employees. We were told by our people to begin an intense program of research and lobbying for the coal industry. This was after Mr. Shannon was appointed again.
Our position changed slightly when, early in Mr. Shannon's term, he spoke to the UMWA at a meeting. He suggested that his people had discovered some discrepancies in Devco's numbers. It had to do with the $20 million that was mentioned during last night's presentation.
Mr. Shannon stated emphatically that when his people got to the bottom of the financial problem, it would not concern him if certain people went to jail. We are not of a mind to send anyone to jail over any of these issues. However, it did confirm employee suspicions that $20 million from Phalen colliery had disappeared or was misappropriated. I do not know the correct term to use, but we were suggesting that $20 million was not put in the right place.
We were quite cautiously but optimistically awaiting Mr. Shannon's report on this issue. We were giving Mr. Shannon the benefit of the doubt at the time. The report never came. We requested the back-up information, the figures and the data, and were told that they were confidential and could possibly jeopardize the Devco-Nova Scotia Power Corporation relationship.
I wish to make it perfectly clear that none of the people I represent, and I am certain none of the people at this table, have anything but the best interests of this corporation at heart. We are not interested in harming the corporation in any way, financially or otherwise.
The 1985 situation and the 1995 situation prompted our members to tell the district executive of the United Mine Workers of America to get their homework done. It has been going on since July of 1995 and it has brought us to this point.
We have had 715 job losses in the industry over the five-and-a-half-year period commencing November of 1995. The employee solution process was aimed at exhausting every avenue prior to putting people out on the street.
Much of our reasoning is based on numbers which we cannot get substantiated. We have been stonewalled in our attempts to get much of the information. If this approach does not work; if our solutions are put forward and we cannot save enough money to stop these job losses, we are suggesting that any job losses or downsizing in this industry must be done with dignity, which means decent pensions for the coal miners in the industry.
After four months of listening to Mr. Shannon's numbers, which have changed several times, it would take a giant leap of faith to blindly give credibility to any of Devco's present numbers without detailed financial data to back up the speculative projections they have made. We have requested that several times, as I have said.
I will draw your attention to the red book of the United Mine Workers. It is called "Creating Opportunity, A Plan for Cape Breton." There are three key points in this. The first is that Ottawa should absorb Devco's social and environmental legacy costs; the second is to build a new labour-management relationship; and the third is to modernize Devco's operations for the long-term future.
These proposals were put forward by the employees of the Cape Breton Development Corporation. I will deal only briefly with the first one, because it was dealt with in depth last night and again this morning. I will then ask Mr. McLeod to give his presentation on the second one, after which I will make a slide presentation.
Senator Murray questioned last night and again this morning how much of this liability belongs on Devco's bottom line. In response to that, the best-case scenario would be that none of the pension liabilities belong on the bottom line. Mr. Shannon mentioned yesterday that in 1991 the Superintendent of Pensions found out about these liabilities and the ongoing costs and said there had to be funding by the year 1998.
I will refer briefly to a submission concerning the impact of the pension liability on the future of the Cape Breton Development Corporation. It says that in March of 1993 the corporation had set out the objective of paying down the pension liability by the year 2001. One year later, this objective had been revised to provide for full funding of the plan by 1998, with a resulting significant increase in the annual payment required.
If, as Mr. Shannon stated, the Superintendent of Pensions set a payment schedule in 1991, would it not be logical to assume that he approved a reasonable term of payback, such as from the year 1993 to the year 2001, as the report suggests?
It is my understanding that someone would have had to approve that pension pay-back. Who justified the shorter term and the higher payments? We heard the Cape Breton Development Corporation's bottom line for the next three years. Instead of paying back $10 million or $8 million per year, we are now paying in the vicinity of the $22 million to $25 million per year, which is almost an impossible task.
Mr. McLeod will now give a report on building a new labour-management relationship.
Mr. John McLeod, International Board Member, United Mine Workers of America: Mr. Chairman, I wish to thank you for the opportunity to express our concerns on the restructuring or downsizing of Devco operations. We will present you with some information and views on the past attempts to establish labour relations within the corporation and try to give you an insight into the type of labour relations the UMWA would like to have established.
I would first like to touch on the social issues which some of our workers face.
At the end of 1994, the corporation did some downsizing. Twenty-nine junior employees were to be terminated, most of whom worked at Prince mine. At that time, union officials were new in office and had to address a local union meeting and tell the members that 29 people were going to be laid off. That was difficult for the union to do, knowing that there were no other employment opportunities in Cape Breton available to these young people. We fought to keep those men working, but management had made a decision and none of our efforts could stop the layoffs.
About a month after the layoffs, I was at the airport when one of those laid-off workers came into the airport with his family. They were leaving for Calgary, where he would work in the mines. He was brought to the airport by his father, who had recently retired from Devco. As he sat in the airport waiting for the flight, I felt disappointed in myself as a union member that I could not fight hard enough to save his job. He was leaving. His father was proud that his son was moving out to look after his family. He had to do that; he had no choice. However, his father would not take his sunglasses off as he looked at his grandchildren. They were not aware of what was happening. He stood steadfastly watching his son leave.
I felt somewhat betrayed. The year 1994 was declared the Year of the Family by the United Nations. Different organizations in this country put out reports urging that the family remain strong, that it stick together. They spoke of the power of the family. Yet, there was a son leaving with his family as the father stood watching.
I felt betrayed. Situations like that cause mistrust. People say they will do good for us, yet we see people being forced to leave.
Over the years, we have struggled for workers' rights. We had to fight for Workers Compensation. All of this adds to the mistrust we feel when we have to deal with parts of the government or companies. There is reason for the mistrust. It does not simply develop overnight. We do not simply decide one day that we mistrust a company or a particular person.
Last evening, the president of Devco, George White, suggested that the unions should be asked if they would "step up to the plate" to make a viable industry. My answer to that is that we have "stepped up to the plate" on numerous occasions. Mr. White mentioned the situation with regard to the 7 East wall in Phalen mine. The men there had to put every effort they possibly could into trying to save that wall. Hopefully, they will be able to save it. They are still working on the situation. It has been a long haul, but the men are willing to work. They "stood up to the plate."
We can also look at Lingan mine. The production there surpassed all other records in terms of production standards. There was the potential there for a major disaster when a fire broke out in 4 East. Despite the imminence of danger, bare-faced miners stood steadfast to extinguish the blaze. Again, bare-faced miners "stepped to the plate" to extinguish that fire.
As Senator Buchanan pointed out last night, disaster 26 claimed the lives of miners. Again, the employees "stepped to the plate" when they had to return to the very section where men had died.
Honourable senators, I have to say there is no doubt that the unions will step to the plate again, when the need arises. We will not step to the plate when the home-plate umpires are for the other team. Nor will we step to the plate when the other team has the option of taking their bat and ball and going home.
In 1991, consultants were brought in to implement a new management-labour cooperation program. At that time, Minister Tom Hockin was also involved. Committees were set up and training was given to develop the skills necessary for the program. Shortly after forming the committees, the federal government directed that Lingan mine be closed, which would result in the loss of 800 jobs.
The committees dealt with the situation through a joint process. Complete access to information was given to the unions. This established trust. Early retirements, bridge benefit programs and voluntary severances were used to alleviate the impact of the closure. These seemed to be the best possible solutions. The process was not easy to accept. However, the union stood by the decisions they had to make.
In 1993, there was an announcement by the company that it wanted to relocate the central shops. The labour-management committee asked that they be given the opportunity to review the company decision in order to make recommendations. The proposal that was put forward by the company was rejected. That was strike one.
In October of 1994, the United Mine Workers met with the board of directors of Devco. At that time, George Khattar had just been appointed president. We requested that the company take steps to try to renew a trusting relationship with the employees by implementing some changes to show that they were willing to work with the employees and listen to their ideas. We told them that if they could establish this trust we would work with the company to develop some type of labour-management relations. The board was cooperative. However, the company did not react. That was followed by strike two.
In May of 1995, the UMWA invited the company to send representatives to travel with the union to other mining operations to review the labour-management process in place at those mines. They first travelled to Pennsylvania to the New Warwick mine. At the New Warwick mine they had set up what is called an RBO program. "RBO" stands for resolution by objective. We viewed those processes and felt similar processes could be implemented with Devco.
We also travelled to Hinton, Alberta, where we were joined by Devco representatives to observe the labour-management process in place at the Cardinal River mine owned by Luscar. We all agreed at that time that this type of process could work at Devco. We arranged to meet upon our return to Glace Bay to draw up proposals for a process which could be implemented.
The UMWA submitted our proposals for review and awaited a reply as to any changes the company might want to discuss or for agreement on the proposals. The UMWA did not receive a reply to the proposals put forward. Strike three followed.
In November of 1995, the President of Devco, Joe Shannon, brought in consultants to set up a process for a labour- management process. His representative presented the union with the outline of a process, and company teams were formed. They brought in a group known as "Tennessee Associates" to help to consult in the process.
The union was not involved in any of the discussions up to this point. We were told by Mr. Shannon's representative that the company would proceed with or without the union's acceptance. The union pushed for involvement. We were finally given the opportunity to participate.
At that time, the company withdrew completely and ended the process. They took their ball and they went home.
On January 9, Mr. Shannon announced a plan endorsed by Devco and publicly endorsed by the Minister of Natural Resources, Anne MacLellan, and the Minister of Health, David Dingwall on January 10, 1996. At that time, the union was sceptical of some of the figures being put forward by Mr. Shannon. Senator Ghitter also showed some concern with the figures in the questions he put forward last night to Mr. Shannon.
The UMWA submitted a request to Devco to allow the union to review the figures being presented. We agreed to sign an agreement of confidentiality ensuring that the information would not be used to jeopardize any business dealings with our customers. This request was denied. Again, the trust was not shown on the company's part.
Honourable senators, the mistrust that exists between Devco and the unions was not created overnight; nor can it be resolved overnight. We need to take time to develop a relationship. The process has to proceed slowly. We need people in place to oversee the process, people who will ensure that all participants are on the same footing. That is where the government must take part.
We feel that politicians must take their part. This may seem contrary to what Mr. Shannon had to say last night about the involvement of politicians.
We submitted a letter to the Minister of Labour, Mr. Gagliano, requesting the involvement of the government in the process. With someone to oversee the process we feel that it would be fair and that both sides would have to live up to what we agree.
The union is serious in its commitment to improve labour- management relations in Devco. The question remains whether Devco is also serious about this, too.
Mr. Drake: If I may, Mr. Chairman, I have an overhead presentation. There is a handout in our information called, "Future of Coal Mining in Cape Breton -- Overview."
What we are looking at now is a mineral production employment chart, a graph which was put forward by the Nova Scotia government in 1994. It shows that of 4,300 employees in mineral production in Nova Scotia, 54 per cent are in the coal mining industry. That number equates to 2,320 people all told. Approximately 2,100 of those people are in the Cape Breton Development Corporation in Cape Breton. Therefore, it is an important factor in the Nova Scotia economy.
There are approximately 2,100 direct jobs in the Cape Breton Development Corporation and 6,000 spin-off jobs. We feel that is a relatively stable estimate, a three-to-one spin-off effect on an industry job in an economy like Cape Breton Island where the unemployment rate is 20 per cent. Realistically, that rate should be 35 per cent or 40 per cent.
More than $200 million per year goes directly into the economy from the coal mining industry. However, if you look at the revenues from 1990 to 1995, as set out in Devco's annual records, it is stated that direct revenues from coal sales range from $216.3 million to $266 million. That is a heavy economic impact in Cape Breton alone. The total economic impact on the Nova Scotia economy was estimated in 1995 by then chairman of the board, George Khattar, at $1 billion.
The next slide deals with the Canadian coal mining industry. Several private coal mining companies in Western Canada are used as an example. They are Teck Corporation, the Fording Corporation, Luscar Corporation and Smoky River Coal. If you look at the chart, you will see that it says that they are expanding their operations. They are expanding their operations because of increasing demand in European and Asian markets. The markets are expanding with the result that Western Canadian coal operations are also expanding.
According to the information we have, Devco is going on a cost-reduction program for self-sufficiency. It is going in exactly the opposite direction of not only Canadian coal mining companies but world coal mining companies.
Devco is downsizing the export market despite 15 years of cultivating markets and cultivating a positive reputation in a recent $15 million expansion of our export facility in Sydney. We spent $15 million in Sydney in 1992.
Last night, Mr. Shannon stated that he was not getting out of the export market. In the past four months we have discovered that of the 38 jobs at the International Coal Pier in Sydney, Devco's plan makes 34 of those jobs redundant. Mr. Shannon's first step when he took over as president and chairman of the board was to terminate the export sales vice-president, Mr. White. No matter what he says, it seems to the employees that we are moving totally away from the export market. His original plan back on January 9 and 10, a plan which was endorsed by the government, showed that in the next four years there were no boats scheduled for the Cape Breton Development Corporation. As far as we are concerned, this means there would be no export market. We are totally against that. We think that is moving in the wrong direction.
With regard to recent sales, I checked recently with Mr. Tom Fleming, our vice-president of marketing. He was the one left in the position to sell our coal. Recent sales to our customers in Germany, Denmark, Sweden and South Africa were very satisfactory.
The next slide deals with the fossil fuel reserve estimates prepared by the Canadian Coal Association. Coal is the most abundant of the world's fossil fuels. It accounts for four times the reserves we have in oil. It is more than two and one-half times what we have in terms of combined natural gas and oil reserves.
If you look at the oil and natural gas reserves on the chart, you will see that as demand increases supplies will dwindle. When supplies cannot meet demand and reserves go down, you will have an increase in price.
