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28 mai 2003
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HALIFAX, WEDNESDAY, MAY 28, 2003

STANDING COMMITTEE ON PUBLIC ACCOUNTS

8:00 A.M.

CHAIRMAN

Mr. William Estabrooks

VICE-CHAIRMAN

Mr. James DeWolfe

MR. CHAIRMAN: Good morning, I welcome you to this meeting of the Public Accounts Committee. I will have my colleagues introduce themselves before I turn the floor over to our witnesses from the Department of Energy. I would like to advise members that I would like to - and I have talked to the deputy chairman for a moment - have about a 10 minute business session at the end. Our witnesses are welcome to remain for that. As is customary, we usually have a few moments of greeting before you leave. The item of business is at the bottom there and I just want clarification on a couple of points, if I could. We will be sticking to the time line. At 9:50 a.m. we will be going to the business part of our meeting.

I would ask my colleague, the member for Halifax Fairview, to introduce himself, please, along with other members of the committee.

[The committee members introduced themselves.]

MR. CHAIRMAN: I'm Bill Estabrooks, the MLA for Timberlea-Prospect. I have the privilege of being the Chairman of the Public Accounts Committee.

I would ask our witnesses to introduce themselves. I know we had a polite moment there, as just a reminder of my previous career, we will give you the first 15 minutes but the most important part of this committee process is, of course, the exchange back and forth between the witnesses and the MLAs so I encourage you to stick to those deadlines. Perhaps we could introduce ourselves, whichever is the easiest way to do that. One person could do the introductions.

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MR. DAN MCFADYEN: Mr. Chairman, good morning. I'm Dan McFadyen, Deputy Minister of the Department of Energy. I have with me today, to my immediate left, Paul Taylor, Executive Director of Transportation Utilization. On my right is Allan Parker, Director of Climate Change. To his right is Bruce Cameron. Until recently, Bruce was Director of Energy Strategy Implementation and is now transitioning to Director of Policy Analysis. To his right is Sandy MacMullin, Director of Resource Assessment and Royalties.

I want to thank the committee for this opportunity to speak to progress that the Department of Energy has made in implementing Nova Scotia's energy strategy over the past year. In fact, we are just shy of our first anniversary at the department which will happen later this month. As you know, the Department of Energy is a combination of the former Petroleum Directorate and the Energy Utilization Division of the Department of Natural Resources. We have 41 employees and an operating budget of $7.614 million, equal to the budgets of the two entities that were joined to create the department.

The department is committed to developing the energy industry here in Nova Scotia, implementing the energy strategy is the key component of that commitment. In February of this year, we reported to Nova Scotians on our efforts in a progress report highlighting what has been accomplished so far. I would like to briefly take members through some of the highlights of that report.

Mr. Chairman, let me begin with a brief overview of activities related to the oil and gas industry. If we are to be successful in building an oil and gas industry, we must continue the momentum in exploration. With that in mind, improving the regulatory environment is our number one priority at the department. Our participation last Fall in the Atlantic Energy Roundtable, a summit of federal and provincial government representatives, industry operators and local businesses and our continued participation in the working groups, is bringing industry and government together to address how we can make our regulations more effective and more efficient. We are also working closely with federal and joint regulatory agencies to ensure that changes to the environmental approval processes are both effective and efficient.

Our amendments to the Gas Distribution Act, the new Underground Hydrocarbons Storage Act, regulations and code of practice and our work with other provincial departments to create a one-window access for onshore approvals are streamlining our processes and providing clear direction to industry through the regulatory processes. If we are going to sustain our exploration activity, however, we need to do more than streamline our regulations. The department is actively promoting Nova Scotia's resources, work force and competitive edge at trade shows and conferences both here and around the world. We are showcasing the opportunities available in Nova Scotia's oil and gas industry through our attendance in partnership with the Offshore/Onshore Technologies Association of Nova Scotia and Nova Scotia businesses at key industry events in Houston, Louisiana, the United Kingdom and here in Halifax.

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This year's Offshore Technology Conference in Houston, which was held earlier this month, was a great success, with more than 50,000 delegates, tremendous interest in Nova Scotia's opportunities and new contracts and leads for businesses like Jacques Whitford, Frontline Safety and Parker Brothers Contracting, just to name a few.

In November, Nova Scotia became an international member and affiliate of the Energy Council. The Energy Council is an organization of energy-producing states and provinces, Alberta and Newfoundland are also members. Joining the Energy Council gives us an opportunity to promote our resources and learn from others' experiences in managing their energy sectors. The energy strategy identified a number of ways to help Nova Scotia get the most out of our resources, to build our capacity to participate and become more competitive.

