STANDING COMMITTEE ON PUBLIC ACCOUNTS
Mr. John Holm
MR. CHAIRMAN: Good morning. Today the committee will be dealing with Nova Scotia Resources Limited. We are joined today by a number of witnesses, Mr. Jim MacDonald, General Manager; Mr. Steve Parker, Chairman of the Board of Directors; Mr. John Traves, Corporate Secretary; and, of course, we also have with us Mr. Roy Salmon, Auditor General; and Mr. Al Horgan, Assistant Auditor General. Maybe we could have the committee members introduce themselves for the guests, before we get started. Maybe we could start by having the PC caucus introduce themselves, then the Liberals, and the New Democrats.
[The committee members introduced themselves.]
MR. CHAIRMAN: Maybe we could turn the floor over to our witnesses. I see that we have a presentation that looks like it is set up. If you would then, please, Mr. Parker.
MR. STEVE PARKER: Mr. Chairman, I will make a few comments and Jim MacDonald will as well, and we will be brief to give people an opportunity. We are glad to be here, and happy to chat with you about Nova Scotia Resources Limited and answer your questions. The Chairman has already introduced Jim MacDonald, who is our chief staff person. Jim is a professional engineer, he has 23 years experience in the energy business, both onshore and offshore. I think he is a very highly respected energy professional. He has been with NSRL since 1990, and has been the chief staff person since 1998. John Traves is our Corporate Secretary.
Just so that you will know, I am a business person in Halifax, I am not an employee of NSRL. I am Chairman of the Board of Directors. In my real life I am Chairman of the CCL Group, which is a national company with 700 employees, 7 offices in Canada, 2 internationally, based in Halifax, and that is what I do when I am not here. I have been a member of the board of NSRL since May 1998, and became Chairman of the board in September 1999. I have been Chairman of their Human Resources Committee, and a member of the Audit Committee of the board since being on the board.
I would like to say a few words, as a Nova Scotia business person, about NSRL. I am a person who walked in cold to this organization in 1998. It is quite an adventure to walk into NSRL, for sure. Since NSRL was founded almost 20 years ago, it has invested in a wide series of energy-related projects. There may well have been good reasons for doing all of them, I don't second guess all of them, because that is not fruitful. The result of the overall program of NSRL, as every one of you knows, is a huge and crushing debt load on the company and on us as taxpayers in Nova Scotia. At year end 1999, that debt amounted to $714 million. That is about $25 million less than people were speculating in the fall, for reasons that I can explain, but nevertheless a huge debt.
I thought the committee might find it interesting to know how the debt is made up. One of the things we did is we commissioned the firm of Grant Thornton and asked them to go right back through the history of the company and allocate the whole debt, so that the board would have a sense of how we got here. I am going to give you some numbers here.
About $178 million of that debt is the company's investment in the Sable Offshore Energy Project, meaning the production-related investment. My own opinion is that probably will be the best money NSRL has ever spent, because that project will probably be considerably commercially successful. Part of that $178 million that I have just mentioned, if you were to take all of the investments of NSRL in its 19 years of history, the amount at year end totals almost exactly $400 million, including the $178 million.
Of the $714 million debt, about $400 million represents what was actually invested in projects by NSRL. A further $255 million of that debt is the build-up of interest over the years, inside the company. It has been - and as a business person it is kind of interesting to see this phase of public accounting - the practice of successive Governments of Nova Scotia for 20 years to take the interest on the debt every year and simply roll it up into the debt. What you have over 20 years is interest on interest on interest, and after 20 years that has totalled over $250 million.
The final amount of the debt, which is about $58 million, is currency adjustments. Most of NSRL's debt is borrowed in U.S. dollars, and I want to talk about that for a minute. If we were to have looked at that number, $58 million, a year ago, this is not a number I looked up but it would have been well over $100 million, but the Canadian dollar has done a little better, relative to the U.S. dollar in the last year. You, in Public Accounts, look at the
operating statements of NSRL, I like to say, as a business person, that if you look at the impact on the operating statements of the company, NSRL really, in terms of impact, isn't even in the energy business, it is in the currency business.
By far the biggest single impact on the bottom line of NSRL every year has been the position of the Canadian dollar, relative to the U.S. dollar. In my short time on the board, I have seen swings, in a quarter, of as much as $25 million up or down. You can get a $50 million swing on the bottom line - it is a non-cash item by the way, it has nothing to do with cash - but when you look at those statements, if you really want to know how the operations of NSRL are going, you have to deduct the currency, which comes out. It has a massive effect there.
Let me turn for a moment to the oil and gas business. I am not an oil and gas professional, but I have founded and owned and run many different kinds of businesses. This business is characterized by the need to spend enormous amounts of money, often knowing full well that the odds of success on any particular single investment are quite small. Even for most business people, this is a very volatile and risky kind of business. For example, the average cost of an exploration well, offshore Atlantic, is roughly $40 million, and it appears to be going up. The odds of making a significant commercial discovery are probably about 1 in 10 on any single project. If you win against those odds, you then have to spend millions and millions, maybe hundreds of millions more, in production facilities before you will ever get a dollar of revenue. At almost any point in that process, you can get bad news, and you lose everything. It is quite a business, it is a very interesting business.
Even when you are up and running with commercial production, the business is volatile. For example, the price of oil today, I didn't look today, is probably around $25 U.S. a barrel; a few months ago, it was $30 U.S. a barrel; two years ago it was $13 U.S. a barrel. So you have this price volatility which is a huge factor in NSRL's future.
There is reserve risk, in other words, will the pool that you are draining end up being bigger or smaller than the estimates of the experts. The average return on equity for publicly traded oil and gas exploration companies in the past two years has been around 2.5 per cent. That is a very low return given the risk of this business. Investment professionals generally agree today that the stock market substantially undervalues oil and gas exploration companies. At least for the moment, investors would rather put their money in other places that aren't giving the kind of earnings-related returns. These companies are having great earnings today, by the way, but the market is not giving them multiples at all for those earnings because investors don't believe they are going to last.
I will just close by saying there are two things that I have learned about the energy business. The first is that there is no shortage of experts who will predict the future on all those assumptions and the second is that the predictions are far more often wrong than they are right, when you look at all the various factors. As NSRL looks ahead, we are prisoners
of gas prices, of the U.S.-Canadian dollar on reserve risk, and on the cost of doing the actual business, how much will it cost.
One thing is certain, the debt of NSRL is not going to go away. You heard testimony from Mr. Livingstone in the fall and to quote him, I think he said, no one will ever buy NSRL's debt, and that is right. No one will. That debt is ours as Nova Scotians. It is the result of 19 years of investment in this business. I see no forecasts at the moment that would indicate that if we keep the SOEP program and benefit from the cash flows, which will be excellent, that debt will do anything but continue to grow. Because it has been built up over time and it is the result of numerous investments.
Before taking your questions, I thought you might like to have an indication of what NSRL owns and very briefly, Jim MacDonald will give you that and then we will turn it over to you Mr. Chairman.
MR. JAMES MACDONALD: Before I go through the assets of the company and explain what we do, I think I should make it clear on what we don't do. We are not a representative of government for the development of regulations and Acts for the regulation of the industry. There are government departments that look after the development of regulations and different rules or controlling royalties, production offshore, liquids that will stay in the province, what may go out of the province. We are not a representative for the operators on the offshore. We are not here representing PanCanadian for the Cohasset project nor Sable Offshore Energy Inc., which was a company set up to represent SOEP. What we do is that we are an oil and gas company owned by the government to act in the best interests of the shareholder. We manage our oil and gas assets by selectively participating in various projects. What I will do, instead of reading it, I will just go through some overheads of the assets that have been built up over the last 19 years.
To give a reference of the area that we operate in, from Halifax we are about 250 kilometres south, southwest you will locate the Panuke-Cohasset oil field, that is about 50 kilometres from Sable Island. Almost all of our activity is probably within a 50 kilometre radius of Sable Island.
The first significant project that we got involved in was the Panuke-Cohasset project. It involved two small oil fields, one called Cohasset and one called Panuke. A very simple development concept, we had a jacket - which is just a steel structure - set up over Cohasset, another jacket, or another steel structure, set up over Panuke. We drilled wells into the different formations in both fields. All of our production facilities were built onto the RG III. Oil would be produced up the well bores, processed on the RG III, out through a subsea flow line - this is referred to as a convoy, it just floats in the water, connects to a storage tanker that will hold the oil. Then every once in a while, a shuttle tanker would take the cargo and take it to market.
Where we are at the moment, we have produced about 44 million barrels of oil between the two fields. We have reached the end of the economic life of that project. We have abandoned most of the wells at Panuke and there is a rig currently sitting over Cohasset abandoning the rest of our wells. Prior to leaving Panuke, when the rig was sitting at Panuke we drilled an exploration well that has received a lot of news. We refer to it as the PP-3C well. That was a discovery well that we had 50/50 working interests with PanCanadian. Subsequent to that, PanCanadian has drilled deeper wells below these sands that we have produced in, and have indicated in the paper they have made a discovery there also.
This is just a reference at Panuke. We had one other block, along with Cohasset/Panuke, and we just tie the others on oil prospect, which is a Penobscot block up in this area where we own approximately 55,000 hectares. We have attempted to farm that out in the past and were unsuccessful. That land will revert to the Crown this July and it will be available for someone else to bid on.
The most significant project at the moment is the Sable Offshore Energy Project. This consists of a six field development; North Triumph, Venture and Thebaud are the main three fields that are producing at the moment. We are producing approximately somewhere between 400 million and 450 million cubic feet today. That gas is being exported through this pipeline into the U.S. In all of this infrastructure, the Thebaud jackets, platforms, Venture, North Triumph, the fields, the interflow lines between the fields, the subsidy flow line to the gas plant at Goldboro and the eight inch flow line for liquids to Mulgrave, we have an 8.4 per cent working interest in that project.
As Steve had indicated earlier, the cost of all that is approximately to date $178 million for development. What we got for our $178 million, this is the Galaxy drilling at North Triumph. I will just go through these quickly. This is the gas line to Goldboro, all these pipes are just the sludge catchers that collects all the liquids coming through the pipeline caught here, and gas is processed here for sale to Maritimes & Northeast. This is the Thebaud setup, Thebaud facilities, a supply boat in the background, and this is where all the main processing is done offshore at Thebaud.