For these reasons, many growing economies, especially the Pacific Rim countries, are expanding their infrastructures. Their economies are growing. They are building coal-fired generating stations to meet that demand. They are spending billions of dollars on coal-fired generating stations. Right now, coal generates 50 per cent of the world's electricity. It is predicted by leading analysts that coal will become the fuel of the future. It is the single largest commodity carried at present by Canadian railways. It supports the Railtex railway, a private operation in Sydney.
A key question brought up last night deals with this next chart entitled, "World: Thermal Coal Imports." Mr. Shannon said that the international price of coal is the killer in this industry. We disagree 100 per cent with that statement. It is not the international price which is doing that. It is getting our price per tonne down far enough that we can be competitive on the export market. It has nothing to do with the international price. If we can get our cost per tonne down effectively enough, then we can be competitive with anyone. Our people are experts, and that is a given.
One of the problems we have dealt with in the past involves certain situations and decisions made by Devco management. When these decisions are made, the employees have no input whatsoever. Those decisions can be as simple as buying a shovel at an outrageous price, or buying a piece of mining equipment which our employees who, after 35 years on a working face, say will not work in this section. Those decisions are made arbitrarily. We are rarely given any input into making them.
What I have in my hand here is a prime example of that. This is the smallest piece of equipment that the Cape Breton Development Corporation buys. It is called a diode. It is an electronic device. I can buy it at Radio Shack for about 75 cents. If I buy it outside Devco's immediate purchasing department I can probably get it for about 20 cents. This particular order was a one-time purchase. It was purchased with another package. Devco paid $4.83 for this one item.
In 1992, Cape Breton Development Corporation purchased for $3 million a machine called an ABM-20. It is a cutting machine for development sections. They are using it at Phalen colliery where they are telling us and everyone else that the development sections are behind in their rates. We agree with that. However, they do not answer this question: Why are they behind in their rates? Some of the reasons have to do with purchasing equipment.
This machine cost $3 million. After the purchase of this machine, our production went down by about 40 per cent in this section. Our people told them that the machine would not work in our mining conditions. It was purchased anyway. We went down and cut in these sections where we lost development footage. Devco went out and bought another machine for $3 million. They bought two of these machines.
The second machine is now on the surface. The estimate to repair the brand new machine on the surface, due to the fact that we stripped it to a bare-bones piece of machinery to repair the one underground, range up to somewhere around $1 million. So we paid $6 million for two machines which basically did not work.
We are suggesting that the cost per tonne increases dramatically because of such decisions. If the corporation is serious about the export market, they should know that the price of coal on the export market is not the real killer. Instead, deadly decisions have been made, historically, and are being made today, just like the decision to pay $4 for this little diode right here.
In the spot markets, analysts are projecting an increase of approximately 100 million tonnes by the year 2000 and another 100 million tonnes world-wide on sea-coal trade by the year 2015. From the numbers that were given here last night, we have 2.2 million tonnes guaranteed with Nova Scotia Power. What we need on that export market is a very small fraction of that tonnage as predicted by world analysts. That would be approximately 1.6 million to 1.8 million tonnes of coal to export.
The spot markets are very competitive. Everyone knows that. The bottom-line solution is the same as it was 30 years ago. It is no different. We can get past all the fancy numbers. I have a lot of problems with some of these fancy numbers. If we get past that and reduce our cost per tonne, we can compete anywhere. We have the people. We have some of the equipment we need. We have the infrastructure and we have a whole lot of coal in Cape Breton Island.
There is a paper in the file with my signature on it. If you look at the back page of that paper, it shows a Cape Breton Development Corporation advertisement which was taken off the Internet about two and a half months ago. It welcomes everyone on the world market to the Cape Breton Development Corporation and states that we have over 2.4 billion tonnes of known reserves and a strategic port location. It says:
...Sales of coking and thermal coal are made to Canadian and international markets in Europe, Asia, South America and Africa.
The Cape Breton Development Corporation produces a high grade washed coking and thermal coal for the export market...
The specialized quality control systems we operate ensure that our customers' stringent specifications for thermal and metallurgical coal are met.
That advertisement is saying that the money which we spent on the Victoria Junction coal wash plant was money well spent because it means we can meet customer specifications by washing and blending our coal. We do not and should not be selling raw coal to Nova Scotia Power Corporation or on the export market. That is a major mistake in this industry as far as we are concerned.
It goes on:
...The key properties of consistent quality, low ash, high fluidity, and high calorific have secured a presence in the international marketplace for Devco coal.
This has been going on for 15 years.
Strategic location is one of the key items. If you look at the map, we are right across the ocean, in close proximity to the European market, which is one of our biggest potential customers. We have been in that market in the last two years very successfully.
We should note that France, by the year 2005, is predicted to get out of the coal mining industry entirely. They will be importing coal by the year 2005. That is another customer for us. We have been in Brazil this year.
Some problems were raised last night in association with Nova Scotia Power Corporation. One must remember that the transportation costs are very high for western coal or American coal. Alberta is about 1,200 kilometres from the coastline in Vancouver, the shipping point for the Pacific Rim countries. In the United States, it is quite similar. We have the advantage of being right next door to our main customer, Nova Scotia Power Corporation, and right next door to a deep-water port where we have spent $15 million refurbishing the facility.
Regarding Nova Scotia Power and the possibility of importing cheaper coal, one must recognize that Nova Scotia Power would need to have storage facilities to import coal. They have none because we bring whatever they want right to their door every day. They have a good deal with the Cape Breton Development Corporation on a quality product from a reliable work force.
First, if they import coal, they need to store enough coal for winter shipping, problematic shipping, and political strife. Who knows what might happen in a country exporting coal to Nova Scotia Power Corporation. That company has no railway; nor does it have any experience in shipping coal. They have no right of way. Devco owns the rail lines. Certainly, if I owned Devco and found that Nova Scotia Power Corporation was not buying my coal, they would not get on my rail line with their imported coal from the United States or wherever it might be.
They have no expertise whatsoever in shipping coal. They have no off-loading facility. If they can get their coal to Canso, which is a good distance from Sydney and two of their major operations, they still have no off-loading facility, and that would be a very expensive venture. I do not think the shareholders in Nova Scotia Power Corporation will allow Nova Scotia Power Corporation to put out that kind of capital. As shareholders, all they want is extra money. They want the value of the stock to increase.
These are huge expenditures. As Mr. Shannon said last night, some people on Nova Scotia Power Corporation's board of directors would argue that they can get coal here cheaper. I do not think they can. The number I have been given is $66 per tonne to get it here, if it can be done, and I doubt that it would be a reliable supply. It would certainly not be anything like the supply we can give them.
I would suggest that the Nova Scotia Power Corporation's directors feel they have to make statements like that because they are in negotiations and that is a part of negotiating.
The key challenge, no matter what else you talk about in this industry, is to reduce your cost per tonne. If you take everything else away that we are saying today, that is the key you must remember. We can do that. The employee proposals are aimed exactly at reducing our cost per tonne.
In January, Mr. Shannon's plan still called for $90 million or $80 million. We do not know the exact number but it was somewhere in that vicinity. There were some other costs in there. The bottom line was that 781 jobs were to be eliminated.
The Boyd plan also required similar funding, $80 million, but the Boyd plan kept both mines operating full time. There would be a three-shift operation with increased production at Prince mine and a three-shift operation at Phalen mine.
In chapter 5, at about page 15 of the Boyd report, there is a statement that nothing about Prince mine or Phalen mine precludes a highly productive, modern, coal-mining operation. That means we can work at it if we are allowed.
The "best option," as it was dubbed by Devco management, is highly debatable. That is why we are here. That is why we put forward this proposal.
You have before you a part of the annual statement for 1985. Mr. Shannon was in the corporation as president at that time. The Cape Breton Development Corporation has always been on the leading edge of mining technology in Canada. This report states at page 3:
The first methane extraction plant in Canada -- a plant which exhausts on surface the methane gas released in mining -- was built during the year at the Lingan Harbour Colliery.
We are suggesting, as Mr. Shannon said last night, that methane gas from the Cumberland gas basins could very well be a competitor for Cape Breton Corporation Development coal. Why can we not use our own methane and get another market for it? A project was put in place in 1982 by a company, which I think was called Nova Scotia Coal Gas Venture, run by a gentleman named Mr. John Hopkinson. That company's proposal was to produce four megawatts of power on a small-power-producers project for Nova Scotia Power Corporation.
Nova Scotia Power Corporation agreed to the project, but because of some controversial decisions made by Devco management, Lingan colliery was flooded and that project was scrapped.
It is my understanding, although I am not absolutely certain of this, that the project was slated to gross $54 million over 20 years. Devco stood to get somewhere in the vicinity of $20 million in revenue, free, from a natural byproduct of mining coal. Use of that byproduct is one of the employee proposals.
Standardization of equipment is very important. Devco has been very slack on this. You cannot buy 15 different kinds of mining equipment and expect to stock parts and train people and have an effective mining operation. I am sure Mr. Shannon would not do that with his trucks.
To give you an example, the Ford Motor Company is suggesting that they can save $11 billion over the next five to ten years by listening to their employees and working smarter. One very simple change that will save them a lot of money is to produce, instead of 15 different cigarette lighters, only one model of cigarette lighter and plug it into all the cars. There is no rocket science here. It is very simple. Anyone can understand it. The bottom line is that the cost per unit is reduced. That is what we are talking about.
Other employee ideas are the energy efficiency audit and purchasing changes. Employee empowerment at Falconbridge is working very well. It is a company of which the Minister of Natural Resources is very well aware.
Expanding the export market is the key to avoiding a Nova Scotia Power monopoly. Once again, I will refer to Mr. Shannon, because we were here last night for a lengthy meeting with him. He stated that the Trenton contract is being used as leverage by Nova Scotia Power for Devco. That contract is somewhere in the vicinity of 700,000 tonnes, and that is leverage.
What happens if Nova Scotia Power becomes a monopoly customer? What kind of leverage will they have then? They could hurt us badly in the next contract, which will be made in four years' time. We suggest that we should keep Nova Scotia Power Corporation very happy, but we should also have another customer so that they know we are not totally dependent on them as a sole customer.
The Prince mine north-south operation is a key to the longevity of that mine. If Devco comes up with another study, we are in trouble at Prince colliery. It is our understanding from engineering information received that, in the Prince colliery, the wall faces must decrease in size as the mine goes deeper. There is a certain extent beyond which they cannot go. The wall faces get too narrow and it becomes ineffective to mine that block of coal. The north-south operation at Prince alleviates this problem.
This project was put forward by Devco management last year as the best option for Prince mine. This year it was verified by Mr. Bob Cooper, vice-president of engineering for Devco. It was verified by Mr. Freddy Howard, the general manager at the Prince mine, as the best option for Prince colliery. It was also verified by the Prince colliery planning engineer who designed the plan; his name is Joe Shay.
We suggest that what they are doing right now at Prince colliery is a dreadful mistake. Also on the chart is the utilization of the Victoria Junction wash plant. We spent tens of millions of dollars on thaat project. It should be utilized to the fullest extent to blend and wash the coal.
The employees believe that this is a viable industry. We feel it can be a competitive industry. We feel certain that the federal government will not come back in five years and give us more money. So we have proposed solutions to Devco to stop some of these job cuts. We suggested an employee solution process to increase revenues by making a few simple changes which are utilized in mining industries worldwide.
These issues are negotiable. We brought them forward to all the other unions and everyone agreed that they could be negotiated in contractual negotiations at the table.
The Cape Breton Development Corporation shuts down in the summer. Scheduled vacations without the shutdown would provide an extra 20 production days. That is a 6.5 per cent increase in output at either colliery. If you added that to the projections made by Devco just prior to January, you would have an increase in revenue.
The average selling price to Nova Scotia Power Corporation and the export markets, as verified by Mr. Cooper and Mr. Fleming of Devco, is $55 to $57 per tonne. Over a five-year period, the simple change of scheduling vacation in the summer saves $51,837,500.
Once again, this was put forward to exhaust another avenue before Devco arbitrarily laid off 715 people. This was not considered and it is not in Devco's proposal for the next five years. The numbers have not been factored in. That was mentioned by Mr. Shannon on January 10.
The next one was also brought up last night; it is called a "hot seat roster." This is one of the reasons why our cost per tonne is slightly higher than in Australian or U.S. mines. In a submarine mine, the more you mine and the faster you mine and the deeper you are, the more time you spend travelling from the surface to the workplace. It is like parking your car an hour from work and walking to work and then leaving an hour early to walk back.
We are suggesting that a hot seat roster would give us a 22-per-cent increase in face time; that is operating time in producing coal. Today, a miner goes to work at 7 in the morning and goes home at three o'clock. When he gets to the surface, another miner leaves the surface and goes underground. The time that the machine is shut down is one hour travelling time from underground to the surface and then approximately one hour from the surface, back to the work area.
As a simple change, the person who is coming to relieve him leaves the surface at one o'clock and travels underground. When the operator of that machine takes the remote control and shuts off the machine, his relief worker picks it up and starts the machine up again. It is called a hot seat change, a nickname based on the fact that the machine is still hot.
That change would increase the numbers at Phalen and Prince collieries to $55 per tonne. If you take the production figures estimated by Cape Breton Development Corporation for both collieries, you are looking at something in the vicinity of a $175-million increase. These numbers have been verified by Devco's people.
We are suggesting that these are negotiable items. I cannot stress that enough. Instead of laying people off and throwing them on the street, let us look at every other avenue before we start laying people off. If we can make profits and be competitive, why should we lay off working Canadians? I do not see any reason for that whatsoever.
Next, we turn to something called economies of scale. Senator Murray asked several questions about this last night. The exact term did not come up, but having more coal produced at the same fixed cost will reduce the cost per tonne.