We're working with businesses to help increase our capacity in fabrication, and we're working with the Offshore/Onshore Technologies Association of Nova Scotia, regional development authorities and local operators on contracting strategies and joint ventures to help promote Nova Scotia's products and services. We are actively participating in the industrial benefits opportunities follow-up work to the discussions on this important issue at the Atlantic Energy Roundtable held last Fall here in Halifax.

We're helping to prepare Nova Scotians as well. Our Energy Training Program for students is bringing together post-secondary students with local employers to provide on-the-job experience in the energy industry. This program was developed to encourage private sector employers to hire Nova Scotian post-secondary students for career-related work terms in all sectors of the energy industry. Employers benefit by gaining access to students, and recent graduates in a wide range of disciplines from the 11 universities and 13 community college campuses in Nova Scotia.

Last year, more than 70 students were matched with 40 employers, giving the students hands-on work experience that will enable them to become part of the highly-skilled energy sector workforce. We're also supporting training programs at Nova Scotia Community College and the University College of Cape Breton that are building our capacity to export our training expertise around the world. The Department of Energy and Marathon Canada partnered to support Skills Youth Energy Quest. This event, facilitated by Skills Canada-Nova Scotia, introduces secondary students to skilled trades careers in the energy sector through hands-on information sessions at the Nova Scotia Community College.

We've partnered with EnCana and Enterprise Cape Breton to bring quality assurance, quality control information to Cape Breton businesses looking to supply the oil and gas industry. We're working together with governments, industry and local businesses to realize the economic benefits from the energy sector. A recent study on the oil and gas industry prepared for the Department of Finance found that more than $5 billion was spent in Nova Scotia between 1990 and 2000. We're working to build our understanding of the important economic impacts of the oil and gas industry in Nova Scotia by working with industry to build

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on this study and provide regular reports on the economic impacts of offshore exploration, development and production, and by continuing to report regularly on royalties from the Sable Offshore Energy Project and other projects, as they come onstream.

As we develop our offshore resources, we're building partnerships with the fishing industry in coastal communities to ensure that we carefully manage the activities to avoid negative impacts on our marine ecosystems. We've worked with the Cape Breton Ad Hoc Working Group on potential exploration and its impact on the local area. We're active on the Canada-Nova Scotia Offshore Petroleum Board's Fisheries and Environment Advisory Committee.

Understanding the marine habitat and the overall offshore environment is key to the responsible development of the offshore oil and gas industry. We've provided financial support for an independent scientific study of the potential impact of oil and gas activity off Cape Breton. In addition, we're working with the federal government and other private sector partners to extend scientific understanding of the behaviour on marine animals. A research project will be undertaken later this year, in conjunction with the exploration activity on the Scotian Shelf, and the department has provided $50,000 to support this important study.

Yet, with all of these opportunities, the energy sector in Nova Scotia is certainly much more than oil and gas. Our Electricity Marketplace Governance Committee is studying how competition can gradually be introduced into Nova Scotia's electricity marketplace. This committee, comprised of a wide range of private sector stakeholders is working to reach a consensus on recommendations to government on specific changes to be made in the electricity sector. Competition for new generation and access to transmission capacity are but two examples, which are key to establishing new opportunities in the electricity sector, particularly in renewable energy. The committee has released two interim reports, and the final report is expected soon. We're continuing to play a leadership role in federal, provincial and territorial negotiations on climate change to ensure that we're all working together to reduce greenhouse gas emissions.

Our position has always been that no one region bear an unreasonable burden for what must be a national approach to this important global issue. We continue to participate in climate change action projects throughout the province, projects that are being organized by governments, industry, organizations and non-profit associations. For example, we support the Nova Scotia Building Association's R2000 Home Program and Clean Nova Scotia's Energy Efficiency Audit Program, to name a couple of programs that we're supporting in this area. We know we must balance the development of new resources with the protection of our environment. Means of conservation and the responsible use of energy that we currently have are priorities, also, for the department.

These are just a few of the highlights of the past year, Mr. Chairman, as the Department of Energy continues to implement Nova Scotia's energy strategy. A number of

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key priorities have been identified for the coming year: encouraging exploration, developing economic opportunities, studying opportunities, particularly in the deep water, continuing our training and development support, working to bring gas distribution throughout Nova Scotia, informing Nova Scotians on energy issues, continuing our leadership role in climate change at the national level, and certainly remaining competitive.