In addition to Cohasset, Penobscot, the deeper well we drilled at Panuke for which we received a 2 per cent gross overriding royalty, the deeper production, we have about 11 other significant discovery licences and they are all in a close proximity to Sable Island. There have been a lot of discoveries and I will just try to put it in perspective for you. The six fields that we are developing in SOEP, we think we have around 3.3 trillion cubic feet. The offshore board estimates that we have maybe 5.7 trillion cubic feet proven in the offshore. So these six fields will be depleting somewhere around 70 per cent of the gas that has been discovered to date.
When we tie in some of the other fields outside of Tier II, we will deplete probably close to 80 per cent of the known gas, or discovery gas in the offshore, and what that tells you is that this is the known reserve area. To sustain a gas industry in the offshore we need a lot of drilling and there has been a lot of interest. There has been a lot of land acquired in the offshore and that is the first step of it. Now it is going to take a tremendous amount of money, time and drilling effort to get additional reserves to keep our offshore going.
That has sort of been an overview. I will just summarize. Cohasset/Panuke, a 50 per cent working interest; in Panuke, a 2 per cent gross overrriding royalty; 8.4 per cent working interest in SOEP which encompasses six fields and all of the infrastructure associated with that; and then various working interests in these 11 other significant discovery licences and they range from 1.25 per cent to 10 per cent, on average about 6 per cent. The Penobscot block, which will expire, we don't consider an asset until the end of July.
MR. CHAIRMAN: Thank you very much, Mr. MacDonald and Mr. Parker. Does anybody else wish to make any comments? Maybe we will turn over to the questioning and today we begin with the Liberal caucus and go with 20 minutes per caucus for the opening round, if that is agreeable. Mr. MacKinnon.
MR. RUSSELL MACKINNON: Mr. Chairman, I thank both gentlemen, Mr. Parker and Mr. MacDonald, for their intros. I guess I am trying to put it into perspective. With the 50 per cent interest in Cohasset Panuke, the 8.4 per cent in SOEP and our various percentage interests ranging from, 1.2 per cent to 10 per cent in the other 11 fields, what is the bottom line? What is the total revenue that could be generated for the province? An estimate.
MR. JAMES MACDONALD: First of all, the only revenue that we have at the moment will be the revenue from the SOEP project. We have 8.4 per cent of that gas stream of 450 million per day. That is the only revenue stream that we have. We have Cohasset. It is a liability because we are abandoning wells. There is lots of cash in negative cash flow. So the only positive cash flow will be SOEP and we estimate that our income for this year will be approximately $3 million after financing costs.
MR. MACKINNON: So it is positive.
MR. JAMES MACDONALD: Positive on that project.
MR. MACKINNON: Is there not more in production as well?
MR. JAMES MACDONALD: No, that is it for production.
MR. MACKINNON: Cohasset/Panuke, I believe when you appeared here back in October 1989 - I am going by memory - your expertise was that the maximum potential for those wells was $30 million as opposed to the actual that we now see of $44 million. I am not
sure if that is a substantial difference or not. In terms of dollars I would think, if you have a 50 per cent interest, and I believe Mr. Livingstone - I am not sure if it was Mr. Livingstone or yourself - indicated that you sought outside expertise, world-renowned expertise, to assure the readings on the wells at that time and that was the external advice as well. I guess I am looking for some quality assurance on these figures. You say Cohasset/Panuke is now a negative. What is the total revenue that would have been generated from that well, forgetting the expense side of the ledger, what is the total revenue that was generated for the province?
MR. JAMES MACDONALD: I think your question is, you are asking the results of the Cohasset project, how did we end up financially with Cohasset?
MR. MACKINNON: No. What is the total revenue that was generated for the province? We will look at the expense side in a moment.
MR. JAMES MACDONALD: I cannot answer that at the moment. That will take some effort to dig that number out.
MR. MACKINNON: We will take that on notice, That is fine. You indicated there are six new fields with an approximation of 3.3 trillion cubic feet, with our interest ranging from 1.2 per cent to 10 per cent. Do we have contracts on those six fields that you referred to?
MR. JAMES MACDONALD: Contracts in the sense of sales contracts for the gas?
MR. MACKINNON: Yes.
MR. JAMES MACDONALD: We have contracts in place of our share; full production will be somewhere around 44 million cubic feet per day. We have contracted approximately 8 million cubic feet per day. The rest of it has not yet been contracted. It has been sold in the short-term market.
MR. MACKINNON: Will we have an interest in that as well?
MR. JAMES MACDONALD: That is our share of production. So the overall production from the project, we would like eventually to get up to approximately 530 million cubic feet per day of which we will have 8.4 per cent. Our 8.4 per cent of 530 million cubic feet is approximately 44 million cubic feet per day. Of that, we have contracted about 8 million a day, the remainder is being sold short-term. Eventually, we will get longer-term contracts for it.
MR. MACKINNON: I want to be sure, because we are talking three packages here: Panuke/Cohasset, SOEP and these other additional wells; these six additional wells or 11, I am not sure. Am I correct?
MR. PARKER: I am glad you clarified that, Mr. MacKinnon. Jim is talking about the SOEP project. NSRL has no revenue from Cohasset/Panuke anymore. The project is dry. Production has essentially stopped.
MR. MACKINNON: I understand.
MR. PARKER: We have a number set up on the books actually to clean it up. So it is an expense. You were asking about going back on Cohasset/Panuke. It is important to know, you can just look at revenue if you want, but if you look at Nova Scotia's interest through NSRL with CoPan over the 10 or so year life of the project, it was a loser for us. We lost something in the order of $200 million.
MR. JAMES MACDONALD: The total debt remaining on CoPan would be $162 million. Of that, about $110 million would have been a principal borrowing, $40 million of it would have been an interest component and about $12 million a foreign exchange component.
MR. MACKINNON: What was the time-frame on that? That was our initial investment into the offshore was it not?
MR. JAMES MACDONALD: That would have been from 1992 to the end of 1999. So to the end of 1999, the project cost us a total of $162 million.
MR. MACKINNON: The initial expense occurred, if I recall, when you were back here in 1989. That is when the investments were made. Am I correct?
MR. JAMES MACDONALD: Most of the investments were made, there were some investments being spent for pre-development in 1989 and 1990.
MR. MACKINNON: Vast percentage. The bulk of the expenditure was made at that period and then from that period it was essentially interest charges?
MR. JAMES MACDONALD: Yes.
MR. MACKINNON: Okay. I am looking at the total picture. Stand back. Between Panuke/Cohasset, SOEP and the other wells, what is the total potential for the province in revenue? Do we have an estimate of that? I know the first two are dry and they are a negative on the books.
MR. PARKER: SOEP Jim has already mentioned to you.
MR. MACKINNON: That is $178 million.
MR. PARKER: No, that is the capital spent to cover NSRL's share.
MR. MACKINNON: Okay, what is our total revenue?
MR. PARKER: What revenue we actually get will depend upon factors that are out of our control, like gas prices and U.S. dollar, et cetera. But, I think, Jim, in terms of revenue, not counting any expenses, SOEP might deliver one that is up to full production in the order of about $50 million Canadian a year. Correct? Something in that order.
MR. MACKINNON: For how long do you expect?
MR. PARKER: That is another risk. How long, of course, itself is another risk.
MR. MACKINNON: Conservatively, and I emphasize small "c."
MR. JAMES MACDONALD: It should sustain that revenue stream flat we expect for maybe 10 years.
MR. MACKINNON: Is it $500 million; 10 years at $50 million?
MR. JAMES MACDONALD: That would be a rough approximation.
MR. MACKINNON: So $0.5 billion.
MR. JAMES MACDONALD: Then as the fields begin to decline, that revenue stream will also begin to decline.
MR. PARKER: I would caution though, I would add that money later is not as valuable as money earlier. It is one of the fundamental rules of economics.
MR. MACKINNON: A bird in the hand is better than two in the bush.
MR. PARKER: It really is, so to count that up as $500 million and compare it to some other number today, would not be a valid comparison.
MR. MACKINNON: So that is on the SOEP. Now we have these six additional wells, am I correct?
MR. JAMES MACDONALD: We have 11 other significant discoveries and that just means that wells have been drilled in them, gas has been tested through the surface and a significant discovery has been made. Now you have to determine, based on the reserves estimated to be in place, will they be economic to tie in.
MR. MACKINNON: What is your expert opinion on that?
MR. JAMES MACDONALD: The existing project consists of Tier I fields and Tier II fields. If those other fields had a significant size, they would be included in that group. Truly, they are Tier III or maybe even possibly a Tier IV field. So, yes there is gas there. Will they be commercial to tie in? They are being evaluated at the moment. We have a team set up to evaluate some of those other discoveries.
MR. MACKINNON: Do you have any insight as to what you would be expecting at this point on any of those wells?
MR. JAMES MACDONALD: Expecting?
MR. MACKINNON: The total yield of any of those wells. Much similar to back in 1989 when you made predictions on Panuke/Cohasset, or are all those professional assessments being done outside?
MR. JAMES MACDONALD: The assessments of the significant discoveries are being done by a team put together by Shell, Mobil, Imperial and Nova Scotia Resources, and that work is under way. Now when you ask for the potential of these fields, are you referring to a revenue stream or production?
MR. MACKINNON: Either one. If you get one, you can estimate the other.
MR. JAMES MACDONALD: For a number of reasons, as we talked about earlier, the reserve risk, the price risk, the capital cost risk, the ability to tie them in, there is a whole bunch of uncertainty. But there has to be a certain rate of return to tie them in, the fields.
MR. MACKINNON: Maybe we could shift the focus. You have estimated 3.3 trillion cubic feet total at this point, approximately.
MR. JAMES MACDONALD: Yes, that we plan to produce, recover from the SOEP project, consisting of six fields.
MR. MACKINNON: Is that the SOEP? Okay, I was getting a bit confused. So, we are looking at the additional 11 and you have no idea whatsoever what is in those 11.