This graph shows costs per tonne, fixed costs, the general mining building and, as I said, revenue of $57 per tonne. The fixed costs of general mining building cost the corporation somewhere in the vicinity of $1.2 million. For convenience, we started with 1.2 million tonnes of coal.
Tonnes per year and cost per tonne are listed here. If you produce 1.2 million tonnes of coal at $1.2 million in fixed costs, it costs $1 per tonne. That is simple. If you double your production to 2.4 million tonnes, the cost per tonne is reduced by 50 per cent. You could double it again, up to 4.8 million. We do have the capacity. Boyd projected that Phalen colliery could do somewhere in the vicinity of 3 million and Prince could do 1.5. At 4.8 million tonnes, your cost per tonne is 25 cents per tonne. Reducing the cost per tonne allows you to stay effective on the export market.
If you have revenues of $57 per tonne and you produce 1.2 million tonnes, your revenue is about $68 million per year. If you double your tonnage to 2.4 million, your revenue will be $136 million per year. If you double it again, it will go off the graph to approximately $276 million per year in revenues.
This is the side of the graph where we should like to be, namely, where the cost per unit is low and the revenues are high. Your operating expenses, and so on, would be included in here somewhere. You can pay all your bills and, if your cost per unit is low, you will still make a profit. However, if you go in the other direction, then you can find yourself in the red. That is what we are afraid of and it is why we want someone to check into the numbers that the Cape Breton Development Corporation has put forward.
A reduction in the amount of tonnage would result in a very high cost per unit, with operating costs also very high but with very low revenues. That is what occurred with Saskatchewan potash a few years back. For example, someone might say, "We are out of the export market. Our costs are too high to produce this product and our revenues are too low. By gosh, we'd better sell this organization." Then someone comes along with a magic wand. They buy the corporation and then they start to make a profit. Nova Scotia Power Corporation did exactly that. They were not making a profit and then, all of a sudden, they were making $94 million per year. Saskatchewan potash did the same thing. Today, their stocks are worth approximately $80 per share, but before it was privatized they were making nothing.
This industry will make money. Mr. Shannon agreed with that statement. Our solution is that we should be increasing our production and staying on this side of the graph.
This is aiming towards one thing, namely, a contingency plan. That contingency plan must include Donkin. If it does not include Donkin, this industry will not survive.
This is a marginal cost graph based on the numbers from Devco, the accuracy of which could not be confirmed because we could not get the numbers from the corporation.
The next graph is an economic comparison of proposals, and the tonnages here were projected by Devco in January. Approximately 2.29 million tonnes per year was projected by Devco and it was approximately $53.52 per tonne, with revenues of $122.7 million. The Boyd study made a projection of commercial viability at 3.07 million tonnes per year and the fixed cost for the first portion of it -- and, I will get into the marginal cost in a moment -- was the same, namely, $53.52 per tonne. We also included the UMWA projection for convenience. This is an example. The UMWA projected 3.8 million tonnes per year.
If Devco's projections are to pay for all the fixed costs here, producing the same amount of coal here would also pay for the fixed costs to produce the same amount of coal there. The balance represents marginal costs. With the same infrastructure, in this example you produce 777,000 more tonnes of coal. That is indicated on this slide. The marginal cost is reduced, because your fixed costs will be paid. The cost to produce this is $43.37 per tonne. It is the same with the UMWA projection. The amount is going down. This slide indicates the cost and the marginal cost. There is also another marginal cost of $41.14 per tonne for this portion of the production.
This exercise is for demonstration purposes only. It illustrates that, by utilizing the economies of scale, as tonnages increase, cost per unit decreases. For example, if you take a 100-tonne truck from Cape Breton and drive it to Vancouver, there are depreciation costs, gasoline costs, the cost of the driver, and so on. Let us say that you put 50 tonnes of apples in that 100-tonne truck and drove it to Vancouver. That truck cost you $1,000. You then load it up with 100 tonnes of oranges in Vancouver. It does not cost you double. There is a marginal cost there and it is reduced.
Next, I will turn to the employee solution process. Most of the ideas that we come up with are stunning in their simplicity. There is no rocket science involved here. These solutions are proven in the field and savings and production increases are immeasurable.
What are the Devco employees doing? The next graph shows employment service production over the last 10 years. This was not modified; the numbers are exactly the same. This was taken out of the Cape Breton Development Corporation proposal when Mr. Khattar stated that, in order to keep this industry viable, we could not be tied to Nova Scotia Power Corporation alone. In order to be efficient, we must produce as much coal as possible with the infrastructure. Devco's people did those numbers. Basically, we have the same people working there today.
In 1984, we had approximately 4,200 employees. Over the years, we have been dropping to a level where, in 1994, we employed approximately 2,200 people. During that time period, our productivity increased from slightly under 3 million tonnes. In 1992, we went up to a production high of 4.2 million tonnes. That was done with 2,550 people. We feel that that is our optimum level.
The output has increased from the 1986 level of 5.9 tonnes per man shift -- and, that is how we measure our productivity -- to a high of 11.6 tonnes over a 10-year period. The highest tonnage is indicated right here. That is under optimum conditions.
A question was brought up last night about our competitiveness with Australian coal mines or U.S. coal mines. Historically, our people have produced maximum tonnages from every mine in which we have been working. We have broken every world record in submarine mining. We consistently produce 45,000 tonnes every week from either mine. That is our usual production rate, unless we run into some kind of troubles that are unavoidable, such as geology, or water, or whatever the case may be. That 45,000 tonnes puts us in the elite of mining operations. If Mr. Shannon, or anyone else, for that matter, wants to argue that and compare apples to oranges, anyone from the unions sitting at this table is ready to do battle with Mr. Shannon. We are as competitive as anyone in the world.
If you look at the Boyd report, our main constraint is the age and the design of our coal mines. Our mines were designed to maximize production with modern equipment. We are utilizing very small belt lines. Picture a fire hose. You have the capacity of a fire hose. You put a reducer on it and then you put a garden hose on the end of the reducer. You then turn the fire hydrant on full tilt. The output that you get is exactly what the fire hose will permit through the other end.
The equipment that we have on our working faces is comparable to any mine in the world for usability, production rates, or whatever the case may be. We are hindered only by the size of our belt lines. The mines to which we are being compared have 72 inch belt lines. The belt line at Prince colliery is 42 inches. We cannot put the capacity at Prince mine on the belt line. We are just about at that maximum capacity right now. The Phalen mine has a 52 inch belt line.
The Chairman: Can you tell me what percentage of coal mines are submarine mines?
Mr. Drake: A small percentage now. There are a few left in the U.K., but I am not aware of any other submarine mines. Most of the mines are surface operations. Comparing us to the underground operations in the United States is not a fair comparison. It is like comparing apples and oranges. You can get too far into a mine, when you take the travelling time into consideration, as I mentioned earlier. However, if the mine is located in the side of a mountain, for example, and the miners must travel three-quarters of a mile into the mine so that the travelling time is eating into their operating face time, then all they have to do is drive another shaft into the side of the mountain and put in a new elevator to drop the men right at the face of the mine. That is an advantage for underground mining. It is also an advantage for ventilation purposes.
We are as competitive as we can possibly be. We only must get our cost per tonne down. That is what we are talking about here. Part of that involves cooperation between unions and management. We are requesting that.
We must look at a contingency plan. Part of that plan must be the Donkin mine. We have a 25-foot diameter tunnel right at the face, 3.5 kilometres under the ocean.
We spent approximately $88 million in taxpayers' money on Donkin. The coal quality was questioned last night and this morning. I will give you a quick rundown on that.
This slide is not included in the chart. This is called channel sampling. It is what you do in a coal mine when you are underground and you want to test the quality of coal. Someone mentioned last night that we should do more bore holes. That is not a good way to do it. You are not guaranteed that you will get a core hole recovery that will enable you to verify the quality of the coal. It costs $1 million per hole. The service is expensive.
What Mr. Farrell said this morning is correct. We need an exploratory program at Donkin mine. That was mentioned in a report in 1981. We are at the coal face. We should get there and check out the quality of the coal.
As to the quality of the coal at Donkin mine, that is, the sulphur and ash content, the ash content is fairly low, at approximately 5 per cent, but the sulphur content varies according to where you are in the seam. It goes from 0 per cent to 5 per cent to 10 per cent. You are somewhere around 5 per cent in the first 0.5 metres of the seam. This seam is approximately 3.5 metres. We are at 5 per cent sulphur here, and from this point down it goes almost to zero, right to approximately here. It gives us approximately 9 feet of high quality coal, which is very washable. Whatever the sulphur content might be, we can utilize the Victoria Junction wash plant to wash that coal and have a highly marketable product for the Nova Scotia Power Corporation or for the export market.
The numbers which have been thrown around -- 4.5 or 3.8 per cent for sulphur -- have been given for a 12-foot block of coal. We do not want to mine that 12-foot block of coal unless Synfuels starts up. If it starts up, then we will support it, because if Synfuels starts up, we can sell in the vicinity of 400,000 tonnes of coal and take the whole coal seam, and it is my understanding from a meeting with Mr. Gillespie that Synfuels would utilize a high sulphur product. So that coal would be perfect for what they want to do up there. Mr. Gillespie said that the Donkin mine has probably the best coal in the world for the Synfuels product.
However, what we would be doing at Donkin mine would be called selective mining.
I would like to read from a 1974 CBDC report which I found in an old file to the Bras D'Or Institute in Cape Breton. On page 3 of that Cape Breton Development Corporation report, and the corporation has a copy of it, comments are made about the Donkin mine. It is located in the Port Morien district. The report states:
In the Port Morien district, the seam out crops under the ocean and is found with shallow cover in the narrowest incline, which would flatten out seaward. The analysis of the seam in this area is 1.86 per cent sulphur.
That is high quality coal. That is the first report.
Mr. Shannon was questioned about this on a radio talk show and he denied any knowledge of it. However, on the bottom of page 4 of the annual report, it says that, "In addition, the results of the analysis of 2,700 tonnes of coal mined were particularly encouraging."
Approximately 5,500 tonnes of coal were mined in the Donkin mine in a side tunnel off the main tunnels. That coal was sent to four labs. We had quite a lot of difficulty in getting those reports. However, the sampling indicated that by selective mining -- Mr. Shannon was talking about selective mining back in 1985 -- and leaving part of the coal seam as floor and roof and mining 70 per cent of the 3.4 metre seam, the sulphur level could be reduced to about 1 per cent.
I will not argue with all these numbers, because too many people are saying that Donkin mine is good coal. I do not know where it came from that Donkin mine did not have good coal. I will not get into that. Donkin mine, in my opinion, will be a highly profitable industry.
I will leave this report with you; I do not have copies of it.
We have a detailed analysis, which we gave to the Cape Breton Development Corporation and to John Manley one and a half years ago. This is a detailed information proposal. It is just a proposal because we had a lot of difficulty. The United Mine Workers put this together over a period of intensive research for one-and-a-half years, beginning in September 1994.
The first page of the summary, which I will leave here, shows that, if you start out on a small-scale operation at Donkin mine, revenues from coal over the transition period from start-up to full-scale operation in 3.5 years would be about $28 million. That is a conservative estimate.
The total cost, excluding the revenues, would be $63 million to open Donkin mine. This is a very small-scale project, not a mega project or a Cadillac project. This is not 1975; this is 1996, and we know it. Mining operations like this are opening all over the world. I hate to mention Westray in the same breath, but Westray was opened for approximately $100 million dollars and it did not have two $88 million tunnels; we do. It is common sense.
The Cape Breton Development Corporation abandoned a full surface operation at Lingan colliery. We can utilize that equipment. It was fully functional when the mine shut down. We have many pieces of mining equipment standing on Devco sites right now that can be rebuilt inexpensively and utilized. They are doing it in western Canada; we can do it in Cape Breton. We have the best miners in the world there.
If you take the revenues away, the report is basically in agreement with what Mr. Farrell said this morning. For somewhere in the vicinity of $100 million, Donkin mine can be opened for a small-scale project of approximately 1 million tonnes per year. It is all broken down. It is very detailed, but it is only a proposal because we had great difficulty getting information from the corporation.
Senator Stewart: How big, Mr. Drake?
Mr. Drake: Somewhere in the vicinity of $100 million, if you take away the coal revenues.
Senator Buchanan: You mean the development coal revenues.
Mr. Drake: Yes, exactly.
Donkin mine is not a panacea. There is no panacea to help the Cape Breton Development Corporation. It will take a lot of effort by a lot of people. Everyone must be held accountable. That is the key. If there are to be quarterly reports for the Cape Breton Development Corporation, then we recommend that Mr. Steve Farrell look at the financial aspects concerning where they may be either incorrect or going down the wrong road based on a bad suggestion. If the development rates and production rates are behind, we would like to know why; we would like to know what happened, who is responsible, and what will be done about it.
I do not want to see another report. I see them every year from Devco. So far, they have not meant a whole lot, because every year I see another one. We want accountability and cooperation in this industry. We can do that and save some of these jobs. We are ready to do whatever it takes to save this industry. I will tell you something definitively: This industry can work. There is no doubt in my mind about it.
I read in today's Financial Post that coal has been mined at the Cape Breton Development Corporation for 30 years, but in Cape Breton we have been mining coal for 300 years. I disagree 100 per cent with what was said here last night about our having to learn how to mine coal. I disagree also that we need to learn how to manage the corporation. We only need cooperation and accountability from all the parties involved. If we can get to that point, this industry will survive.
One of the key issues is what Mr. McLeod talked about: labour management cooperation. Start listening to the coal miners. They are your experts. We do not need an expert from the United States to tell us how to mine coal. We will use some of their ideas, but we do not need them to tell us how to mine coal in Cape Breton.