The next year promises to be an exciting year for the Department of Energy and for Nova Scotians in the energy sector. I want to thank you for your time to make this brief presentation and certainly welcome your questions.

MR. CHAIRMAN: Thank you, sir, and thanks for staying safely within those guidelines that we suggested at the outset. It's coming up to 8:13 a.m., and the next 20 minutes belong to the Official Opposition.

The honourable member for Halifax Fairview, Mr. Steele.

MR. GRAHAM STEELE: Mr. Chairman, I would like to start on the topic of industrial benefits. One of the touchstones of the offshore oil and gas sector is that line from the Offshore Petroleum Accord which says Nova Scotia should be the principal beneficiary of offshore hydrocarbon resources, and yet, right from the beginning, there has been a question about whether that's, in fact, the case, because Nova Scotia is not getting the majority of the jobs or the contracts, it's not even getting the majority of the money, since so much has to be returned to Ottawa. When I started looking into this, in preparation for today, what I see is a sector that seems determined not to deliver more benefits to Nova Scotia but to change the way that it counts it so that it appears to be delivering more benefits to Nova Scotia.

For example, on the Sable project, there is one methodology endorsed by the Canada-Nova Scotia Offshore Petroleum Board, but at the same time the project owners are pushing a different methodology, the cash flow methodology, which appears to deliver a lot more of the benefits to Nova Scotia. Then I see our own government apparently trying to redefine how it counts offshore benefits. Now there is a place in the energy strategy where it's talking about not the percentage that goes to Nova Scotia but the percentage of the potential that goes to Nova Scotia, not even counting the things that Nova Scotia is not currently capable of producing, which is fine. If you can cut out half the project and say, well, we can't even compete for that, so we're not going to count that, it makes the percentage go up a lot higher.

Throughout the whole energy strategy, I looked and looked for some kind of target, where the Government of Nova Scotia, on behalf of the people of Nova Scotia, are saying, here, this is where we want to be, this is the percentage of the offshore that should come to Nova Scotia, but I don't find it. What I find, instead, is a line like this, which almost makes me weep because it's so, I don't know, flimsy. Let me just read one line out of the energy strategy and remember, here I am, I'm flipping through this great thick energy strategy with

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volumes of supporting papers saying, okay, where's the target, where is the province's goal so at least we know if we're getting there or not, and here's the line that I find, "What is the province's ultimate goal? It is to achieve 100 per cent of Nova Scotia's potential. Government will take firm actions in pursuit of this goal."

[8:15 a.m.]

This reminds me a little bit of the approach to education where you say, well, how is little Johnny doing - and maybe this is on my mind because my kid is starting school this September, my children are entering the public school system - and in the news this morning we hear that, again, Nova Scotia is not doing very well in national tests, but there's a school of thought in education that says you don't measure the students' progress compared to the rest of the country. You don't measure them compared to the rest of the province or even the rest of the class. You just say, well, what's little Johnny's potential and if we help Johnny reach his potential, then we've succeeded. The problem is it leaves you floundering, not knowing how you're doing compared to anybody else, not knowing, it's so vague and subjective about what Johnny's potential actually is, you don't know if you're there or not, and yet that's what I read in the energy strategy.

The objective, according to the energy strategy, is to achieve 100 per cent of Nova Scotia's potential and it's so vague and subjective. I just get a bad feeling that there's a lot of game playing going on with these numbers, like are we getting our share or not? We're supposed to be the principal beneficiary. Are we or aren't we? I don't know. So my first question, Mr. McFadyen, and I will direct all my questions to you, and then you can toss them off to whoever you think is most appropriate or answer them yourself, what is Nova Scotia's target for getting industrial benefits from the offshore?

MR. MCFADYEN: You raise a number of important aspects in your question. The department, or I should say the goal as set out in the energy strategy is to achieve 100 per cent of our potential and I think that's an important statement to make. Setting targets for the broad range of activities that occur in our offshore, would be a very, very difficult challenge because each project brings with it a number of different aspects, a number of different needs, and we have a variety of capabilities that, depending on the project, can result in a very different set of opportunities to participate in those projects. There is a reality out there that when we talk about our potential, we only have the potential to provide certain services to the industry. We don't, for example, manufacture tubular steel pipe in this province. So that is something that has to be imported.