MR. JAMES MACDONALD: No, that is not totally correct. There has been a fair amount of reservoir work done, not only by Mobil, Shell and Imperial, but the Department of Natural Resources have done a thorough review of all of those fields. They have determined what they think the reserves would be; the Offshore Petroleum Board has also conducted a review of those fields and that is a public document of the expected gas in place in all of the fields offshore.
MR. MACKINNON: Do we have any idea of what those figures are?
MR. JAMES MACDONALD: Yes. Do I have them with me? Most of those fields are probably less than 200 billion cubic feet. If you want . . .
MR. MACKINNON: So that would be about 2 million or 2 trillion?
MR. JAMES MACDONALD: I can give you some values for some of the fields if you would like.
MR. MACKINNON: Perhaps while he is doing that, Mr. Parker, in the interests of time, that $170 million that was spent on the SOEP project, do you think that was a wise investment? Do you think that was a good investment?
MR. PARKER: I do. It looks like it is going to be a good investment now. You have a commercial project up and running, it came up relatively within budget and the business case on SOEP looks to us, as a partner - and I repeat, we don't speak for SOEP. We are an 8 per cent partner in the business and don't operate it, but it looks to us, as a partner in SOEP - that that is going to be an economic business case. If you ask to predict how good it is going to be, you are actually asking people to predict gas prices and other factors 10 and 12 years into the future. Nobody can really accurately do that, but it does look like a positive asset; in fact, a very positive asset.
MR. MACKINNON: This 8.4 per cent interest that we have, do you think that is on par with all the factors that are entered into that, our percentage?
MR. PARKER: If you were to count the money that NSRL has spent just in producing on SOEP - and once a decision has been made, we are going to go ahead. These are production wells and once that decision has been made - it was roughly a $2 billion project, something like that and we have, in phase one invested $178 million. There is a phase two of SOEP to come, roughly another $70 million or so, roughly as allocated, and NSRL will have to total up another $70 million or so in phase two, Tier II it is called. Those look like economic investments as long as you don't try to count all the investment in previous years looking for those wells and getting to the point of production.
MR. JAMES MACDONALD: For example for recoverable reserves - and these are numbers put together by the Offshore Petroleum Board - for example, the Citnalta field may have 196 billion cubic feet of gas; Arcadia, 157 billion cubic feet; Uniacke, 130 bcf; Olympia, 129; West Venture, 105; a second West Venture significant discovery area, 49; West Olympia 21. If you add all of those up, including Chebucto of around 386, that adds up to about another 1.2 trillion cubic feet.
MR. MACKINNON: What is the total?
MR. JAMES MACDONALD: It is 1.2 tcf, trillion cubic feet.
MR. PARKER: These, however, Mr. MacKinnon, are not wells. They are discoveries that no one has made any decision to do anything with yet, nor is it known if they are economic yet.
MR. MACKINNON: I guess, in a nutshell, I am trying to get a sense, are we going to be able to do one of two things; stay the course and be able to recover the investment that we have made with NSRL, including the debt, or are we better off cutting our losses and getting out of the business all together?
MR. PARKER: Okay, with regard to your question, I am glad to give you an answer which is looking at the future and speculating. But, it is pretty clear right now to me that there is no scenario on the current SOEP program that would see the total debt of NSRL be satisfied. When I say that SOEP is a positive investment, it is positive relative to the investment in SOEP. But, the NSRL debt on the current profile of NSRL will continue to grow over a period of time because you have 19 years of re-invested principal and interest building up over time.
MR. MACKINNON: So, actually, by going into the SOEP, we were lucky enough to be able to get into it the way we did to at least contain the liability. That is essentially what you are telling us.
MR. PARKER: That is true, and NSRL deserved a little luck.
MR. MACKINNON: Some good government management, too, I think. But on the 1.2 trillion cubic feet, is there any possibility - I know it is very difficult because they are just discoveries - is there any analysis done that would indicate whether we are better off hanging in at this point until we realize some revenues from those additional wells that would help to negate this liability?
MR. JAMES MACDONALD: We have looked at the SDLs and tried to make a decision of which ones may be economic to tie in. As the field expands outwards, we are starting off with Thebaud and Venture and North Triumph and then we will tie in Alma. As
we tie in some of the other fields in this project and start to expand, now you have satellite fields getting closer to some of these smaller fields. They may, in the future be economic. So as the project expands, and you have a facility that it is getting closer to one of these remote fields, the tie-in distance is getting a little bit shorter. They now may be able to become economic.
MR. MACKINNON: Do you have any sense of whether it is worth our while hanging in there and continuing towards these additional 11 fields, or are we better off just selling our interests and cutting our losses? We don't want to be back here next year or the year after looking at an additional $100 million or $200 million of liability.
MR. CHAIRMAN: If I might interject, Legislative TV has asked that I make sure to recognize each speaker because they are having difficulty distinguishing between voices. Mr. MacDonald.
MR. JAMES MACDONALD: Based on just time value of money, a size of the field, the value of some of those smaller fields, maybe five to ten years out, that is the tie-in point, is not a large amount of money. There is some money there. There is some value to them, but it is very difficult to monetize those fields at the moment or say this field is going to be worth X many dollars.
MR. MACKINNON: You haven't answered my question.
MR. JAMES MACDONALD: Because I can't answer it. If you are asking the overall picture, should we stay in the SOEP project and stay in the business? There are a number of questions there. Should we stay in and just liquidate reserves; should we stay in and explore; should we stay in acquire additional property? It is a funny business, because when you are in, you are in. It is a Chinese finger trap. If you get associated with some of the big runners like we are associated with, Shell, Mobil and Imperial, those companies do not move quickly, but they would never stop. They are very methodical and they move continuously, they never stop. When they want to drill a well, they will drill a well. If you are partnered with them, you have to belly up. It is not a game for the faint-hearted. If you are in, and if you think we could just participate in those wells and deplete them, that may be so, but you are also in for the ride. There may be additional wells, additional structures on the fringes of those you will be obligated to participate in, so there are additional seismic programs that have to be run to evaluate them. It is very difficult to answer that question to say should we continue in the offshore. We are going through a process to do an evaluation on the company to try to determine exactly that.
MR. CHAIRMAN: Your first round has expired. Mr. Epstein.
MR. HOWARD EPSTEIN: Thank you, Mr. Chairman. Mr. Parker, I am not sure whether you have brought us good news today or very bad news. The trend of the comments seems to be on the negative side more than on the positive side. Given that we have a limited amount of time, I think what I will start off by doing is telling you what it is that the picture looks like to me and invite comment back, if I may, as a starting point.
Here is the situation. As the discussion that was just held a moment ago indicates, there is an important public policy decision that is going to have to be made soon, and the question is what do we do with NSRL? Do we sell it? Do we stay in the game, and if so to what extent do we stay in the game?
This is a very important decision for the province. Now the history seems to be that, in fact, it was the previous Tory Government which made the brilliant business decision in about 1980 to get into the business of the offshore. As a result of that, we are now $700 million, and more, in debt due to the expenses of the exploration and production that we incurred, combined with the relatively low cash flow that resulted, and the accumulated debt, as I think you have clearly set out for us. At some point, around 1994 I think, the Liberal government made a policy decision that it wanted to get out of being in the offshore oil and gas business, but was not able to secure any purchasers for NSRL. We have drifted since that time, and now the next Tory Government has come along and seems to be indicating strongly that it is interested in the possibility of getting out of being in the offshore oil and gas business and selling NSRL.
Now, all of that, generally, has within it a huge amount of detail, but given that it is a pertinent question, do we stay in or do we sell, it seems to me there are a whole variety of factors that we have to look at. One is the assets we would have and what they might fetch on the market. It seems to me that is a real problem, because we have the 8.4 per cent asset share in SOEP, we have quite small shares in other SDLs, and we have a tax pool situation that might or might not be an asset. When it comes to Cohasset/Panuke, that is no longer really an asset; it is a liability because it is about to go out of production. This makes it a very mixed bag when it comes to looking at the actual assets. If I have understood Mr. MacDonald correctly, he is suggesting that maybe we don't have enough information about the non-SOEP SDLs to really tell us what their production potential might be. That is an uncertainty, and it is one regarding which we might get more information over time as geological research progresses, and as market prices vary.
It is still quite speculative. It also, by the way, raises the question of who might be the potential purchasers, if any, of our interests, ranging from 1.25 per cent to 10 per cent of those 11 SDLs. Presumably, the logical potential purchasers might be Mobil, Shell, and Imperial, who are the large majority shareholders in different proportions in those other SDLs. On the other hand, you have to wonder why they would be interested in buying out
our interest at all, they already have well-established positions inside those SDLs and it is not clear that they would have any overwhelming motivation to purchase our interests there. We are partners with them, we have to come up with some investments, if we want to continue; at the same time, we have no effective decision-making power inside those ventures, because we hold such a small proportion of the interest there.
To all of that, you have to add the factor of the debt. Here is a company that has a huge debt burden that it is carrying as well, and although the 8.4 per cent of SOEP is generating revenues, what we are told in the latest Crown Corporation business plan that has been published and I think confirmed here today, is that, and I am quoting now from the business plan, "NSR(V)L expects 2000 to show substantially improved financial performance. Revenues from SOEP will cover ongoing operating costs as well as the bulk of debt-servicing costs." But to say that the revenues from SOEP will cover the bulk of debt-servicing costs means that it won't cover all of it, and what it will mean is that we are going to continue to lose money, even with the 8.4 per cent interest in SOEP being what should be a good revenue generator.
Of course, natural gas prices have been going up, and I see that the business plan also anticipates that natural gas prices will continue to rise. That certainly strikes me as a reasonable assumption. We are tapped into a very good market. The northeastern United States has a high demand for natural gas, they are interested in our product, it is a good product. I am a little curious as to what it means that we are only selling about 20 per cent of our interest into longer-term contracts and the rest of it into the spot market. I wouldn't mind hearing a little bit about the differences between the prices in those two markets and what that means for us, and which is to our greater economic advantage. But that said, it doesn't sound to me as if we are going to have any trouble selling the product, and I think that is true of SOEP overall.