The Financial Post wrote about Winston Churchill and his leadership that kept Britain alive against the Nazi hordes in the war. He was a brilliant orator. After the war was over, Winston Churchill was unceremoniously dumped from office by a weary public that wanted proper health care and education reform. The outside world was shocked at the verdict of the British electorate, but Mr. Churchill said only one thing: Trust the people.
The Chairman: Thank you. Before we leave Donkin, we had testimony from several people that the quality and the productivity at Phalen should be attacked before Donkin is brought on stream. How do you feel about that? The point being made, as I understood it, was that the experiment should be made at Phalen before going on to Donkin with regard to the application of new technology.
Mr. Drake: I disagree. Mr. Shannon's proposal puts all of our mining eggs in Phalen's basket. Any miner who works at Phalen colliery will tell you that Phalen colliery right now has an operating basis that goes from week to week. We have had too many problems with geotechnical concerns. We have three flooded mines above Phalen colliery. We have rock outbursts at Phalen colliery. We have more problems at Phalen colliery than you can shake a stick at. Our people are willing to work at it. However, if you put all your mining eggs in Phelan's basket and something happens next week or next month or next year, we will be in major trouble in this industry. We will not be able to supply our main customer, Nova Scotia Power, or the export markets.
Donkin mine must be part of a contingency. Donkin mine has approximately a 3 to 3.5 year transition period to phase it into a 1-million tonne per year operation, or whatever the case may be. If anyone waits until Phalen or Prince mine has a problem, then the coal mining industry will have a problem.
Will there be an industry in the future? Will there be an industry after 20 years? If we are three and a half years out of the industry in selling coal to our customers, how do we get back into it? Donkin mine should be started now, and that is also recommended in several reports, including one by Kilborn years ago. Mr. Kent mentioned this morning that Donkin mine should be a priority.
There was a 1995 study by Public Works Canada just on the Donkin project; it is Public Works Canada File Number 02SQ.23440-4-1213, and is an assessment of horizon control technology for selective mining in underground coal mines. It says on page 118 that there has been an experience of leaving both roof and floor coal at Prince and Phalen collieries. We have done it. These were only partly successful, as the cutting horizon was manually selected by the machine operator. That means the man on the machine said, "We have to leave two inches of bad roof coal. We are going to leave it there." They did it by eye, but we have new technologies almost available today. It also said in the report that 48 mines in the USA out of 324 surveyed successfully left roof coal, while 31 were leaving floor coal. It is reasonable to conclude that roof and floor coal can be successfully left in place in Donkin colliery.
Mr. Gillis, representing the Canadian Auto Workers, will be addressing that in detail. That study was by Associated Mining Consultants for Public Works Canada, and the date was April 14, 1995.
If they leave Donkin out of the picture totally and do all these things in Phalen mine or Prince mine, then we will have to depend on the universe unfolding as it should for the next three or four years. However, we cannot depend on that any longer in this industry. We need a contingency plan, and part of that contingency plan has to be the Donkin mine.
The Chairman: I thank you for a very full and clear presentation. We certainly learned a lot.
I welcome Mr. Michael Baker, who is the president of the Canadian Union of Public Employees. I will ask him to introduce the other people who came with him and then proceed with his presentation.
I would just remind the committee that we are hearing Mr. Gillespie at six o'clock. It is now close to five o'clock. We do not have the answers, but we now at least have some questions. I suggest that if we can have relatively brief presentations, we can use our time usefully in questions. On this committee, you have people who at least know what questions to ask.
Senator MacEachen: To pick up on your point about time, we had a very good presentation. It was thorough and lasted almost an hour and a half. It is important that we have some questions. Can we reach some sort of negotiated agreement on how long the presentations will take and how much time we will have before six o'clock?
The Chairman: I would ask the other unions to confine their remarks to between five and ten minutes each. Is that reasonable? It seems to me that if we do not do that, we might as well throw in the towel and not ask any questions at all. I think that is reasonable under the circumstances. We need to get clear in our minds what the problems are and what some possible solutions are. You must give us time to probe.
Mr. Kevin MacNeil, National Representative, Canadian Union of Public Employees: Mr. Chairman, I am the national representative for CUPE, which represents the Local 2046, which is the supervisors, nurses, security people, and the railroad dispatchers. Brother Baker is the president of the local. I will be doing the presentation. With Brother Baker is Brother Brian Kanne, who is the secretary of the local, and Sister Bonnie Ferguson, from the research department at CUPE national, put together one of the documents from which Steve quoted. The four unions did try to coordinate their effort in this. The gentleman is Mr. Fraser Morrison, who is the secretary of CUPE Local 2046 and also the provincial president of CUPE in Nova Scotia.
I will attempt to be very brief. What Mr. Drake from the UMWA has said to you is correct. We have all, the CAW and the IAM as well, worked together to attempt to look at the situation around that industry to see what we could attempt to do to be helpful.
I would have to concur with him, first, that there is a labour relations problem. I would have to in defence say that one party does not create a labour relations problem. Even I cannot do that. However, there is some difficulty there. I will tell you that, while I am not a miner, the rest of these people with the exception of Bonnie are, and they have many years in the mining industry.
The labour relations climate around the Cape Breton Development Corporation has not been extremely positive in the last number of years, despite our attempts. Because of many different pressures and difficulties within the mines and whatnot, it has not been easy for anyone.
Nonetheless, we keep changing senior management, and they keep importing a new idea, and someone else has a new labour relations technique, and they do not seem to be able to deal with the fact that it is an old industry. They have been relating the employees and employers for a long time. They have traditions and customs of their own. They come in from one side and say, "We are going to try this whole new scheme." As Stephen has said, they have tried it, and it is in their current proposal.
I am sorry, but we must be part of the decision. It is a collective bargaining process, a mutual cooperation process, which means that one side does not decide unilaterally how it will be done. These things are attempted, they are started, and invariably, up until now, they have failed. That is not all our fault, but we are not without our share of the fault in it either. I will be honest about that.
As they say, and as Mr. Drake has said, we must concentrate hard on improving relations if we are to move this industry forward. However, we are not convinced that the real intent here is to in fact move the industry forward. I do not mean that in regard to this committee hearing. We appreciate this hearing very much, because we have attempted to try to talk to the Government of Canada, if you will, through Devco, and we have been not received well; I guess that is the charitable way of putting it.
We were told in January what the plan was. There was a lot of noise about it publicly. In March, we were told, "Well, we want some consultation. Come in and see us. We will tell you what we are looking at doing. You have one week to respond to what we are doing. No, we cannot provide you with the information you need in order to do a rational response."
CUPE was assigned to attempt to look at the pension liability problem, which we understood from Devco was one of the major problems. We are still trying to get from the governmental authority here in Ottawa the information to which the plant members are supposed to be entitled. We understand that in three or four weeks we may have it. We do not have it yet. We have what bits and pieces we could get. I will say for the people at Devco in Cape Breton, at the general mining building in Glace Bay, that if there was anything they could find in there that we asked to have, if they had it, they provided it, but they could not provide us much of the historical material we needed.
One of the difficulties here is that Mr. Shannon kept referring to the mandate that had been given to him and the corporation. I think it is a changed mandate. I know it is a changed mandate, because I have been in Cape Breton all of my life. I had a one-year sentence I had to serve in Ontario. Other than that, I was fortunate and got to go back home. However, the idea at the time of the setting up of the Cape Breton Development Corporation was that the private sector had taken everything they could out of it and were leaving. They were leaving us flat and in the lurch.
The Government of Canada at that time said that is an economic and a social disaster, so they stepped in. We had what was initially a corporation to downsize and get out of the coal industry in an orderly fashion, as I think you are all aware. Then, some other things happened, one of them being the oil crisis to some degree. The Government of Nova Scotia at that point, to their credit, took the opportunity and said, "Look, we can either continue to ship money out of Canada and out of Nova Scotia to buy a power resource, or we can look at the publicly owned resource that we already have and use it for our benefit." That is what we have been trying to do up until now.
It is ironic because we have a little side research project going on this. We now discover that the motto of the Cape Breton Development Corporation as of this year is to be a profitable corporation in economic, clearly financial bookkeeping terms. That was never, to my knowledge, the intent. It was a goal, absolutely, but the intent was to use the resource in the community and in Nova Scotia and in this nation to the best interests of the people of the nation. The intent was to try to keep people working, keep them functioning, keep them reasonably in the area as working Canadians at the best economic cost of doing so, which is, in my view, profitable. That is my view. That is certainly not an economist's view, and it sure is not the view of the bookkeepers who are running the thing now, where nothing but the black, bottom line matters. Well, their black bottom line does not do a damned thing either for this nation or for the community in Cape Breton or in Nova Scotia.
They are saying that we have turned the thing around. Five years ago, the Government of Canada said to Devco, "You must become a self-sustaining and stand-on-your-own operation." Well, we were getting close. It was not that terrible a thing. However, there was one thing they did not do, which was give us what we were talking about back in the free trade days about the level playing field.
Since the inception of that corporation, from everything we have been able to find thus far from our research, and we are still working on it, there is a pension fund liability. Mr. Dingwall mentions the total liability of the corporation if we shut it down and the environment and all rest. I am not talking about that. That is there, and it will be there no matter what happens. There is a pension liability, and Mr. Drake referred to it. Over a five-year period, three of them still to come, this being the next fiscal year, we have had to pay about $120 million into the pension fund to cover the unfunded liability that has been building there since prior to 1970. We know that for sure. Over all of those years, and this is no discredit to anyone, it was allowed to continue because of the government ownership of the corporation, I suspect, because the pension authorities in this country are very responsible people.
One of the reasons that Joe Shannon indicates he believes it happened, and I think I agree with him, is that one of the presidents or chairmen of the board or whatever decided to downsize the corporation when he did not have the funding to do it, so he did it in the non-contributory pension plan, the compassionate pension provisions.
I have people out there today, two in particular, who have been fighting for eight months to get a compassionate disability pension, and they cannot get it because they are now guarding it so closely. While it is an entitlement of the plan, they are afraid to pay them. However, what they did was they used that plan, or mis-used it, really.
Then, the man who would be the Superintendent of Pensions at the provincial level -- and you know who I mean -- thought, "I had better have a hard look at this." He had a hard look at it and said, "Hey, this is getting serious. The government has now told you to get on your own two feet. You have a $120 million unfunded liability in that pension plan. You have five years to put it back."
The Chairman: I hesitate to intervene, but I must if we are to get through this. I thank you very much for your presentation.
I welcome Lynn Pollock and Bob Gillis.
Senator Murray: Mr. Chairman, there is quite a thorough outline of what Mr. MacNeil is talking about in this presentation. I have not read it through, but I can see that it is quite thorough.
Mr. MacNeil: The bottom line of my presentation, number one, is that we have looked at the plan proposed by the corporation. I can tell you it does not work and it will not work. Within two years, they will be in a mess again because they are not looking after it properly. They have to put $80 million in the pension fund in the next three years. That is where the major part of their problem comes from. The government solution has been, "We will lend you $80 million for five years." I mean, that is like throwing a rock to a drowning man. You have to resolve the thing.
The other point I wanted to make is that the Government of Canada or Nova Scotia, for a $10 million cost, which was the deficit of Devco in the last two years despite paying the pension liability, have created 2,200 direct good jobs, paid something around $22 million back in taxes, and supported another 4,000 people in Nova Scotia. That is what you got for the $10 million, and that is profitable for a government. It is not profitable for a corporation, but it is profitable for a government in a society.
The Chairman: Honourable senators, we will now hear representatives of the Canadian Auto Workers. I welcome Bob Gillis and Lynn Pollock.
Mr. Bob Gillis, Vice-President, Local 4504, Sydney, Canadian Auto Workers: Mr. Chairman, I represent the Canadian Auto Workers, Local 4504. I am a draggerman, mine examiner and surveyor. I am not a public speaker, so please bear with me. My presentation to the Senate committee is on select mining for the Cape Breton Development Corporation.
To start off with a little history, on March 26, 1996, the past president of the Cape Breton Development Corporation introduced his corporate plans to the union leaders and media. Mr. Shannon's mandate was for a profitable organization only; ourselves and everyone else in the community is for profit, as well as the social impact and how it affects our community.
According to the CEO's numbers, we are into a $9.4 million loss and we should have been profitable, but we all knew the reason for this. We ran into some geological problems on the 7 East wall at Phalen colliery that nearly crippled our industry, but we are back on track or will be back on track in a couple of weeks.
Mr. Shannon's plan was to work the Prince colliery four months a year and dump 780 men on the streets. The union, the employees, community and clergy opposed the downsizing plan and, as a result, the government stepped in.
On May 7, 1996, the Government of Canada approved the Cape Breton Development Corporation's five-year corporate plan. A concentrated effort was put forth by employees, unions and community and that has resulted in a plan which will lead the Cape Breton Development Corporation to commercial viability.
Let me give you some of the ideas that were introduced. First, multiple entry at Phalen colliery; second, quality management; third, standardizing of equipment; fourth, quarterly progress reports; fifth, no annual extended shutdown at Prince colliery; and sixth, a $300,000 study on proposed select mining at Prince colliery, which was proposed by the Canadian Auto Workers Union.
The way I see it, select mining is an alternative plan to keep our two mines working. In his proposal, our past president wanted to use Phalen coal for Nova Scotia Power usage only and dump the overseas market. We know that the Devco contract is up with Nova Scotia Power Corporation in the year 2000, and we would be in a checkmate position with this organization. They could dictate the price they would pay for our coal, if they wanted our coal, and there probably would not be a coal industry at all.
With select mining, we could keep Phalen colliery coal for our oversees market and keep Prince coal for Nova Scotia Power usage.
I chose select mining for two reasons. First, Prince colliery coal contains the most sulphur content, which makes it hard to sell. Select mining would remedy the situation. Second, Devco and Nova Scotia Power have a contract with our government to improve the quality of sulphur "voluntarily." By burning coal with less sulphur, we would further reduce emissions in our atmosphere. Select mining would remedy these two problems.
The first thing I looked at was to identify where the problem coal was with the most sulphur content. We did this by a means we call "channel sampling." We found that the most sulphur in the coal is in the bottom six inches to one foot of the seam. At some points it goes up to 18 inches. We now have to make a decision whether it is feasible to leave the bottom six to 12 inches of bench coal or take it. I believe that if we engineered this process, we would make a viable industry.
The technology is there for horizon control systems, which are currently being practised in underground coal mines. These systems are based on the measurements of natural gamma ray emissions from coal roof and floor strata.
There are three ways of achieving this. The first is by developing the identified technology so that data from sensors is presented to the machine operator to enable him to effectively and manually adjust the cutting horizon to the desired level. You may recall that the UMW mentioned that, when they were doing select mining, the machine operator was actually doing it by eye. This version, however, means that the machine operator can get a governor on the height and depth of the shear drums and periodically and manually make the adjustments himself. The governor would leave six inches or one foot or possibly 18 inches.
The second way to achieve this is, in the longer term, by incorporating the sensor signals into the machine control system. Incorporating the sensor control would pick up the gamma radiation. The software is available for this study.
The third way is simply to follow a process of leaving six inches to one foot of bench coal, not by using any new technology, but by using the machinery and men we already have. For example, we need 2.8 per cent sulphur content in coal to meet the required specifications for Lingan and Point Tupper and for saleable Prince coal. If we sell the coal as is, we end up with 3.4 per cent sulphur, which is not saleable. If we leave six inches of bench coal, then we have 3.1 per cent sulphur. This would require a slight blend. If we left one foot of bench coal, then our sulphur content would be 2.82 to 2.9 per cent, which would meet the specification or be very close to it.
The process to do this is very simple. With a seven-foot seam at Prince, you would take 6 feet or 6.5 feet of the seam with the shearer. For those who do not know what a shearer is, it is the cutting machine that goes up and down the wall. At Prince, I believe they have a 450-foot wall, but the 15 West wall is coming up to 650. You run it up the wall. You take that coal, run it through the belt-line system and take the coal out of the mine. Then you would fleet your shearer down the wall. By fleeting it down the wall, you take your six inches or one foot of coal and divert it to your bunker underground and then go through the process of pulling your painline and jacks over and starting the process all over again.
There is a bunker at Prince that holds 500 tonnes. It is used for other purposes now, but when we go on a two-shift operation, we can put the high-sulphur coal in there and empty it at the end of the shift or even twice a week. When your bunker is full underground, then you can send this coal with the 10 per cent sulphur to the surface and separate it from the saleable coal. We did some calculations, and it is probably around 8.3 per cent.
This process would keep the Prince mine going to supply our power stations 12 months a year and save Phalen coal for our export market and also utilize our coal piers. I believe this is a viable way of selling our Prince coal and also improving the quality of sulphur voluntarily for Devco and, in turn, benefiting Nova Scotia Power.
In conclusion, I believe that we instilled our government's mandate of job creation by keeping Devco going, as well as studying the process of selective mining and helping maintain Nova Scotia Power and Devco contracts with our goal to voluntarily improve sulphur emissions.
I am also proposing to the Senate committee that it suggest to Nova Scotia Power that Nova Scotia Power at least match the $300,000 Devco proposed to further reduce this process and further reduce the sulphur emissions into our atmosphere.
Senator Buchanan: Mr. Drake, I want to congratulate the UMW on its presentation. I thought it was excellent.
I agree most certainly that the long-term future of coal mining in Cape Breton will stand or fall on whether a new mine is opened. That was the same situation back in the late seventies. New mines had to be opened for mining in Cape Breton. The same thing applies now.
We have heard many comments about the Donkin mine. There is no question that the coal in the proposed Donkin mine is excellent coal, with an average of slightly more than 3 per cent sulphur. However, if you go into the eight-foot seam in the centre, you are down to about 1 per cent sulphur coal, which is excellent coal. There is no question about that.
However, we have to ascertain the cost. I have read that the cost can be as high as $400 million or $500 million, which is absolute nonsense, from everything I have read. I was involved at the beginning of 1979 when the Donkin cores were started. The province spent $500 million to start the process of the cores. We hear these figures, and then we hear Steve Farrell this morning say that the cost to produce 1 million tonnes of this excellent coal in the centre would be about $120 million to $125 million. Mr. Drake mentioned the same thing this afternoon. If you deduct the development coal, which you would sell, you are down to roughly $100 million dollars.
We must keep in mind that approximately $100 million has already been spent at the Donkin mine in site clearance, slough tunnels and everything. I think it is very important that this committee not just slough over the Donkin mine. We must find out the cost of developing that mine to produce 100 million tonnes of coal.
Donkin coal is the best coal for liquefaction. The roof and floor levels would be excellent. I know that for a fact.
I was in Trenton, New Jersey, back around 1984-85 with HRI Technologies, a subsidiary of NOVA from that great province of Alberta. They analyzed coals all over North America and concluded that the best coal for liquefaction was Donkin coal. They had it there; they analyzed it. What would be the high sulphur end of the Donkin coal where they would liquify it, produce oil, take the sulphur out and sell the sulphur? My point is that the Donkin mine has many pluses going for it. Taking into account everything I have heard from everyone I have spoken to since we started in 1979, it seems to me that the Donkin mine would be nothing but a winner for the coal industry.
We will get to coal liquefaction later on, because that is another project that I have been living, sleeping and dreaming about since Senator MacEachen, Alastair Gillespie and I signed the original document 16 years ago.
Mr. MacNeil, there is no question that when we started to move Nova Scotia Power from oil to coal because oil prices were sky-rocketing, we had the coal that could be utilized at that time by NSP. We have moved from a position where we have power plants utilizing oil for the most part, except for Seaboard. We started and completed in the late seventies when we were in office, right through to the eighties, Lingan 1, 2, 3 and 4 and Point Tupper and Point Aconi. We have moved away from oil to a point where we are now using 70 per cent Cape Breton coal for generating electricity.
When you consider these two corporations, Devco and Nova Scotia Power, one producing the coal and the other utilizing the coal, look at the benefits for the economy of Nova Scotia from these two companies employing all of the people they do and utilizing our own indigenous fuel. I cannot for the life of me understand why people are saying we should move out of coal. It is incredible to even consider bringing coal in from places like Colombia, where the government is so unstable. We have great, stable governments in Canada and Nova Scotia. You do not find instability in Canada, but you do in Colombia.
I challenged the government of New Brunswick for bringing coal in from Colombia because they could got it a little cheaper when they could have bought coal from Cape Breton.
I agree with Steve Drake when he talks about the cost of building facilities to bring coal in from the United States or Colombia for Nova Scotia Power. We are talking about rights of way, storage facilities, piers and everything else. Nova Scotia Power will not do it. They can threaten it, but they will not do it.
Senator MacEachen: I was interested in what Mr. MacNeil had to say about the purpose or the orientation of Devco.
Senator MacDonald: "Mandate" was the word that Mr. MacNeil used.
Senator MacEachen: I was interested in what Mr. MacNeil had to say with respect to the purpose of Devco in its original thrust. He is right that that was the original thrust.
I went back to the original statement that the Prime Minister, Mr. Pearson, made when he announced the coal policy that led to the action by Parliament to establish the Cape Breton Development Corporation. He said, and I paraphrase, that the Government of Canada regarded the situation in Cape Breton as basically a social problem. He referred at the time to the hardship that would be experienced by communities, families and individuals if this problem were not handled in a social context or in a social way.
However, that was the sixties. Now we have the nineties. You and I may hold that view today, Mr. MacNeil, but we are clearly outnumbered.
Mr. MacNeil: We are indeed.
Senator MacEachen: The mood has changed and that attitude is not as easily sold. People do not accept it the way they did in the past. I acknowledge that and I think that we all have to work within that situation and try to do our best. We try to do our best -- as Mr. White said yesterday and I thought very wisely -- to survive as best we can, because there is nothing more certain than that moods change. Moods will change and circumstances will change. Moods in a country change.
The country today is facing fiscal difficulties. There is a definite common belief, it seems, in every province and in the Government of Canada that one of the big priorities is to put our fiscal deficits to bed or to look after them. That is what we have to face. That is why I think the government of which Senator Murray was a distinguished member gave a mandate to the corporation in 1991, or thereabouts, to bring about a state of economic viability. That mandate, as I understand it, was continued by this government. Today, the Cape Breton Regional Municipality said, "Yes, we accept the necessity of viability in these operations." In other words, we cannot look forever or into the indefinite future and say that the Government of Canada will produce a subsidy or a contribution.
I have listened carefully to Mr. Drake and to all the witnesses. I am trying in all the evidence to pick out the constructive elements upon which we can build. Certainly Mr. Drake provided a number of those. He came back again and again to cost consciousness and competitiveness. His conviction is that the coal industry can achieve a cost situation that will make production competitive anywhere. I think that is also a changed attitude.
At one time, the coal spokesmen did not put cost consciousness as a top priority, as Mr. Drake put it today. That is my recollection, but you do not have to accept that.
I grew up in a coal mining town. I heard coal miners talking all the time. When I listened to my father with his friends, they talked about coal mining. One thing was certain. Each of these miners was convinced that he was a better manager than any of the managers in place at that time.
That conviction is shared by every miner today. They know so much about mining that they think they could do a very good job managing. When Mr. Drake talks about the wisdom of miners, he is hitting on a very solid theme. You have to listen to them.
We have cost consciousness and cooperation nailed to the masthead. The president of the United Mine Workers was telling us that labour-management cooperation is essential in pulling off the success of the coal industry. Finally, he talked about accountability. I liked what he said.
So now we have these plans. Are we just going to let them slide off the table and not come back in six months or a year and look at how the performance has been? How will it be done? I think the committee ought to give some thought to how this process, which is so important to the future of the industry, is monitored, and by whom. Who will blow the whistle in a year and say whether the plan was lived up to? Someone has to do that.
We are talking to one another, but in a certain way we must talk to the people who are concerned about this problem. What about the future? We have two mines. However, in order to create an atmosphere that will lead to activity, confidence and effort, you must look into the future. That is what Mr. Drake is trying to do with respect to Donkin. I think that is necessary and important.
I said this morning that Donkin is a huge investment. In today's world, $120 million, the figure repeated by Senator Buchanan, is one that is not easily extracted from the Government of Canada.
Senator MacDonald: It is not necessarily even accurate.
Senator MacEachen: Well, the figure was mentioned. I agree that we must check it out. However, what are the circumstances? I think the committee ought to examine this question. What must happen in the next short period in order to put Donkin on the table and permit the shareholder to look with some interest at a major investment in the future in the Cape Breton coal industry?
Mr. Michael Baker, President, Local 2046, Canadian Union of Public Employees: Senators, I have been working with Dosco and Devco for 42 years. I have seen more politicians in the last year and a half than I ever want to talk to or see again. Politicians like to say, "It's a tough world out there." Sure it is tough out there, but they must realize that it is damned tough where we are too. We are losing a lot of good people. A lot of families have been broken up; a lot of families are leaving. It is tough out there, but it is a lot tougher for us.
Mr. Drake: In answer to the question as to what would have to happen in the next short period for a shareholder to seriously consider investing in the Cape Breton Development Corporation, approximately five years ago when Devco set forward on a mandate of self-sufficiency, the key was, as it is today, accountability. If we can achieve accountability in this industry, I firmly believe that this industry can be profitable.
We cannot, as was done in the past, continue to make decisions that cost huge amounts of money and add to our capital costs or decrease our revenues. If we can achieve equal accountability for everyone, I think we can have a profitable mining industry. If we have a profitable, competitive mining industry, I do not see any reason why the federal government would not seriously consider the Donkin operation. The markets are there and are expanding. We have the product. We have resources of 1.5 billion to 2 billion tonnes of coal. We need to be able to prove that we can be competitive. Accountability is the key to that.
As Senator MacEachen so eloquently put it, someone has to monitor that process. If the corporation is monitoring that itself, in two or three years we will be in the same position we were in last year, the year before and the year before that. It must be monitored by an outside agency. I urge the committee to look into getting someone to monitor this corporation carefully over the next three or four years, and to focus on it as if it was under a microscope. I believe we can achieve that position.
Senator MacEachen: I take note of Mr. Drake's comment that a prerequisite for all of this to happen is to achieve competitiveness and profitability within the next several years. I agree that, if that can happen, the mood might be better.
However, with regard to accountability, to whom must the various stakeholders be accountable and how do they render their accounts? What is the system that you foresee by which that accountability would be exercised?
Mr. Drake: I do not have a definitive answer to that. However, you have to be accountable to yourself first. You have to put in a good day's work for a good day's pay. That includes the miner on the coal face, the vice-president of finance and the president of the corporation. Accountability to yourself comes first. Accountability to the taxpayers of Canada comes next.
When a member of management makes a decision and that decision does not work and is costly to the corporation, that should be considered a mistake. If that person continues to make mistakes, that person should be reprimanded. Maybe he is not suitable for the job. I am not saying that anyone should be fired, but perhaps that person should be put in another position.
However, there have historically been mistakes in this industry which have cost the corporation and the taxpayers huge amounts of money with no consequences. If a coal miner makes a mistake, this collective agreement deals with that mistake. For the first mistake the consequence is a reprimand. There is a procedure in place for second and subsequent mistakes. This is an agreement which we signed.