There are ready markets there, indeed it looks as if we are not looking at a 25 year lifespan for this project. It seems very likely that the scenario is that given the demand in the market, the line will be pressurized and the rate of extraction will virtually double, and so the depletion time-frame that we are looking at will be about 14 years rather than 25 years. That is the picture I think we are likely to look at. My guess is that for the 14 years, it is a virtual certainty that we are going to able to sell every last molecule of that gas at, probably, very good prices to the United States. I think that would be a kind of general understanding of where it is we are going. All of this leaves me a little puzzled as to what it is that we are doing. I mean if we went to the market and we said to someone, all right, we are trying to sell you this company. It has $700 million worth of debt, it has these tax pools that might or might not be of some use to you, and here is a list of its assets.
Well, I kind of think about this mix, it looks, at the moment, as if there is not much there that would make it, at the moment, very attractive to any purchaser to take on this company as a complete entity right now, except perhaps the tax pools. So I guess I want to
start by asking, do I seem to have a reasonably accurate picture of what it is we are looking at when we are coming to grips with this question, this very important public policy question of whether we are going to be able to sell this asset or should stay in the business? Can you help me out here?
MR. PARKER: I think your analysis, Mr. Epstein, has been very good. You have seen me nodding through your comments and you are essentially right in virtually in everything you have said. NSRL is a mixed bag. It does have one extremely interesting asset potentially to the market place and that is the SOEP asset. Is that asset of sufficient economic value to cover the debt? Probably not, virtually, certainly not, I would say unless you have very different assumptions about the world than we would have. So that is the current situation.
MR. EPSTEIN: Can I just focus on this because I know that inside NSRL, 25 year projections have been done as to how the financial viability of the company is to be regarded under different scenarios as to the price of natural gas from SOEP as over against the debt that the company has been carrying. Although I have requested them in the past, I have never been given them. I have not pushed the point, but it seems to me that it is about time we saw some details on this.
You have given me, I think, in part, the answer to the question because you are saying, or you did say a little while ago that you are not aware of any scenario that will satisfy the debt. So that must mean that . . .
MR. PARKER: A realistic scenario I think I said, something like that.
MR. EPSTEIN: That must mean that even under the most optimistic current projections of what the price of our sweet gas from SOEP is, we are not going to be able to completely service the accumulated debt? Is that really the bottom line on that side of it?
MR. PARKER: That is a question of opinion because it is based upon what scenario will you put on price, but if the price of gas were to triple over that period - no, I think most of the experts look at some factor like zero to 3 per cent increase per year in the price of gas over a period like 10 or 15 years, I think, Jim, that would be roughly right?
MR. JAMES MACDONALD: The two biggest factors on evaluating the project will be reserves and the price of the gas. You can go out on the forward curves at the moment for a 5 or 10 year period, and you can see that the Nymex is trading about $3.00 today, and you can see that in the 10 year period it may be $3.00-plus. Under those reasonable scenarios and disregarding something unexpected, like a tripling of price, which could happen, it is just one of those variables, I tend to agree with your analysis that the idea of being able to retire the debt of the company is unlikely.
MR. EPSTEIN: You have introduced a number that is a little worrisome to me. Will it take a tripling in the price of gas before NSRL will be able to handle its debt from our 8.4 per cent interest in SOEP or is there a different number?
MR. PARKER: Howard, there are other scenarios that really matter as well. One is the U.S. dollar versus the Canadian dollar. We are going to get paid in U.S. dollars for much of that gas, although we may sell some in Canada as well, but our financial statements will continue to be in Canadian dollars.
MR. EPSTEIN: Okay, I understand that. Now, the Department of Finance in doing its three or four year projections in its attachment to the budget pegs the Canadian dollar as going from 68.4 cents to about 72 cents over the next four years. I am not aware of anyone who has said that the Canadian dollar vis-a-vis the American dollar will be out of that range really, although you occasionally see some projections that talk about it maybe going to 75 cents within a four year period. I know the problem that you are under when you are doing 15 year projections, I understand that and I understand that it is a factor. So then run by me some scenarios that use assumptions about the value of the Canadian dollar versus the American dollar that our Department of Finance has been working with and tie it in to the price of gas.
MR. PARKER: I don't think - I know - that I am not capable of doing that and I was also going to mention, there is also the risk of reserves. Will this gas pool be bigger or smaller in reality . . .
MR. EPSTEIN: I am not asking you about the other 11 SDLs. Let's leave them out of it.
MR. PARKER: No, I am talking about the actual SOEP pools, okay.
MR. EPSTEIN: Your assumption is that they might turn out to be larger than 3.3 tcf?
MR. PARKER: They will turn out to be different than 3.3, they will.
MR. EPSTEIN: Sure, okay, fair enough.
MR. PARKER: I think that they pick a pool size that is at the 50 per cent scenario rate. So there is a 50 per cent likelihood that that pool will be bigger than 3.3., et cetera.
MR. EPSTEIN: Well, I have to say that the size of the offshore that I was hearing from you folks here this morning struck me as low compared with the kinds of numbers that have generally, I thought, been thrown out by the CNSOPB, by the National Energy Board, by the Geological Survey of Canada. It seems to me they are talking ultimately about fields, and I am talking here about the Sable group of fields, the Sable Basin I guess is the right term,
of sort of 13, 15, 18 tcf total. Now, this isn't SOEP. This is SOEP included along with the others and I heard, what I thought I heard, significantly smaller numbers coming from Mr. MacDonald awhile ago, but maybe I was not adding them up correctly or not hearing them.
MR. JAMES MACDONALD: We often hear that number quoted, that there may be 13 or 18 tcf of gas in the Nova Scotia offshore. That is a statistically arrived number, that there may be that amount of gas in the offshore. What we have proven to date is the 5.7, in that ballpark range. We all have our fingers crossed that there may be 18 or a lot of gas in the offshore, but to say it is anything more than just a calculation I think would be a mistake. We only know what we have proven to date.
MR. EPSTEIN: Well, it is worse than that. I want to be clear. I am a gas sceptic when it comes to the size of those fields. I spent three days at the National Energy Board hearings a few years ago listening to SOEP's chief geologist, Dr. Goobie, come and talk about how you figure out what are recoverable reserves, even when you have got an SDL, and I came away from that feeling very convinced that you need very good geological and financial information before you can decide to go ahead and the hard fact, of course, is that even though there are 22 SDLs out there that the SOEP partners have interests in, there are only six for which they came forward and made a specific proposal to do gas extraction. That is it.
If you want to make the most cautious analysis, there are only six fields that are at a state, in terms of the geological and financial knowledge, that are able to go into commercial production and they are in commercial production as of now. That is it.
MR. JAMES MACDONALD: Even of those six fields, Mr. Epstein, every reservoir engineer would like at least one year of production history with pressure profiles to really try to evaluate the performance and the reserves in the fields.
MR. EPSTEIN: So I understand all these uncertainties now. I am still looking for a number.
MR. JAMES MACDONALD: We have not run a case that retires the debt so I cannot tell you that if gas doubles, triples, quadruples, it would retire the debt. We have not run that case.
MR. EPSTEIN: I don't know why not. You have got several variables that you can plug in, the Canadian . . .
MR. JAMES MACDONALD: It is not that we cannot do it. It is just that we have not done it because it is unlikely, it just did not seem a reasonable case to run. I mean it would be interesting out of curiosity what it would take, but within our price file forecast we did not see it occurring.
MR. EPSTEIN: I have got to say I think it is important that those scenarios be run so that we at least have a couple of pictures of what it is that might put us at the point of being able to do it, even if they look very unrealistic and unachievable because at least it tells us what kind of circumstances or combination of circumstances would put us in a position to do that. I would have thought it was a sort of base piece of information, even if you regarded it as being out in fantasy land somewhere.
Let's just move along. If that is the case, that it is very unlikely that one of those scenarios will come to pass then really, in terms of the hopes of being able to cover the debt, we are really looking at those 11 additional fields in which we have small but some interest. Is that right?
MR. JAMES MACDONALD: Yes. I am acknowledging that we have a small interest in those fields. The first part of your question was . . .
MR. EPSTEIN: The thrust of the question was, if SOEP itself is not going to generate enough revenues to cover the debt, and Cohasset/Panuke aren't because they are closing out, then really we are looking at our remaining interests in the other assets of the offshore to perhaps generate revenue if we are going to cover the debt.
MR. CHAIRMAN: One minute.
MR. JAMES MACDONALD: We have made a reasonable estimate of tying in developing Tier I, developing Tier II. We have looked at the other SDLs. We have evaluated the reserves in place, analysed different production scenarios and tied them in. So even when we include all of our SDLs, it is unlikely we would retire the debt.
MR. EPSTEIN: I started off saying I didn't know if Mr. Parker had brought us good or bad news today. I think the answer at this point is, we have been brought very bad news. I think that is really what it comes down to at that point.
MR. JAMES MACDONALD: I don't know if it is bad news. The SOEP project is a very good project. It generates a decent return. The difficulty is . . .
MR. EPSTEIN: If we had no other problems, we would be all set.
MR. JAMES MACDONALD: That is correct. Part of the problem is, as Steve broke down, the capital that we put into those projects, a large component of it is interest on foreign exchange and it is difficult to find a buyer for that type of expense.
MR. CHAIRMAN: Your time has expired.
MR. EPSTEIN: So this forces us to look back at the original decisions, so yet again we can thank John Buchanan.
MR. CHAIRMAN: You will have to come back to that in the next round. I will turn it over to the PC caucus now.
The honourable member for Kings South.
MR. DAVID MORSE: Mr. Chairman, I would like to thank our witnesses for coming here today and indeed I would also like to thank Mr. Epstein for his questioning and his opening statement. I concur that it was the Tories in 1981 who got involved with NSRL. My understanding at the time was that the motivation was that it held great potential for Nova Scotia's future but that it was risky and there needed to be a catalyst. Through a previous Tory Government we stepped up to the plate with NSRL and we provided that catalyst. What I would like to know is, approximately what was the NSRL debt in May 1993, or at the end of 1992?
MR. JAMES MACDONALD: I am sorry. I can get the number for you but I just don't know it at the moment.
MR. MORSE: Are we talking about $100 million, $200 million?
MR. JAMES MACDONALD: I would say that probably $250 million is a rough approximation.