I believe that similar accountability should be in place for members of management. When they make serious mistakes, rather than being promoted they should be demoted, or at least severely reprimanded.
In November of last year, 7 East had a major roof fall. Miners informed the Cape Breton Development Corporation management team that we should mine that section over the weekend to try to alleviate the problems we were going to have. The miners knew what was going to happen, but no one listened to them. We have asked for an investigation, but there has been none. No one was held accountable. If you keep up with the same process and procedure, this industry will not survive. I do not have a definitive answer for that, but I certainly believe that accountability to yourself and the taxpayer is the key.
Who holds management accountable? The employees of the corporation certainly do not. I would suggest that the politicians should maybe take a closer look at holding management accountable for the numbers and projections we saw here. I disagree with what Mr. Shannon said, that politics should be out of this corporation altogether. Who will hold Devco management accountable if the politicians are out of this totally? No one. They will have a free rein and we will be in trouble.
Senator Murray: Mr. Chairman, I do not want to dampen the enthusiasm of Senator Buchanan and Senator MacEachen and the witnesses who have been talking about Donkin, and I understand why Donkin is an attraction to them, because it seems to offer more hope for the longer-term future. However, the shareholder, the Government of Canada, has just spent, I think, half a million dollars on the John T. Boyd study. I have an executive summary here. You have all seen it, but let me put a couple of sentences on the record. First of all, they talk about Phalen and Prince in terms that are not completely encouraging. They say:
The major geologic concern at Phalen is the potential for "gas-rock" outbursts similar to the September 1994 occurrence. Controlling this phenomenon is crucial to continuing the life of the colliery.
Then they say about Prince:
At Prince, the major geologic concern within current mine workings and the North Block is an erosional channel that crosses the active workings. Accurate projection of the location of erosional activity is not possible. We conclude that it is possible for the channel to be encountered in the future, which would have a severe negative impact on the performance of the mine.
Those are statements about the two mines that you have going now. I believe they should give a person pause. Then they say:
There is little likelihood that Donkin could be developed as an operating colliery under any commercial standards at current coal realization levels due to these factors: massive capital expenditures, long lead times, suspect reserve data, inferior coal quality, etc. Furthermore, it is our opinion that the better quality middle section of the Harbour Seam could not be selectively mined due to the limited thickness of the total seam and the absence of prominent marker bands. At this time, speculation on the development of a new colliery is a distraction to resolving the substantial, immediate problem of making Devco commercially viable.
You put yourself in the position of cabinet ministers and senior bureaucrats around here who are considering the future of Devco, and that is the most recent and most definitive word they have from anybody on the possibility of a Donkin mine.
Mr. Drake: First of all, you have to understand that in the John T. Boyd study, if you look at the whole study, they said on several occasions that the information given to John T. Boyd by the corporation was not adequate, to be polite, and not comparable to other mining industries. Devco's data were insufficient, to say the least.
I read that exact statement that you just repeated, Senator Murray. If you look at it, it says "under current coal realization levels."
Senator Murray: Yes.
Mr. Drake: As to the problems we have at Phalen and Prince mine, if we had those at Donkin, we would be in the same position that we are in right now. There is no doubt about that. Boyd was very selective with the words he put in there. We are not projecting current coal realization levels at the Donkin mine the same as we are projecting at Prince and Phalen. At the Donkin operation, there are three minable coal seams. There are estimates from Montreal Engineering, Kilborn Engineering, and Associated Mining Consultants Limited, which tell us that you could probably go somewhere around 4 million tonnes, if Donkin was designed properly for multiple seam mining. That is not the current coal realization levels we have. The John T. Boyd study was a $500,000 study which touched very superficially on the Donkin coal block.
The Public Works Canada study that I mentioned earlier says that it is reasonable to conclude that roof and floor coal can be successfully left in place at Donkin colliery. If you are going to do anything at Donkin with a realistic chance of the technology being usable by 1998, you should immediately start on that project to get the technology in place.
Senator Murray: In terms of the investment that Senator MacEachen --
Mr. Drake: If I may, sir, on your whole statement, also regarding the inferior coal, I went through a 15-minute presentation just on Donkin. Depending on who is speaking to you, they will tell you that Donkin is good coal, Donkin is bad coal. From the information we have, the centre portion of Donkin coal is as sweet as any coal we have mined in Cape Breton for the last 300 years, and most of it is on the harbour seam. The harbour seam is the seam of coal in the Sydney coal fields that we have mined most extensively. If you look back historically, we have sold every single pound. Boyd touched very superficially on Donkin.
Let me make one other point. Do you say we cannot mine selectively? We have done it at Prince colliery and Phalen colliery. This report by Associated Mining Consultants Limited of April 14, 1995, for Public Works Canada, says that it is being done in 48 mines in the U.S. Also, horizon control is currently being practised in underground coal mines in the United Kingdom, U.S., Australia, Germany, Poland and Russia.
What I am saying is that what Boyd said on the Donkin project does not hold water, and it would not hold up if you had five engineers in the same room dealing with the Boyd statements on Donkin.
As for the capital investment, if you look at the project that we put forward on Donkin mine, it shows that in the first year the approximate number is $9 million. That is over a period of 3 and a half years; $9 million dollars the first year. I am not sure of the second year. I gave the report to the clerk. You are looking at somewhere in the vicinity of a $100 million investment. Now, that $100 million investment or $120 million investment, whatever it comes to, is quite accurate, senator. You have $28 million to $30 million of coal revenues over that period before Donkin is at a full-scale operation, before you are actually producing coal. That is development coal for developing the sections in the Donkin mine.
Also, if you look at the surface operation at Lingan colliery, there are tens of millions of dollars to be saved on the project by utilizing reusable equipment that Devco already owns. We verified that with a former vice-president of engineering with the Cape Breton Development Corporation, Mr. Bob Cooper. He verified that there are many pieces of equipment that we could utilize at Donkin. We do not need a Cadillac operation. The days of Cadillac operations are long gone. We are suggesting that Donkin should be part of a contingency plan.
There were things in the Boyd study that were excellent, but I think the $500,000 could have been better spent in the Cape Breton Development Corporation.
Senator Murray: You do not disagree, do you, with the statement that has been made around the table that, whether the investment we are talking about is $100 million or something more, there is not much chance of its happening unless the plan we have before us, or some other plan that targets commercial viability, is achieved?
Mr. Drake: As I said earlier today, if the universe unfolds as it should, and this plan that was put forward by Devco works, they are showing huge profits in the next three to five years. I do not understand why they could not utilize some of that money to fund a partial Donkin operation. I do not think what we are looking for here is a handout from the federal government. I think this industry can be self-sufficient. I have said that for the past 18 years. I have been working in the industry for the past 18 years as an underground coal miner. A lot of mistakes were made. I do not think we have to make them in the future. I think this operation can be self-sufficient and we are willing to work at that.
Senator Murray: How old were you when you started?
Mr. Drake: Just about 22.
Senator Murray: You have not mentioned, and none of the union leaders have mentioned, at least in my presence -- I was absent for a few minutes, I regret -- the problem of absenteeism and the accident rate. The Boyd report states that the historical range of absenteeism at Devco's collieries, including vacations and holidays, is between 24 per cent and 29 per cent, which is well above the U.S. range of 14 per cent to 16 per cent.
The report notes that Devco's absenteeism data include approved absences due to company business and long-term sickness of more than 90 days, but notes that the number of absences in these categories represents a small fraction of total absenteeism. At the same time, they say that the frequency of accidents at Devco is more than four times higher than the U.S. average. The severity of these accidents, that is, days of work lost, is at least five times higher than that in the U.S. You have not commented on that.
Mr. Drake: No one asked me a question about it. I will comment on it now. I was waiting for you to ask that question, Senator Murray, because you asked it last night and I do not think you received a satisfactory answer to it. I will deal with absenteeism last.
Most of the people in this industry work under very severe conditions. Some of the accidents are horrific, ending sometimes in fatalities or mutilation. Those are some of the people who receive workers' compensation benefits and pensions from the Cape Breton Development Corporation. However, we have people in this industry who have spent 30 years working underground; their lungs have no air in them. Yet they are classed as absentees by the Cape Breton Development Corporation and put into the same melting pot as a brother who might miss Friday night. There is no attempt to calculate the absences of these people in a different category.
We are saying that with workers' compensation and absenteeism the criteria in the United States may be very different from the criteria of the Cape Breton Development Corporation. Boyd would be basing his figures on those criteria. You cannot compare apples and oranges, as I said earlier.
On several occasions we have asked Devco to give us a detailed analysis of the criteria they use for absenteeism. We have never got it. We are suggesting that the Cape Breton Development Corporation uses certain things to qualify this 18 per cent, 20 per cent or 21 per cent number. Their criteria are questionable. I have in my office, and I can fax it here, a computer print-out which deals with a friend of mine. I blanked out his name and his cheque number so that no one will know who he is. He missed 32 days in a one-year-and-one-half period. Devco's legend was on the side of the chart. It shows that he missed 15 days. On his record, those 15 days are represented by a "V," which stands for vacation. A vacation day is a scheduled, contractual item.
With regard to training, if I work underground and go on a training program on the same site on the surface, I am said to be "absent from my place of work," for the purpose of calculating where I am, I suppose. The person to whom I referred a moment ago also had beside his name the code for training. All told, I think he was marked as an absentee for 21 days.
I do not know how Devco actually calculates that. I am not saying that what they do is wrong. I am just saying the numbers are questionable. If we could get the exact numbers, that would be fine.
This union has never condoned unnecessary or unsubstantiated absenteeism. We have never done that. Part of what we do to ensure that this corporation has the tools to deal with absenteeism has been in our contract for a long time. I refer to our collective agreement. Article 3 is entitled, "Regularity of Work." Article 3.6 deals with corrective procedures for absenteeism. This is the deal we in the UMWA made with the Cape Breton Development Corporation.
For the first offence there is an interview, with a written warning. For the second offence there is an interview, with a written warning. For the third offence there is an interview, with one day's suspension with pay, something which is confirmed in writing. For the fourth offence, the corrective procedure is dismissal.
Some 2,200 UMWA people signed this agreement. We have given the corporation the tools. The corporation has a job to do. Mr. George White knows that quite well. He is the president. We have a job to do. Our job is to protect our people from needless harassment or anything else. That is exactly what we will do.
One other thing that was not mentioned was overtime. It was one of the items mentioned last night. The Cape Breton Development Corporation says it is 18 per cent or 20 per cent, but they are budgeting for 10 per cent. Those were the numbers Mr. Shannon used last night. If you are budgeting for 10 per cent absenteeism and you are working 18 per cent absenteeism, then that tells me you have a shortage of men for whatever the reason might be. The Cape Breton Development Corporation is budgeting 10 per cent again and laying off 715 people. That does not make any sense to me.
A coal miner averages, before taxes, about $30,000 or $31,000 per year. In the economy in which we are existing right now, that is not a whole lot of money with which to raise a family, a couple of children, to have a car, and pay your mortgage, or whatever the case might be. If that brother has a legitimate opportunity to work overtime, that is a decision of the corporation. I worked overtime all my life. I used to work 60 hours to 70 hours a week all the time in order to pay the bills and to have a few little niceties on the side. The corporation schedules the overtime. Any coal miner who accepts it is accepting it of his own free will, and I do not blame them. If the corporation wants to reschedule and cut back on overtime, then the people employed in this industry will have to adapt.
A gentleman here last night made a statement to the effect that back in 1966 the No. 26 colliery was in jeopardy of closing. One of the things he did was cut back drastically on the overtime. The men were angry, banged the table and said, "We are not going to take this." They adapted to it. That year, that colliery produced 1 million tonnes of coal. That gentleman is here tonight. He told me that last night when we were sitting here.
That is a management decision. If you do not want to schedule overtime, then do not schedule it. Our people will adapt to that and we will save money.
Senator Murray: Mr. MacNeil, I glanced at the submission concerning the impact of the pension liability on the future of the Cape Breton Development Corporation. I think it is the most complete presentation on this subject that I have seen. I have not got through it yet. Just answer this if you can, please. What is the amount of money that you are asking the federal government to assume? What is the size of the liability you are asking the federal government to assume and what is your rationale for that?
Mr. MacNeil: I do not reasonably expect that they will assume anything. After we were told to become self-sufficient, the Superintendent of Pensions came forward and said -- and I do not imagine the government knew about this either -- "By the way, with becoming self-sufficient comes this $120 million debt that has been accumulated over the years." That is unfair. As Senator MacEachen said, we are in different times. We know there are no big pots of money.
I can tell you gentlemen that, just as sure as I am sitting here, and you all know it is true, in five years' time they will not be in the mining business with this plan. What they will do before that five years is up is privatize that industry. In the privatization process, the Government of Canada will assume the debt that it is refusing to assume on behalf of Devco.
Senator MacDonald: I want to come back to this business of accountability. Do you realize that in over 29 years there have been 10 CEOs of this operation? Who has appointed them? They have all been patronage appointments.
Mr. Drake: I agree.
Senator MacDonald: They have a chairman, a chief executive officer who is called the president, and five directors. Who will run Devco? It is the board of directors. They are all patronage appointments. Most of them over those years have been incompetent.
Mr. Drake: I agree.
Senator MacDonald: You cannot have a plant run by 2,200 people regardless of how you talk about getting along well together and a new vision. You have to have a bigger board of directors. The government must realize that, when a chief executive officer is appointed, then you appoint 10 directors -- not five -- from wherever you can get them. You pay them a proper amount for directors' meetings. About $20,000 per year will get you 10 directors. That will be your monitoring process.