MR. MORSE: Okay, so we will go with $250 million. So I guess we could accept responsibility for $250 million.
MR. JAMES MACDONALD: As we have indicated, that $250 million grew due to interest and foreign exchange so the genesis of that debt, as we have gone through it, that original capital resulted in a significant portion of our debt today.
MR. MORSE: At the time that the Liberals took power in May 1993, Jim Livingstone was the President and I understand that NSRL had a couple of profitable years under his presidency.
MR. JAMES MACDONALD: When Mr. Livingstone was President, yes, we were in the peak of the Cohasset project and on a net income statement, we would have made money and there may have been a year where there may have been enough to service the financing charges also.
MR. MORSE: Okay, so we have established that under Mr. Livingstone NSRL was profitable and appeared to be going in the right direction. Then the Liberals came in. I believe the new minister was Don Downe. Some decisions were made, including to fire Mr. Livingstone, and now we are at $714 million. There were some other things that we will be talking about later in the discussion.
So NSRL has been a catalyst really for the boom we are experiencing in Nova Scotia today. You look around Halifax, there is a demand for office space. There are a lot of people who are being employed in the offshore. There are businesses that are growing to supply the offshore and, in fact, I think it would be fair to say, would you agree, that the offshore is fuelling Nova Scotia's mini boom?
MR. JAMES MACDONALD: I think there is no question, the SOEP project has been a mini boom to the province, the jobs created and the spin-off activity from supply vessels, helicopters, taxicabs, hotels, et cetera.
MR. MORSE: The list just goes on. Again, I would like to thank Mr. Epstein for pointing out who stepped in in the early stages when there was not a lot of interest in getting involved in the offshore. I would also like to point out where the debt grew and that there was a change in the management.
Also, I guess I would like to talk a little bit about the gas find underneath Panuke. Apparently PanCanadian, our former 50 per cent partner in this field, found a potentially large gas well underneath the Panuke oil field?
MR. PARKER: Mr. Morse, I would be glad to answer your questions and Jim can provide us with technical background. PanCanadian has made an announcement about some gas flow rates and there is no question that they are excited about them. There is no confirmation and PanCanadian is clear about that, about whether or not this is a commercial field.
MR. MORSE: So it is not a question of just turning on the gas and collecting the profits. There may be some more exploratory work?
MR. PARKER: Let me give you a little history of this field, Mr. Morse, if I could, because I think it is a good illustration of what I talked about earlier. Sometime in 1998, Jim came to the board and said that our partner, PanCanadian, would like to drill a deep well underneath the production field that we were working in. He essentially said to us, this is the cheapest well you will ever see because we have a drill rig there, we have a crew, the rig can do this and the estimate from the experts on what that first well would cost, in total - now, we would have a 50 per cent share but all numbers I am going to give you will be total - was $1.5 million. Now the board didn't have millions and millions to invest in exploration but $1.5 million on a recommendation of management sounded like a good deal.
MR. MORSE: So just to clarify, this is Mr. MacDonald.
MR. PARKER: Yes, and the professional staff and the consultants they hired, et cetera. That well ended up costing $30 million off a $1.5 million estimate. There is no criticism whatsoever of our partner when I say that. They had a blow-back, they had pressures never before seen offshore Atlantic, they had sour gas, they had to - I say they, it is us, too - pay to bring in equipment from all over the world to deal with that. So we ended up with roughly a $25 million to $30 million bill. Then PanCanadian, very excited by the pressures and things that they had found, and I am sure rightly so, came back and said we would like to drill an additional well nearby. The total cost estimate for that well was $61 million and it was at that point that we negotiated the gross overriding royalty, and I could talk about that process sometime if you wish.
Now PanCanadian has announced that they have had exciting discoveries because they ended up doing that $61 million well on their own and they have indicated, with us sitting on top with a royalty, if anything should come . . .
MR. MORSE: Why on their own?
MR. PARKER: Because we chose not to invest 50 per cent of $61 million.
MR. MORSE: Surely, there must be private-sector partners who would have liked to have gotten involved in this.
MR. PARKER: Actually, the first thing we did, was we went out to a series of private-sector partners, shared with them all the data. I believe we talked to seven companies.
MR. MORSE: Yes?
MR. PARKER: They all turned down the opportunity to farm in on the project.
MR. MORSE: No, wait a second. This is kind of confusing to me, because what you are telling me is that the oil and gas players would not get involved in this. There is one quote that I have here in the paper actually from a member in this House that says, taxpayers stand to lose hundreds of millions of dollars by not doing this. Could I have your comments?
MR. PARKER: I would just confirm, and we have said this publicly, that PanCanadian was excited. We have great respect for them. We want them to find huge quantities of gas out there. I think you all want them to do so.
MR. MORSE: Yes, so do we.
MR. PARKER: But we felt that the risks were high, and that the private sector should do it. We then went to seven companies, most of whom already are out there, and shared with them the data. They chose not to participate. PanCanadian then was offered the opportunity to do it on their own with us having a gross overriding royalty. They chose to go ahead. I would like to just take this story up to the modern time. It was indicated to us at the time that this well might get us to a point where we would be knowing if we had a commercial field. We did not feel that it would, that it would take further exploration. PanCanadian has now announced that they intend to drill two or three additional wells out there.
MR. MORSE: At what price per well?
MR. PARKER: This is for them, but we would estimate roughly that same cost, $60 million per well, another $180 million. They are very excited about it, and we all hope they are right.
MR MORSE: So do we, but I do take note that those companies that are involved in the offshore, other than PanCanadian, chose not to risk this. For Nova Scotia taxpayers, that would mean we would have to take $120 million, $180 million from health and education to do this.
I am not sure that would be particularly attractive to the Nova Scotia Government and I take it that the board turned down this proposal. That is what you are telling us? Would there be any other infrastructure required to do this? Are we secure that we could use the offshore pipeline, or would we perhaps be looking at another large investment for another pipeline?
MR. PARKER: It would be our estimate again, and we are not participating partners now except we have the gross overriding royalty, but we estimate some number of hundreds of millions of dollars probably would have to be spent if that becomes a commercial field in order to put it onstream. Whether or not it could link into existing facilities, would not be for us to say. But just drilling these wells and finding a commercial field, sir, is not enough. They then have to spend some major amount of money. Presumably there will be a return on it.
MR. MORSE: Hundreds of millions of dollars?
MR. PARKER: Yes.
MR. MORSE: By the way, I think it is marvellous that PanCanadian is doing this. They are in that business. I understand they have an annual cash flow, positive cash flow, something to the tune of $900 million a year. So, this is not a big deal to them, or at least as compared to the Nova Scotia taxpayers who are only peripheral players in this business. What sort of guarantees are there that if, in fact, we went down this road, there would be a pay-off?
MR. PARKER: There are no guarantees whatsoever.
MR. MORSE: Are we talking about a 5 out of 10 chance that we are going to have a commercial well?
MR. PARKER: As you go down the process and learn more and more, the odds change, of course, but you pay to get those greater odds. I think our view at the board was that there was less than a 50 per cent chance, probably far less than a 50 per cent chance. Approximately in the 20 per cent range, something like that.
MR. MORSE: Okay, so 20 per cent. PanCanadian, they are not fools. I can't say the same for this government. That is another quote from a member in this House, actually, it is a certain Energy Critic in this House. So, we are talking about less than a 20 per cent chance of having a commercial return. I wonder what the odds would be at the Sheraton if you just took those hundreds of millions of dollars, I would take it from this or advocate it by, actually you, Mr. Chairman. This is February 25th of this year, I am quoting you, sir.
MR. CHAIRMAN: I recognize that.
MR. MORSE: Okay, and I commend you for taking responsibility for your comments.
I would just like to read them again for the record, New Democrat Energy Critic John Holm said taxpayers stand to lose hundreds of millions of dollars. PanCanadian, they are not fools, I can't say the same for this government, Mr. Holm said.
In your opinion, would the Sheraton, which was built against the wishes of Nova Scotians, by the former Liberal Government, would they offer us better odds on those hundreds of millions of dollars than . . .
MR. PARKER: I haven't the faintest idea, but as I said in my first comments . . .
MR. MORSE: So, it is up for discussion though.
MR. PARKER: This is the business. This is the business, it is like this. This is how you find gas and oil, by making these kinds of bets. This is characteristic of the business everywhere around the world. The public policy question is, should taxpayers be doing this? Do we have a risk tolerance to do it, and, do we have the cash to do it?
MR. MORSE: You can understand, though, why we would not want to take the public schools budget and gamble it on the offshore.
MR. PARKER: What we did as a board was we took a business decision. We went to management and said, can you find a way to get us the biggest stake in this without further cash outlays? Management did that, and the board was satisfied that this was an excellent way
to go, because whether the chance is 20 per cent, 15 per cent, or 40 per cent, we have a direct stake in that field coming in now, and we have no further cash commitment as a result. The board looked at this as a series of business alternatives, and went for the alternative that gave us what essentially is a no-risk opportunity.
MR. MORSE: Getting back to the comments by you, Mr. Chairman, I would say that hindsight is a great thing, and even though we are really not to the point of hindsight, because there is certainly no guarantee that those hundreds of millions of dollars that I would take it from the article you were advocating that we risk for Nova Scotians, would bear a return, it has been indicated maybe 20 per cent would be well spent for this. It is consistent with your . . .
MR. CHAIRMAN: Five minutes.
MR. MORSE: That is a shame, this seems to be slipping by very quickly. This is consistent with the philosophy of a Party that believes in a greater involvement in the private sector, which I believe is consistent with the NDP. You are only telling half the story in your comments. I would think that I have probably made my point there. Just one final point I would like to make. Mr. Chairman, again, you were advocating, in fact in this very Chamber not too many months ago, that we get involved, perhaps, in selling gas to truckers. I have no expertise in the oil and gas business, and maybe you could make some comments or maybe Mr. MacDonald would make some comments. Would you think that from NSRL's point of view that you would like to expand into the sale of diesel fuel to truckers? Would that be an attractive opportunity for Nova Scotians?
MR. JAMES MACDONALD: To your first question, would I like to comment, no, I don't have the expertise to comment on the province selling diesel fuel to the trucking industry.
MR. MORSE: Anyway, I think that I made some points. I am going to pass it over to my colleague, the member for Colchester North.
MR. CHAIRMAN: The honourable member for Colchester North, you have three minutes.
MR. WILLIAM LANGILLE: I guess in the back row, we have to stand up. On your key assumptions for gas prices, I just want to clarify the mmBtu, that symbol. Could you clarify for this committee what that stands for?
MR. JAMES MACDONALD: Yes, that stands for million Btu. In the oil industry, we use m for thousand, so mm would be million.
MR. LANGILLE: That is one million Btu.
MR. JAMES MACDONALD: Yes.
MR. LANGILLE: That is on the New York Mercantile Exchange, is it? That is where you get your price?
MR. JAMES MACDONALD: That is the unit they use on the NYMEX futures pricing.
MR. LANGILLE: On your assumptions, I believe for this year you said it would be $2.40.
MR. JAMES MACDONALD: Yes, that sounds about right.
MR. LANGILLE: In fact, it is up to $3.00-plus, is it?
MR. JAMES MACDONALD: In the pricing we deal in both Canadian dollars and U.S. dollars. In Canadian dollars, for the first quarter of this year for sales, we are slightly over our average price in our budget. I will get the exact numbers for you. While I am looking for that, the volumes for the first year, we had anticipated bringing production up a little faster. Production start-ups, if you are aware of in the newspaper, of the hydrate or the ice bug, as referred to, in the subsidy flow line, so we had some start-up difficulties. So even though we are getting a little bit higher price, the revenues would have been lower for the first quarter.
MR. LANGILLE: I guess where I am going here is that the price of natural gas is on the increase.
MR. JAMES MACDONALD: The price of natural gas is . . .
MR. LANGILLE: Increasing. In the past months it has been on the increase. It is not declining.
MR. JAMES MACDONALD: If you can extrapolate a short-term trend into the long term, yes, there probably is a price increase. The prices this summer are probably higher than they have been in past summers. Typically, you have five heating months and then the prices drop off during the summer period for seven months, but this year the price has been staying high.
MR. LANGILLE: I believe in the oil patch they are predicting the price will keep increasing due to the amount of people that are going to be depending on natural gas.
MR. JAMES MACDONALD: There is an expectation that there will be a shortage of gas and that shortage would hopefully translate into a higher gas price.
MR. LANGILLE: We know that we have the Alliance pipeline running into Chicago and into Ohio, that is ready for completion, so you will have a big demand from Alberta for natural gas. We are a player going into New England states . . .
MR. CHAIRMAN: Time has expired. I will turn the floor now over to the Liberal caucus. Maybe we could go for about 10 minutes this round.
MR. MACKINNON: After listening to the member for Kings South, I am absolutely convinced as to why I don't want to vote for this budget. That having been said, let's look at the reality. Back in 1993, Mr. MacDonald; $250 million, and I believe you indicated that with the SOEP project, we had to invest an additional $178 million. Is that correct?
MR. JAMES MACDONALD: Yes, that is correct.
MR. MACKINNON: So that would be on top of the $250 million?
MR. JAMES MACDONALD: Yes.
MR. MACKINNON: Okay, you would agree that was a good investment?
MR. JAMES MACDONALD: I would.
MR. MACKINNON: Okay, with the $250 million, that is $428 million and the rest is interest charges.
MR. JAMES MACDONALD: The Cohasset project lost money. That was the beginning of the Cohasset project, so overall there may have been year-to-year positive cash flow. The net result of Cohasset is it did not make money for the province.
MR. MACKINNON: If I recall, one of the primary concerns Mr. Livingstone had when he took over at that juncture was that the way the contracts were worded, up to that particular point in time, the majority shareholder would make a decision and we wouldn't have much choice. If they decided to invest, for the sake of discussion, $100 million in some aspect of the project, we would have to contribute our 8.4 per cent, whether we wanted to or not. Is that not correct?
MR. JAMES MACDONALD: Yes, within the confines of the project, we are an 8.4 per cent working interest.
MR. MACKINNON: That is perhaps the reality that the honourable member for Kings South didn't realize or probably didn't take time to read. I guess one would have to ponder why would a large oil company such as PanCanadian take 91.6 per cent of the risk and we were only taking 8.4 per cent, so obviously if we are relying on these . . .
MR. JAMES MACDONALD: In the Cohasset project, we own that 50/50 with PanCanadian.
MR. MACKINNON: Yes, even on any of the future ones, with SOEP we have 8.4 per cent.
MR. JAMES MACDONALD: That is correct.
MR. MACKINNON: So, there are risks.
MR. JAMES MACDONALD: Absolutely.
MR. MACKINNON: So 91.6 per cent of the risk is with the private sector.
MR. JAMES MACDONALD: Yes.
MR. MACKINNON: Looking at the issue that my colleague addressed with regard to NSRL's foregoing its 50 per cent interest of the latest Panuke find for 2 per cent of the royalties, when was that decision made?
MR. JAMES MACDONALD: We would continuously evaluate the projects, the wells as they were drilled, so we would be evaluating the original discovery well, which was the PP3C, and that would be sometime in the middle of July.
MR. MACKINNON: July 22nd?
MR. JAMES MACDONALD: Even prior to that, earlier we would be looking at that well, trying to evaluate the cost. You have to anticipate that when you drill a discovery and look forward at your future costs. We were well aware that a discovery would just lead on to additional requirements for drilling. So, we were starting to evaluate exactly what we found, probably in the middle of July. On July 22nd . . .
MR. MACKINNON: Was the decision made then to make the switch from 50 per cent for the sake of 2 per cent on the royalties?
MR. JAMES MACDONALD: There was never a decision made to participate. What we were looking for, as my chairman indicated, is how to stay in this project and minimize capital expenditure. The way to do that is either through a farm-out or through a royalty type of situation. Now, in any negotiation, there is a beginning and an ending. When we started the process, and the time we finished, we probably didn't finish signing the agreements until probably October sometime. So is a decision made when you begin a process or is the decision made when you end the process? I mean, tell me the right decision was made.
MR. MACKINNON: I want to be clear. On July 22nd, there was no decision made to make the switch?
MR. JAMES MACDONALD: On July 22nd, my instructions were to try to minimize our exposure into future expenses on drilling.
MR. MACKINNON: But that is not my question. My question is, was there a final decision made at that point, at that meeting, to switch for the 2 per cent royalties?
MR. JAMES MACDONALD: Depending on how you view it, the final decisions would have been made the day the final agreements were signed, which would have occurred in October.
MR. MACKINNON: So, it would be wrong to suggest that the decision was made before July 27th, before that date, according to what you are saying now?
MR. JAMES MACDONALD: You sort of get into a debate over what you consider a decision point.
MR. MACKINNON: Okay, a government decision was not made before that date. A government policy decision was not made before that date. You are suggesting you are still at the board level?
MR. JAMES MACDONALD: I am suggesting that this project was within the confines of NSRL, and our board had decided not to participate.
MR. MACKINNON: That is what I wanted to determine. It wasn't a government decision. It was, at best, a board decision, and it was still into discussion up to that particular date, correct?
MR. JAMES MACDONALD: This type of a decision is a board decision, yes.
MR. MACKINNON: It is either a yes or a no.
MR. JAMES MACDONALD: Yes, it is a board decision.
MR. MACKINNON: I raise that because the Minister of Finance has indicated quite to the contrary, that the decision was made before July 27th, and you are saying here today, Mr. MacDonald, that the government decision was not made before July 27th. So I wanted that on the record. Besides, the records, the minutes of your meeting for July 22nd, and I will table them, Mr. Chairman, it was certainly indicated, if it was that major of an issue, it would have been a little more clear, rather than the minutes that are recorded. I am not going to get
into them, they are rather self-explanatory, rather ambiguous, I would suggest, for a major policy decision of that nature.
Now, we have the $428 million that we are tied into. Are there any other contracts or are there any other agreements or financial arrangements or contractual arrangements that NSRL are obligated to follow that would require additional capital expenditures that would have been negotiated prior to 1993 should one of the major stakeholders decide to proceed on an additional investment?
MR. JAMES MACDONALD: That had been negotiated prior to 1993? I can't think of any at the moment.
MR. MACKINNON: But there could be.
MR. JAMES MACDONALD: It would be very unlikely.
MR. MACKINNON: I will take that on notice and you can check your files.
MR. JAMES MACDONALD: The only obligation for a capital expenditure prior to 1993 would have been the Cohasset project and the liability being the abandonment of that project. So other than that . . .
MR. MACKINNON: I realize my time is getting very short here.
MR. JAMES MACDONALD: . . . we would have liability for anything that was in the offshore at that time, for example, wells that may not have been abandoned but there is an obligation to abandon those. But prior to that date, those are the only two areas that I can see that we would have liability for.
MR. CHAIRMAN: One minute.
MR. MACKINNON: So to summarize, we have $250 million going into 1993, the provincial Liberal Government - let's be clear, that is the intent of the member for Kings South - invested $178 million, that brings it up to $428 million. By admission of both yourself and Mr. Parker, by all accounts that was a wise investment but we are still dealing with the reality of the interest charges and all the rest is just interest charges. Am I correct?
MR. PARKER: And currency changes.
MR. MACKINNON: And currency changes. Thank you, Mr. Chairman.
MR. CHAIRMAN: We will move on now to Mr. Epstein.
MR. EPSTEIN: Mr. Chairman, I actually have three topics I would like to cover and in the 10 minutes, if we are quick, we can probably cover all three of them. Here is what they are. I want to look at the price differentials between the spot market and the long-term contracts. I want to look again at the tax pools question and then I have a couple of questions about the Panuke CDA agreement. So let's go through those, if we may.
To start first with the price differentials between the spot market and the longer term contracts for gas, can you tell me the difference in the rates that you are getting now for your longer term contracts and the spot market?
MR. JAMES MACDONALD: For the month of April - I don't have the exact numbers in front of me - the long-term contracts are probably getting us 10 cents to 15 cents per MCF or 1 million Btu premium. In the winter months, that would reverse because in spot market there is a high demand for gas probably for five months. So the logic on a long-term contract is that you average out the summer and the winter. So when the summer months come around, you will always get a premium on your long-term contracts, and you will be getting less than spot market prices in the winter months.