You say, "Don't let the politicians go away." I say, "Let the politicians realize that this is the only way the thing will operate."
Some of the names that I have seen on those directors' lists belong to friends of mine. I worked the same conservative polls with them.
Mr. MacNeil: Some were competent, though.
Senator MacDonald: I detect a tension here. I am a fellow Cape Bretoner and I know the culture of us Cape Bretoners. I know where we all come from. We cannot fool one another much longer.
The only recommendation that I would suggest, Mr. Chairman, is a board of directors who are competent and qualified. They will act as a monitor and they will be the ones who run the plant.
Mr. Drake: We made a recommendation last year that a union person from within the corporation be appointed to the board of directors also. What we were given by the Minister of Industry at the time was permission to sit in as observers at the meetings of the board of directors and, basically, monitor the process.
That did not materialize. They refused to give a union person from this table a position on the board of directors. We think that would also be a good idea and should be explored.
The Chairman: Thank you, witnesses, for coming and for being so thorough and frank in your answers. We appreciate that.
Honourable senators, we now welcome Alastair Gillespie, who is a stranger to none of us. He has had a very distinguished career in this Parliament and has been associated with this particular project for some time. We are very pleased to have him with us and want to explore this project with him in more detail.
Mr. Gillespie, if you have an opening statement, we would be pleased to hear that. We will then get into questions.
Mr. Alastair Gillespie, President of Scotia Synfuels Ltd: Mr. Chairman, I was pleased to accept the invitation to appear before you. It is not all that long ago that I appeared before a similar committee, the energy committee of the Senate. At that time, you were inquiring into the potential of the Scotia Synfuels project. You produced the third report of the Standing Senate Committee on Energy, the Environment and Natural Resources. It is fairly well thumbed through now, because I have used it and referred to it many times, but there it is. Your researchers perhaps might be reminded of its existence, because it deals in some considerable depth with elements of the project.
Senator MacDonald: We all have it.
Mr. Gillespie: I also understand that you have had the benefit of a chronology which I prepared for the Synfuels project covering the last 15 years. I thought I might make a very brief opening statement and then take questions.
Initiatives of Scotia Synfuels Ltd have established it as the preeminent leader in R&D for new-use markets for Devco's coal. I think that statement is unquestioned.
Here are some of the facts. Scotia Synfuels Ltd, or SSL, and its predecessors associated with it have spent at least $10 million on the research and development of high-value, liquid hydrocarbons from Devco coal. SSL purchased the mothball refinery at Point Tupper for a future Synfuels project. We salvaged it from the scrap heap. With our associates, we restored and upgraded the marine oil terminal at a cost of $100 million. There was no federal assistance. That was all private-sector money. It was probably the largest private-sector investment in Nova Scotia within the last five years, and I would expect by far the largest private-sector investment in Cape Breton for many years.
SSL has established that the co-processing of coal and heavy oil in a 40/60 ratio will produce high-value transportation fuels and/or high-value, virtually sulphur-free utility fuels for power purposes.
Each tonne of Cape Breton coal can be converted into five barrels of oil. Lastly, in this very brief list of facts, the Synfuels project would create or sustain close to 500 new, permanent jobs.
Some questions arise to put this in context. First: Who have been the project's allies? The provincial Government of Nova Scotia. Second: Who have been the naysayers? The first naysayer has been Devco. Why Devco? Because Devco considered the Synfuels project a threat to its major monopoly market, the Nova Scotia Power Company market. SSL's insistence on international prices did not sit well with management. The message was: "If you build your plant outside Nova Scotia, we will sell to you at international prices, but we will not if you locate it in Nova Scotia."
The second naysayer was the Federal Department of Energy, Mines and Resources -- more recently, Natural Resources Canada. You might ask, "Why them?" It was not because they had doubts about the technical feasibility of the project; indeed, they assured us that they were satisfied with the technology. They were concerned that Scotia Synfuels, or the Synfuels project, would add to an already surplus refining market in Atlantic Canada. They placed no importance on the huge U.S. import market or the preferred access of Canadian refined petroleum products to that market through the U.S.-Canada Free Trade Agreement. We were considered trouble.
The third naysayer that I have identified here is the Federal Department of Industry. Federal bureaucrats felt that Cape Breton had had more than its share of costly, taxpayer-supported, white elephants and seemed concerned that SSL's coal-based Synfuels project would increase the pressure on the government to continue subsidies to the money-losing Devco.
I can elaborate on those when we get into some questions, but those are three naysayers that have not helped us one little bit.
In conclusion, I have discovered during this period that the culture of Devco is a very dependent one. It is not one of self-reliance. It seemed too ready to accept the notion that as an underground mining operation it could not compete. That view ignores its locational advantage, situated as it is on the ocean, which is unique in North America. It has significant transportation cost advantages over other coal enterprises in North America. Yes, its coal is high sulphur and, yes, high sulphur coal is not considered a desirable feedstock for power plants. However, Cape Breton coal is a superior coal, as Senator Buchanan and others have already pointed out. It is a superior coal for conversion into sulphur-free liquid hydrocarbons using co-processing technology. Cape Breton coal has an advantage over other coals for this market.
Finally, I believe that SSL has demonstrated this new-use potential, a way of adding value to a Nova Scotian resource. The potential will only be realized, however, if there is a change in the corporate culture at Devco to one of self-reliance.
That concludes my remarks, Mr. Chairman.
Senator MacDonald: Mr. Gillespie, what year was it that you had the first naysayer from Devco? How long ago was that?
Mr. Gillespie: It has been a recurrent theme. It was certainly in the early nineties. I had discussions and correspondence with the president of Devco during the early nineties, for example.
I tried to invite them to participate with us in some of the consortium work. It seemed to me that here was a very significant, new market for them. But there was not any great interest. Apparently the pricing issue was a serious one in their minds. The president indicated that they would be most interested in supplying the coal, but my insistence upon their supplying it at internationally competitive prices always turned the conversation off. My point was that if we were to sell in the international markets as we would have to, we could not pay more for our feed stocks than the international prices.
Senator MacDonald: What would it take now to resume your enthusiasm?
Mr. Gillespie: I would have to see strong federal support, which has been lacking. My last discussion with Natural Resources was a shocker, quite frankly, to me. I was seeking support in principle from the Department of Natural Resources. The official line that I received was that there was a surplus of refining capacity in Atlantic Canada and a synthetic fuels plant would only add to that. I pointed out that the biggest market in the world is alongside us in the eastern United States. In fact, more petroleum product, gasoline and diesel oil, is imported into the east coast of the United States each day than the total consumption in Canada.
One of the significant advantages to Canada of the Canada-U.S. free trade agreement was preferred access to the United States market. A petroleum product made in Canada would be treated as if it had been made in the United States. There would be no tariff hurdle to jump for that product to enter, whereas petroleum products made elsewhere would have to jump that hurdle.
I can only assume, and I am speculating here, that the Department of Energy had bought into the oil industry argument that they had a problem with surplus refining capacity. If you look at the history of the oil refining industry in Eastern Canada, it has been one not of expansion -- with one exception, Irving, but one of retraction, of trying to squeeze out the independent, of raising margins at the pump. Surplus refining capacity has been considered an enemy.
Senator MacDonald: I still do not quite understand why Devco would take that. Why would you be considered a competitor? I just do not understand.
Mr. Gillespie: They were supplying Nova Scotia Power Corporation, as it was then, at prices significantly higher than international prices. They therefore felt it would be impossible for them to supply coal to another domestic operation at a lower price than they were supplying to their major customer. That is why I think they saw us as a threat. The whole principle of being prepared to sell to a domestic customer at the same price as they were selling internationally created too many problems for them with their major customer.
Senator MacDonald: Would that have changed slightly with the privatization of Nova Scotia Power?
Mr. Gillespie: I think it undoubtedly has, but it is a quibble, I suppose, as to whether or not they are presently supplying the power corporation at international prices. They are certainly supplying them at different prices than they were before.
Incidentally, let me say I was most reassured to hear the union leader, Mr. Drake, and his commitment to competitiveness and profit. That was very reassuring. I had not heard that before. I had not heard it from Devco management either.
Senator MacDonald: I seem to have heard it from Devco management. I do not know whether I read it. Mr. Shannon made a remark, did he not?
Senator Buchanan: Yes, that is right.
Senator Anderson: I understand that the Synfuels project involves the co-processing of oil and coal. To what extent has this synthetic fuel-making process been tested? Where is the company in regard to that?
Mr. Gillespie: Yes, it certainly has been tested. Let me be quite clear: we do not claim to own the process. We have participated with the developer and owner in the co-processing process. The process was developed and is owned by a company called Hydrocarbon Research Inc. out of Princeton. They have been in business for something over 50 years. It is an adaptation of the heavy oil upgrading technology which they have supplied around the world and through the Husky Oil upgrader, for example, in Alberta and Saskatchewan. It is a commercial technology.
Senator Anderson: What evidence is there that this process could operate on a commercial basis?
Mr. Gillespie: We have spent millions of dollars in test programs with Hydrocarbon Research in their laboratories using Cape Breton coal with a variety of heavy oils, and as a result of those test programs we can say with confidence that it will produce a superior product, a high-value product, and a sulphur-free one. The sulphur comes out as a by-product. In environmental terms, it is an extremely positive contribution.
When you get into the power plant fuels, for example, sulphur is a very serious problem. There are two ways that are being used right now to remove sulphur. One is through scrubber technology, which is after combustion, and the other is during combustion, which is called the fluidized bed system, which Senator Buchanan would be more than familiar with at Point Aconi. We think there is a better way, and that is to remove the sulphur before combustion. That is the fuel we would produce, a sulphur-free fuel.
Senator Anderson: Is this fuel a liquid or a solid?
Mr. Gillespie: It is a liquid. There are two basic configurations. One is the transportation fuels configuration, in which you produce napthas for gasoline and diesel oils and heating oils; the second configuration is to go to a utility fuel mode, in which you are producing a sulphur-free fuel for power plants. You can go either way, depending on how you assess your market at the particular moment.
Senator Anderson: Thank you.
Senator Buchanan: As Mr. Gillespie knows, so far as I am concerned he has no difficulty in this committee with his Synfuels project, because Senator MacEachen and I, together with Alastair Gillespie, Gulf Canada and Nova Scotia Resources, signed the first agreement in 1981 at Port Hawkesbury for the Synfuels project. Absent from the table, unfortunately, at that time was Devco, which we all found unfortunate. We were very supportive of the project, as was Gulf. Unfortunately for Port Hawkesbury, but maybe fortunately for you because you now have the refinery, Gulf closed its refinery out and was no longer a player in the Synfuels project.
Over the last 15 years, my support of the project has never weakened at all. In fact, it is been strengthened. Over the years, Senator MacEachen has continued to support the project. The reason for supporting the project is that it is another market for coal and another justification for opening the Donkin mine, where there is higher sulphur coal in the roof levels and the roadway levels. Four hundred thousand tonnes of that coal could be used each year in the Synfuels project, which, added to the 1 per cent sulphur in the centre, more than justifies going ahead with the mine.
About ten years ago, I went to Trenton, New Jersey, with HRI Technologies, Montreal Engineering and Kilborn, all Alberta companies and all very supportive of Cape Breton, the Donkin mine and the Synfuels project. These companies analyzed various kinds of coal from various areas of North America and concluded that Donkin coal was the best coal for liquefaction.
There is no question that the project should have gone ahead years ago, but it has been stalled continually. My opinion has always been that it has been mostly stalled in the bureaucracy here in Ottawa. It has been stalled because there is a lot of misinformation about whether or not the project is viable. As I have said so many times, if it is not viable, Alastair Gillespie and his group would not be able to raise the money they were talking of raising, because the amount of federal money required has not been that much over the years. Maybe Alastair would comment on that.
In 1991 or 1992, I asked people in EMR what their objection was. Their objection was that the company wanted too much money. When they found out that the company did not want that amount of money, they said, "Well, when they start the project, they will run out of money and come running to the government for more." That is ridiculous. Private sources will not put their money in at the beginning, if they are then to be told that the company has to run to the government for more money.
You may recall that those people backed off and admitted that that might well be right, but said they had to look at another proposal. You probably did supply that other proposal, but we have never heard of it since from the departments.
Why have the departments, through the 1980s and into the 1990s, opposed the project?
Mr. Gillespie: I gave some of those reasons a few moments ago, senator. I will say a little bit more about the Department of Energy. My comments are to some extent based on speculation but also on knowledge of the industry and conversations I have had.
The oil industry in Canada is looking for ways of increasing its marketing margins. That is a well-known public fact. To some extent, the oil industry helped to create the independents. The industry had surplus capacity. Their own marketing outlets were not sufficient to cover their production. They sold that surplus capacity to the independents. Then, a few years ago, they suddenly realized that they had been creating their own competition and wanted to start scaling down their surplus capacity. As a result, we have seen a number of reductions in refining activities in Canada and efforts to squeeze the independents out and raise marketing margins.
There is no question about that. Some of them can say with some degree of pride that they have in fact raised their marketing margins.
The oil industry, therefore, does not see this project in Nova Scotia as being particularly beneficial to them. For example, our partners in bringing the Point Tupper property back to life, in reactivating the marine oil terminal, were American oil companies. They were independents; not the majors. They had the independence, flexibility and financing power to join us. I do not think this was welcomed by the oil industry in Canada, certainly not by the majors in Canada.
To the extent that Natural Resources Canada takes advice from the majors, you can see that they have been influenced in their position that there is already sufficient refining capacity in Nova Scotia. That is a very short-sighted and unbelievable position to take, but that seems to be the policy.