MR. EPSTEIN: What length of time does long term mean in this niche of the industry?
MR. JAMES MACDONALD: Long term, we talk contracts ranging five years to 10 years.
MR. EPSTEIN: Okay, so what is the corporate plan with respect to the proportion of the sales that you wish to keep in long and short term?
MR. JAMES MACDONALD: We are continuing to look for additional long-term markets. There are negotiations going on now to find additional markets. Now the proportion that we want to keep, when you sell gas at the moment, you are selling it tied to an index. For example, an Nymex. As you move gas further north, there are different indices. So when you get up to New York and into the Boston area, we would sell gas based on an index there and that index floats every day because it is a daily price. So even though we talk long-term contract, it is tied to an index price. We will use Nymex for an example. So it also floats. The question would be, I guess, are we going to look at locking in some of that floating to fixed and, yes, we are evaluating that.
MR. EPSTEIN: Are NSRL's longer term contract customers located in the Maritimes or are you entering into agreements for longer term with American customers?
MR. JAMES MACDONALD: The two contracts we have are located in the Maritimes.
MR. EPSTEIN: Would that be with Nova Scotia Power?
MR. JAMES MACDONALD: No.
MR. EPSTEIN: New Brunswick Power?
MR. JAMES MACDONALD: Partially New Brunswick Power in supplying fuel to their Bayside project.
MR. EPSTEIN: Any of the pulp and paper companies?
MR. JAMES MACDONALD: No pulp and paper.
MR. EPSTEIN: Refineries?
MR. JAMES MACDONALD: We have a small contract with Canadian Gypsum in the Strait area. So those are the two agreements.
MR. EPSTEIN: Let's move, if we could, to the tax pools. Here is what I want to try to understand. I don't know who the right person is to answer this but what I want to know is, is it clear that the state of the law or the rulings from Revenue Canada make it clear that we could not sell the tax pools to some other company?
MR. PARKER: It is not clear, Mr. Epstein. Any transaction we do with another company has to be based upon valid business reasons for the transaction. The federal government has a general anti-avoidance rule and if they believe, in their wisdom, that the purpose of any transaction is for tax reasons, they can void a transaction. The other comment I would make about the tax pools is, tax pools have different value to different potential buyers. As we have studied this question, it is very clear that it is a complex question. If you were to sell NSRL or sell parts of NSRL, the tax pools could be of great interest to certain buyers and not at all to others, depending upon their situations. But we can't do anything about selling tax pools themselves because the GAAR regulations will get you. There has to be a business reason to do the transaction.
MR. EPSTEIN: Okay, well now, two things got bound up together in that answer. One was the question of the tax pools as an independent entity and the other was the question of selling part of NSRL and that tax pool situation along with it.
MR. PARKER: Because you can't sell the tax pools as an independent entity.
MR. EPSTEIN: Well, that was what my first question was. Is it clear that we can't sell the tax pools as an independent entity?
MR. JAMES MACDONALD: Tax pools are not street entities that can be traded. That goes against the entire tax system.
MR. EPSTEIN: So then we would have to sell some part of the company in order for any potential purchaser to take advantage of the tax pool situation.
MR. JAMES MACDONALD: That is correct.
MR. EPSTEIN: Is it possible to get any rulings from Revenue Canada that give us a better idea of the situation? It seems to me surely I saw some materials here about trying to get advance rulings from Revenue Canada but it wasn't clear to me how that ultimately shook out.
MR. JAMES MACDONALD: The movement of tax pools is associated with a bona fide business transaction. Revenue Canada, I think, dislikes dealing in the abstract. If you had a concrete transaction, they would give you a ruling on it. They don't like hypothetical. They don't like saying, if we did this or that, what would be the situation. They like to have a business transaction in front of them.
MR. EPSTEIN: So at this point we don't know from Revenue Canada how they are likely to treat the tax pools as part of a potential sale. We are left doing our own analysis. Is that right?
MR. JAMES MACDONALD: That is correct. If there were a potential sale, I am not exactly sure what form it would take, so you need to identify exactly the sale structure and then try to determine a tax position with respect to that sales transaction.
MR. EPSTEIN: Is it the instinct of the board of NSRL that the tax pools would be a valuable part of the sale of NSRL?
MR. PARKER: It is our instinct, yes, that if we did arrange a sale, there would be a higher value sale if it was to a buyer who could use all or part of the tax pools.
MR. CHAIRMAN: About three minutes.
MR. EPSTEIN: About another three minutes, okay. You can see my concern because if I understood you correctly in at least one of your initial comments, you seemed to suggest that when you endorsed an earlier statement by Mr. Livingstone that it might be that the scenario the board contemplates is that if there is a sale of NSRL, the taxpayers of Nova
Scotia might be left with the debt, and what I wonder is whether that seems to the board of NSRL the only realistic scenario under which the company might be sold?
MR. PARKER: I think it is too early to draw that conclusion, but it is very possible that is the case. The board of NSRL, if charged with a public policy decision by the shareholder to sell the company, I can assure you we will try to get the highest possible value, and we will look at every asset NSRL holds in doing that. We will simply try to get the best possible deal we can. The tax pools may be part of that, it really depends on who comes forward in the market place with an interest in the company.
MR. EPSTEIN: Okay. Let me just move quickly then, if I may, to the Panuke CDA situation and the efforts to find a private sector partner to step in and take our share. What I wondered about was the time period during which you looked for a private sector partner. Can you just refresh my memory on that. It was in the summer, was it July, August?
MR. JAMES MACDONALD: Yes, we started looking in July. That would have gone on for probably about a three month period from July through to September, through that time-frame.
MR. EPSTEIN: Can you tell me generally how you went about looking for private-sector purchasers and how many companies you approached for example?
MR. JAMES MACDONALD: As the chairman indicated, there were six or seven companies that were approached. Typically, a lot of the work was done by contacting exploration groups of land departments of those companies. They were given an explanation of what the play was, where it was. They were familiar with the East Coast, so they understood that. There were data rooms set up. They would send over their geological staff, their geophysical staff. They looked at the geophysical play, the geology, the pressure data, the regional trends. They go back, take that information, crunch their own numbers, look at development costs, operating costs. They look at the whole regional trend and then they come to their own conclusions on that.
MR. EPSTEIN: Is two or three months a reasonable amount of time for those companies to make a decision about this?
MR. CHAIRMAN: I have to have a short answer because the time is up.
MR. JAMES MACDONALD: It is not unusual for investment bankers to evaluate entire companies within a 16 week time-frame.
MR. CHAIRMAN: It goes to the Progressive Conservative caucus.
The honourable member for Colchester-Musquodoboit Valley.
MR. BROOKE TAYLOR: I think what we have to do is ask ourselves here this morning, and the answer seems fairly obvious, and that is whether or not Nova Scotians, the owners of NSRL, the oil and gas company, are getting fair value or good value for their tax dollars. Mr. Chairman, the answer to that question is simply no. Now, I know it is much more complex than that and I thank the presenters for coming in this morning as witnesses at this hearing. But the fact of the matter is that after 19 years, Nova Scotians are on the hook for some $714 million. So, I think it has been proven time and time again that many times, relative to major business decisions, gas and oil experts probably didn't make all those types of major agreements and transactions. More likely than not, senior bureaucrats and politicians, without the expertise, involve themselves, and I am speaking about successive governments. I think, not too long ago, it was disclosed in this committee, in fact, that a former Minister of the Crown tried to have his personal accountant broker a deal to sell the tax pools off. I would suggest at that particular time, politics was employed and involved. That accountant stood to gain possibly $500,000 or $700,000 if the transaction had been pulled off. For once, I think the federal government made a wise decision in 1996 that essentially prohibited the transferring of these tax pools.
I also remember a former Minister of the Crown who decided to hire a company out of Toronto to divest Nova Scotians of their considerable interest in western property. Some people valued that property - and this comes from a good source and authority - at $50 million and I think it was sold for between $4-$5 million, so if you don't have gas and oil experts making these major decisions, the opportunity for boondoggle and blunder is quite obvious.
If I could, I would like to talk a little bit about the offshore accord that does permit Nova Scotia back-in rights on the pipelines. I understand that the back-in right was given away - once again, probably by a politician or senior bureaucrat without any gas and oil expertise - for a song and a dance; not even a song and a dance because it was given away for nothing. My question is, let's say the province had chosen to exercise that back-in right, could the province then have sold those rights to another private sector company?
MR. PARKER: Mr. Taylor, we have no idea. We are not involved at all in the pipeline back-in rights situation. We have no expertise or involvement in those decisions, so it is a question for others.
MR. TAYLOR: Well, Mr. Chairman, it may be a question for others, but NSRL, I believe, did have some involvement in that decision or certainly a Minister of the Crown of the day, perhaps Natural Resources did and that is the information that I have. (Interruptions) I guess I would ask Mr. MacDonald at that particular time, did NSRL have any involvement at all? Were they knowledgable? Were they consulted relative to giving away our back-in rights for nothing?
MR. JAMES MACDONALD: The back-in rights are given to the province by the federal government through the offshore accord legislation. That legislation allows the province to acquire, on commercial terms, 50 per cent of a trunk line through the province. If that trunk line extended into the offshore, they may be able to acquire 50 per cent in the offshore portion also. The legislation indicates that is a right of the province to exercise. NSRL has not been granted that right, nor were we asked whether we should provide opinion on whether the province should exercise it or not.
MR. TAYLOR: Mr. MacDonald is telling us here this morning that NSRL wasn't asked for an opinion on that particular question. Yes, I did indicate that I didn't believe that people with gas and oil expertise made that decision and perhaps Mr. MacDonald then - being a player, certainly an important player with NSRL - could tell us who from his experience, made that decision then.
MR. JAMES MACDONALD: As I wasn't involved in that decision-making process, I truly can't say who signed the agreement giving away the back-in rights.
MR. TAYLOR: I wonder at that particular point in time then if Mr. MacDonald recalls who was the chairman of NSRL?
MR. MACDONALD: I would think the chairman at that time would have been Bob MacKay.
MR. TAYLOR: I was hoping that Mr. MacDonald, being involved with NSRL as the General Manager wasn't that far removed and sometimes we use an old term around the House getting replies and answers is as difficult as pulling horse teeth. I guess what I would say is that when the expiry date on a carton of milk expires and the milk goes sour, normally we will throw that product out and I guess what I have to question myself as to where are we going with NSRL? I know that the Minister of Finance, I believe sometime in February, indicated that he and this province were going to seek valuation of NSRL. He has asked the Crown Corporation to seek proposals, I am wondering where that request is today?
MR. PARKER: NSRL has engaged, after a bidding process, the firm of Scotia Capital, a competent firm, to look at the assets of NSRL and to look at the market place conditions. We have asked Scotia Capital to work with us in terms of developing, first of all an answer for what the value of NSRL would be on a retained case and also to take a look at what potential market values might be, because in the end potential market values are just theory.
The market decides if you put a company out, it is like selling your house, the value of your house is what somebody will pay for it, but Scotia Capital has been asked to look at various scenarios such as taking the company public, selling it to a private industry seller, various kinds of structural things that could be done, and we are working with Scotia Capital
now and will be developing a report that will come back to the board of NSRL and the board of NSRL will provide that report to the shareholder and then a public policy decision will be made. I guess even if no decision is made, that in itself is a decision really because it keeps you on the retained case. Our job is to give the shareholder the best information we can prior to making that decision.
MR. CHAIRMAN: A little less than a minute.
MR. TAYLOR: Mr. Chairman, it seems as plain as the nose on your face that this whole thing has been a financial nightmare for Nova Scotians, and I say that with all respect. Irrespective of everybody's best intentions, the province is on the hook for $714 million. I guess in closing I would ask Mr. MacDonald, because he has had, I guess, the longest association with NSRL, whether or not he personally thinks the province should continue to invest and be a partner, if you will, in the offshore play and, more importantly, should they continue to own NSRL?
MR. JAMES MACDONALD: To continue participating in the offshore, as I said, the oil companies don't move quickly, but they never stop. In most of those other SDLs we are associated with major oil companies, Mobil and Shell. They will continue. They will never stop exploring, drilling and developing. Those companies have tremendous cash flows and properties around the world. We have one little project to provide us with a cash flow - SOEP. That project alone has a significant risk left to it as it is, even while we are bringing it up on producing. We are in a teeter-totter state where the cash flow from that project balances and the cash in is equal to the cash out. As you have asked my personal view, I think it is very risky for the province to continue exploring and developing projects in the offshore.
MR. TAYLOR: I take that as a no, Mr. Chairman.
MR. CHAIRMAN: The time for questioning has expired, but we have just a couple of minutes left. I don't know if there is a request for any short snappers, a minute and one-half or so apiece. They would have to be short snappers.
MR. RUSSELL MACKINNON: Thank you, Mr. Chairman. Mr. MacDonald, is it not correct that Mr. Livingstone, at one time, made an offer to buy NSRL's interests, assets, after he left as CEO?
MR. JAMES MACDONALD: I think it is correct that . . .
MR. MACKINNON: Was that figure for approximately $30 million?
MR. JAMES MACDONALD: I think K2 may have expressed an interest in acquiring some of the assets of the company.
MR. MACKINNON: Would you be able to table the documentation on that proposed offer?
MR. JAMES MACDONALD: At that time Rothschild was conducting the divesture, or the process, and part of that process would be the requirement that if you are going into the offshore, for those assets, you have to show the ability to operate in the offshore. You are looking for a solid financial statement. I am not certain that the documentation that Rothschild required was provided and, as such, I suspect, or I think that K2 was not permitted to review the data rooms. So in saying that, unless there was an unsolicited offer that they may have proposed, I don't think there was ever a formal offer accepted by Rothschild to review by K2.
MR. CHAIRMAN: Mr. Epstein, did you have a short snapper.
MR. EPSTEIN: I do, Mr. Chairman. Just to nail down one diversion that I think was thrown at you earlier, I take it that it is clear that NSRL is not in the diesel fuel business, certainly not in the retail diesel fuel business, isn't that right?
MR. JAMES MACDONALD: That is absolutely correct.
MR. EPSTEIN: That is fine.
MR. CHAIRMAN: Is there a short snapper?
MR. LANGILLE: Mr. Chairman, there are three by-products on your gas load, is that right? We have ethane, propane, butane?
MR. JAMES MACDONALD: Yes, that is correct.
MR. LANGILLE: Ethane provides the foundation for a petrochemical industry. What is the state of that in Nova Scotia right now? Are we developing anything; has there been any interest in the petrochemical?
MR. JAMES MACDONALD: In the past there has been interest expressed, I think by different parties, suggesting that maybe a petrochemical facility could be built in the province.
MR. LANGILLE: As of now, these products are flowing through the gas line into the United States?
MR. JAMES MACDONALD: At the moment we are not extracting the ethane from the stream and some of the propane and butane is also left in the gas stream and the rest is being extracted at Point Tupper.
MR. LANGILLE: Could those be flowing into the pipeline from Boston and filtering down into the petrochemical plants in New Jersey? Do you know where they are going, that is my question?
MR. JAMES MACDONALD: We don't know where the end product is going because we only have 0.4 per cent; we would know where our product would be going, but most of the gas is just being sold as heating fuel as if it were a methane component and it is being sold to different companies that will burn it as fuel. At the moment there is no one extracting that product for petrochemical use.
MR. CHAIRMAN: Unfortunately, we have to draw the questioning period for today to a close. On behalf of the committee, I certainly would like to thank our witnesses for appearing before us. I know, speaking for myself, although I did not ask any questions, I found the information being provided very helpful. So on behalf of the committee, thank you very much for taking the time to appear before us.
Before we do adjourn, for committee members there are a couple of matters, one, a letter was given to members and left on your desk from Mr. Rick Lawler indicating his willingness at a future occasion, but expressing that he cannot really - and you can read the letter for yourselves - appear on May 17th. So that means that that date is open and, unfortunately, we still do not have a long list, or any kind of significant list, of potential witnesses who we wish to appear before us.
Next week we have the Cape Breton County Economic Development Authority coming before us. After that we have nobody scheduled if Mr. Lawler is unable to make it. There were a couple of suggestions made previously. One of them was that senior officials of the Nova Scotia Liquor Commission be asked to appear before this committee. I believe it was the member for Colchester-Musquodoboit Valley who had raised that as a possibility. I don't like us leaving without having but one meeting witness agenda scheduled. So does any committee member have a recommendation that you would like to bring forward as our witness for the May 17th meeting?
The member for Colchester-Musquodoboit Valley.
MR. TAYLOR: Yes, Mr. Chairman, we would still like to leave that suggestion relative to the Nova Scotia Liquor Commission senior management on the table for consideration.
MR. CHAIRMAN: Well, that is for consideration. That is not a motion to have anybody appear.
MR. TAYLOR: That is right.
MR. CHAIRMAN: So we are then in the situation where we, after next week, have no witnesses unless . . .
MR. TAYLOR: I will make the motion.
MR. CHAIRMAN: . . . a motion is to have somebody invited before this committee.
MR. TAYLOR: Mr. Chairman, in that context I would make a motion that we do invite senior management in from the Nova Scotia Liquor Commission.
MR. RUSSELL MACKINNON: And the chairman of the board?
MR. CHAIRMAN: I heard the member for Cape Breton West, were you trying to make an amendment to that motion or . . .
MR. MACKINNON: Yes, Mr. Chairman, if I might, if we are inviting senior management, we should at least invite the chairman of the board, much the same as what we did with NSRL here today. You have to at least have the chief spokesperson for that institution here.
MR. CHAIRMAN: Is that agreeable?
MR. MACKINNON: You just don't go cherry-picking among senior management. You could have this entire Chamber filled with senior management.
MR. TAYLOR: Mr. Chairman, I have no difficulty with the chairman of the board, but what I had hoped is that perhaps we could bring in the general manager - if that is the capacity and the proper terminology - especially relative to the distribution and the head office out in Lakeside, I believe.
MR. CHAIRMAN: In an attempt to be helpful, could we leave it this way? I think what I am hearing is that you would like to have the overall manager invited.
MR. TAYLOR: Yes.
MR. CHAIRMAN: You have expressed an interest as to an area that you would like explored and ask the senior management to bring the staff he feels is necessary to address issues in that area; also that we would invite, along with the senior management, the chairman of the board to also attend as a witness on that date. Is that my understanding of where we are? (Interruption) Okay, if that is the understanding, are we ready for the question?
Would all those in favour of the motion please say Aye. Contrary minded, Nay.
The motion is carried.
Again, I guess I would like to make the plea to the committee members, that if this committee is going to operate efficiently, we do have to have a list of proposed witnesses that committee members would like to bring forward. We owe it to those we wish to invite. We owe them the respect of giving them sufficient time to be able to be invited to appear before this committee. Maybe next week members can again turn their heads to who else they would like to have appear before this committee, and we will also get back in contact with Mr. Lawler and see if we can't determine when may be a more convenient time, given the circumstances contained in the letter, for him to appear. Any other business?
MR. JAMES DEWOLFE: Mr. Chairman, are you considering breaking for June, July, or August, or . . .
MR. CHAIRMAN: Well, that is a consideration that I am sure will be brought forward. I wasn't on the committee last year. I don't believe the committee met during August. (Interruption)
MS. MORA STEVENS (Legislative Committee Coordinator): If I may, we meet sporadically during the summer months. The one exception was when we were dealing with the gaming hearings. We also have the conference coming up, so that is going to be taking a lot of the office time. But we would like to get a schedule at least down with prospective witnesses because we are researching these projects as they go. So that certainly does help, and even if we know it is a couple months in advance, it does help witnesses prepare.
MR. DEWOLFE: Mr. Chairman, I suggest that in light of the conference and the busy schedules that we seem to have right now, that we strongly consider adjourning at the end of May.
MR. CHAIRMAN: That may be a consideration we can bring up at another meeting. Right now we have already passed the hour of adjournment. We also have to bear in mind the important responsibilities and mandate for this committee.
The committee is adjourned.
[The committee adjourned at 10:04 a.m.]