Senator Stanbury: Mr. Gillespie, you may recall that many years ago you and I were trying to convince Canadians to do some exporting in various ways. I had the pleasure of leading one or two trade missions at your request. We got things started, which I think have developed very well. Canadians now generally know how important it is to be able to export their products.
Jean-Luc Pepin once said to me, "Canadians do not export; they allow others to import from them." It seems to me that that is what we are running into here. People have simply not understood the importance of exports to the well-being of their industry.
I assume that the sticking point that you are talking about is that Devco has been afraid that, if it lowers its price for you, another domestic industry, Nova Scotia Power, will demand that price too. They believed that that would ruin them; that they would lose either customers or great amounts of money.
We have been hearing yesterday and today about the reductions in the cost of production at the Devco mines. I think we have reached the point where it will be about $55 per tonne. The unions project that it can go down to $41 a tonne over the next three or four years. Will that get them into the international playing field?
Mr. Gillespie: I would say yes. In fact, we did our numbers on the basis of approximately $50 a tonne Canadian. The international price delivered for coal was about $40 U.S. when we were doing our last set of numbers. Yes, I think that would be competitive. It would have helped a lot, had I received reassurances from the managers of Devco that they would have met that price.
Senator Stanbury: I can see that, when their cost was $77 a tonne, they would have faced a great disaster, had they been required to sell at $40 a tonne. It may just be that the increased volume that your project will provide will be enough to get their price down into the range that would be internationally competitive and, therefore, acceptable to Nova Scotia Power as well as to you. The added volume that you would require is quite substantial, as I recall.
Mr. Gillespie: It is, but you should realize that there is a second point. Devco has been selling nearly half of its output -- not quite half, but a substantial part of its output -- at international prices. My argument to them at that time was that they were already selling a large part of their output at international prices. Instead of selling to foreign buyers, why not just shave off 400,000 tonnes a year from those foreign buyers and transfer it to us? They said they would do that as long as we built our plant outside Canada.
Senator Stanbury: That is one of those mind blocks that I am talking about that we faced many years ago when we were trying to persuade people to export from Canada.
Mr. Gillespie: Yes.
Senator Stanbury: I am not sure how you get around it except to say that, as they see their costs coming closer to international prices, then they might understand that by adding your volume to their present output they should be able to become completely competitive internationally, which would be a great advantage to the people of Nova Scotia and would help their trade generally.
You should not give up hope, because there has been a very substantial change, from what we can gather, in the attitude of the municipality and in the attitude of the unions with respect to exports. As far as Devco is concerned, their exports have dropped to almost nothing, and that I cannot quite understand. They need the volume as long as they can get a reasonable price for their product. However, if that change of heart and change of attitude is going on in the community, then they are getting closer to the point where your project will make sense and where they can see how it will fit into the total export picture, which will substantially improve the economy of Cape Breton.
Mr. Gillespie: Senator Stanbury, I hope that will happen, but I am not sure I will live that long.
Senator Stanbury: Perhaps exposure to these thoughts may help a little.
Senator Buchanan: Cape Breton keeps you young.
The Chairman: Just to be clear, what you are saying is that, if Cape Breton were an independent country, you would have no problem going ahead with this particular project. I would not recommend that of course. What I might suggest is that, if Cape Breton wanted to join Newfoundland, we could have an Icelandic economy.
Senator Graham: Welcome, Mr. Gillespie. I am at both an advantage and a disadvantage here this evening -- a disadvantage, because I was not here to hear your presentation and the line of questioning that followed, but a distinct advantage, because I know you very well and have known you for a long time. I have participated on many occasions in your Herculean efforts to bring Scotia Synfuels to fruition. I recall one rainy afternoon on a weekend in Sydney when we held a huge rally in the school building in Sydney in support of your efforts. It was raining so heavily that you entered with your gum boots on, which is quite appropriate when we are talking about the product you are attempting to produce.
As I say, however, I am at a disadvantage in that I did not hear your presentation and the line of questioning that followed. Having said that, I know quite a bit about the project and your efforts. I will simply read the transcript with great interest and say that I hope things change for the better. We will follow the progress of your efforts with great interest and I hope, where appropriate, with every support we can give.
Senator Landry: I had intended to ask several questions about absenteeism, but the union representatives have answered most of them. My only comment is in relation to Senator MacDonald's suggestion that there be a competent board of directors. I think there would definitely have to be a competent board of directors, but the government should have representation on the board. After all, if the government puts money into Devco, it does not want to lose all control and influence.
Senator Ghitter: The Standing Senate Committee on Energy, the Environment and Natural Resources issued a report in June of 1992, and I suppose that what has occurred since that date is somewhat bittersweet from your point of view. I would suggest, however, that the market conditions may be somewhat better for you today with respect to proving your point, with the price of crude being what it is, the Canadian market being what it is, and with the buoyancy in the oil and gas industry. Those are positives, I take it.
Have you re-examined your position since your submissions to the Senate committee to determine whether it has improved since then?
Mr. Gillespie: I think it is fair to say in terms of the market that every year that goes by makes the project and the viability of the project more positive. As you indicated, crude oil prices have firmed in the last little while. I do not think many people would suggest that coal prices will increase faster than oil prices. I think the long-term forecast will be for a widening differential in favour of oil, all of which favours a project of this kind, where the basic raw material is coal.
Let me just put this in some kind of context for you. The normal oil refinery operates on a margin of about $3.50 a barrel. It is OPEC-priced crude oil. Let us say that today it is around $20. It may be a little more. OPEC will sell its products -- gasoline, diesel and heating oils -- at about $23.50. That is about what the market is now. The margin can sometimes be $4, but $3.50 is a good average.
Our feedstock costs, however, are less than $10 a barrel. This is the really significant change that we have offered in the way of an opportunity. If you take coal at the international price of $40 a tonne and you get five barrels, the coal component is $8 a barrel. If you use a heavy oil that cannot be refined, and that is the heavy oil that we have used from Venezuela, and you price it at $10, you have a feed-stock cost, when you weight those two inputs, of less than $10 U.S. a barrel. That means that you have an extra margin of at least $10 a barrel. You pick up the same refinery margin that a regular refinery gets, $3.50, plus the extra $10. That is why you can consider a capital-intensive project of this kind as being viable. Certainly, it is capital intensive, but because the margin is so much greater, it is viable.
Senator Ghitter: I take it you would argue that the viability in the case you have just stated would be better than the viability of a Syncrude or a Suncorp on those numbers.
Mr. Gillespie: No comparison with some of those things. The Husky Oil upgrader is a very good example. Its margins are a fraction of the kind of margins that I am talking about.
Senator Ghitter: Is your proposal alive? Where is it right now?
Mr. Gillespie: I feel a little like a pilot of an airplane that has been on a long journey and is coming in to land and he has just received a message from the control tower to go into a holding pattern. I have received a number of messages which have put me into that holding pattern. I am not sure whether I am going to come in to land or not.
Senator Ghitter: Are you running out of gas?
Mr. Gillespie: Yes, I am running out of gas. I am getting older by the day.
The Chairman: It is not obvious.
Mr. Gillespie: We had been trying to "make a landing" on a refinery at Dartmouth, the Eastern Passage refinery; we had been trying to purchase it when Ultramar had offered it for sale. It would have been a superb location for us, because it was an operating refinery and therefore would have saved us a significant amount of capital money, because we could have built a synthetic fuels unit right alongside of it and integrated them. We were not successful there. We got shot down by the federal budget of 1994 on investment tax credits, which made the Point Tupper investment much less interesting.
The Dartmouth project looked attractive. We have tried that one; we have not clicked there. We are now looking at certain locations outside the province of Nova Scotia. I cannot say more than that at the moment.
Senator Ghitter: I take it your file basically is not an active one here in Ottawa in front of the department.
Mr. Gillespie: Well, it is in one sense, in that we are seeking clarification of government policy. I was with the Department of Industry this morning on just that particular point.
Senator Ghitter: I mentioned the bittersweet aspect. Is the bittersweet part your $260 million interest-free loan? Is that still part of your process?
Mr. Gillespie: That died years ago.
Senator Ghitter: It was referred to in this report.
Mr. Gillespie: We have done none of our work based on any kind of government grants, for example. What we did do is work on investment tax credits which required us to raise all the money, spend it, and get the plant operating before we could access any of those credits, but all of that was killed, effectively, in the 1994 budget.
Senator Buchanan: I want to make a comment on what Mr. Gillespie just said. The interesting thing about the project, as he just said, is that the Synfuels group were prepared to go out and raise the money in the world investment community. As they say in Cape Breton, if you are going to make any money, you have to have the plant to make the money. If there is no plant, there is no money and there are no taxes. That is a difficult point to get across here in Ottawa.
They were prepared to build the plant, put the money in, and then look for the investment tax credit. If there is no plant there, the government is not going to get any taxes anyway. If the plant is there, they may not get any taxes for a while, but they will eventually.
So this would be a win-win situation for the federal government. It would not cost them much money to do the project, because there would be private money, and it would use 400,000 tonnes of coal in Cape Breton, which at the present time could be higher sulphur than the Power Corporation requires, because we signed environmental agreements through the 1980s that require the corporation to use lower sulphur coal. So the use of higher sulphur coal would be a big plus to Devco. I cannot understand it. It is a win-win situation.
Senator Stanbury: There is a mind block.
Senator Buchanan: Yes, there is a mind block, and there has been for many years in the bureaucracy here in Ottawa. I recall that in the 1980s we sent people up here to talk to them; we sent our Minister of Mines and our Minister of Development -- even I came up here to talk to them -- and they all said that the project was not feasible. Even when we proved to them the project was feasible, they still had this mindset against it. I guess they still do, Mr. Gillespie.
Mr. Gillespie: As I mentioned in my opening remarks, the impression I got from the Department of Industry was that Cape Breton had had more than its share of white elephants and they were concerned over two aspects: first, that we might become a white elephant, I suppose; and, second, that, although we were going to be raising the money ourselves, once it was there --
Senator Buchanan: You would have to carry the white elephant, not them.
Mr. Gillespie: Well, their concern might have been that once it was there, there would be pressure on the government to keep it going. I do not know whether that was in their minds, but one thing that I think was in their minds was that, if they supported this, it would be another reason to keep Devco going, and I think there were a lot of people in the bureaucracy, quite frankly, who were not all that interested in seeing Devco kept going.
Senator Buchanan: Now you have it!
Senator Graham: Could I ask a supplementary? I apologize for being late but my duties as House Leader, since we sat quite late this afternoon, required me to be there. I apologize to the United Mine Workers and the other unions who were here. I had hoped to be here but my responsibilities would not allow me to be here, and my colleagues opposite would understand why.
I am wondering, Mr. Gillespie, about the supply of coal. Senator Buchanan has said you would use 400,000 tonnes, and I agree with what he has said, because, as I understand the proposition, when you began years ago and there was the Cape Breton tax credit, you would raise the money and finance the company and it would be up and producing before any kind of tax credit would kick in. This is what you were saying to Senator Buchanan. That was my understanding. You had undertaken to raise all the finances yourself and what you were looking for essentially was the tax credit.
There were two other elements, if I remember correctly. One was money for a further feasibility study that was required, and perhaps you could elaborate on that. The other was the cost of getting the coal that you would require, the 400,000 tonnes. As I understand it, the source would be Donkin. Was that a stumbling block in terms of the cost of opening the mine at Donkin? There are really two questions there.
Senator Buchanan: It would not necessarily be Donkin, but it certainly would be Donkin coal.
The Chairman: The question was addressed to Mr. Gillespie.
Mr. Gillespie: The first question was?
Senator Graham: The first question was: Was there a request for money to finance a further feasibility study?
Mr. Gillespie: Yes. That is quite correct.
Senator Graham: How much money would that have involved? The second question is: Were the authorities, the federal authorities, using what they might term as the prohibitive costs of opening a Donkin mine to supply you with the necessary coal product?
Mr. Gillespie: Let me deal with your second question first, senator. At no time did I say it was essential from the point of view of the Synfuels project that Donkin be opened. I felt that was a Devco decision. How Devco supplied us and where they supplied us was Devco's business. We had tested these various coals and they were all suitable. As far as I know, Donkin was never an issue.
In 1992, the federal government entered into an agreement with the Province of Nova Scotia and Scotia Synfuels to participate in the final preconstruction, engineering and feasibility work, which was about a $15 million Canadian program. It was on a one-third, one-third, one-third sharing basis. The province went in for one-third. The federal government promised one-third. Scotia Synfuels was in for one-third. This was the highest risk money we needed, because, at the end of it, there might not be a project. It was accepted on that basis.
We waited for one year. The premier of Nova Scotia, Mr. Cameron, came to me and said, "We have waited long enough. Are you prepared to go ahead with the first phase on a 50-50 basis without the federal government?" The first phase amounted to about $1.5 million. I said, "Yes, I am, on the understanding that the province will be in for the balance of the work with the federal government if it is successful."
The federal government of the day never did come through. We did that work with the province of Nova Scotia. It was highly successful with the Venezuelan Boscan crude.
That is a rather long answer to your question, senator, about there being a request. When the new government came in, we renewed the request. At that time, though, the new government had decided on significant cost-cutting programs. They were not prepared to honour the undelivered commitment of the previous government.
The Chairman: Mr. Gillespie, thank you very much for being with us and for sharing with us what is an interesting but very frustrating idea and project. No doubt, we will hear more about it. We will certainly consider it seriously. We will be reporting on it.
Mr. Gillespie: Thank you very much for your interest, Mr. Chairman. It is very much appreciated. I am sure the record will help to inform and, perhaps, even to educate.
The Chairman: We will be sending a copy of the record to the Department of Natural Resources.
The committee adjourned.