So those are the kinds of things that when we talk about potential, it's a very important point to make, that we want to achieve 100 per cent of our potential, not 100 per cent of the activity out there because we will never have the capability to produce 100 per cent of the needs of the industry just because we don't have some of those manufacturing and other needs that the industry has.

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In terms of actually monitoring, as you pointed out, there is a system that the regulator specifies which all companies are required to follow and report on, which follows the Canadian Standards Specification Board's criteria for determining the percentage of Nova Scotia and Canadian content in those contracts. The operators are putting forth an argument that there may be better ways to measure and it comes back to some of those issues of defining our potential. So that's an ongoing issue, but for right now, the system is in place. It's a very rigorous system. It's a very comprehensive system and I think it presents a very clear picture of the actual Canadian and Nova Scotia content of the overall activity out there, but it doesn't assess us against what our potential is to deliver. I'm going to ask Bruce Cameron if he wanted to add anything to that.

MR. BRUCE CAMERON: I don't think there's very much to add because the deputy has really put his finger on the key part of the potential issue because it really is, if I give an example, the Sable project, for instance, being the foundation project, needed a gas plant and there was a lot of construction that was related onshore to creating that gas plant. The second project that we see on the horizon, the Deep Panuke project, the nature of the gas stream doesn't require a gas plant. So if you set a target for a project and then said we expect to achieve that when the project is entirely different, it's quite a bit different.

One of the issues that you raised was how to benchmark what we're doing in the offshore compared to, and one of the interesting issues is that the offshore is virtually the only industry in Nova Scotia where we very carefully measure exactly what the Nova Scotia content is and explain to the public what's being achieved. In most other industries they simply do talk about the cash flow. The tourism industry is a good example. They talk about the total flow of tourism being over $1 billion. They don't break out how much of that belongs to aircraft manufacturers that are imported into Nova Scotia. They don't talk about the interest payments that are made elsewhere. So we are not really good at explaining where the offshore is compared to other sectors and that's a good point.

MR. STEELE: You know what worries me is that this idea that Nova Scotia is going to be the principal beneficiary of the offshore is getting defined out of existence. According to the latest numbers, which I had to hunt down yesterday, and there's another point, these numbers aren't easy to find and I've raised the question of the fact that we have different groups apparently trying to establish different ways of counting so it looks better, not changing what's happening, just changing the way it's counted. That's one issue. The second issue is the numbers are just hard to find. Believe it or not, in this day and age, the numbers of Nova Scotia's industrial benefits are not available anywhere on the Internet apparently.

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If you go to the Offshore Petroleum Board's Web site, the last figures they have are from June 2001. When I called them, they gave me a report which they said is not available in electronic format and, according to this latest report, using the accepted accounting methodology, the Canadian General Standards Board's methodology, so far 35.9 per cent of the Sable project has gone to Nova Scotia. Now, is that enough? Are we the principal beneficiary of that project, Mr. McFadyen.

MR. MCFADYEN: I think if you came back to the issue as I raised earlier in looking at, that includes in that number every dollar that was spent on the project which also includes every bit of steel that was manufactured, every piece of tubular good, every compressor that was bought for the project, all of which are not manufactured here in Nova Scotia, nor are we likely to have. So there's a huge capital input in there that we do not have and are unlikely to have the ability to produce in the future.

If you look at our participation rates in terms of those areas whereby we did have capability, I think 35 per cent represents a very, very healthy contribution to that project if you're to factor out all those issues and that's one of the issues, that's actually why some people are looking at the reporting system right now. Do we need to improve the way we are looking at measuring it in order to get a more accurate reflection of what it is exactly we're achieving in terms of our potential capability to provide those goods and services.

I guess the other personal observation, if I might, as you will all know, I'm a relatively new Nova Scotian and very proud to be here and having come from another jurisdiction, which also has a very large oil and gas sector, I was, quite frankly, quite amazed when I arrived here at the degree of development of the service and supply sector in Nova Scotia relative to the size of the industry. I just wanted to offer that as a personal observation in that from my perspective, I think we're on the right track, we're making good progress. We're working very effectively with both the producing community as well as OTANS, the Offshore/Onshore Technologies Association of Nova Scotia, to promote and develop our capabilities and to seek out those opportunities. So, are we on track? Yes, I believe we're on track. Are we making good progress? Yes. Is there more that we want to achieve? Absolutely, which is why I highlighted in my opening remarks the work that we are doing with OTANS and the RDAs and others to make sure that we're seeking out those opportunities for which we have the capability, for which we have the opportunity and pursuing those.

MR. PAUL TAYLOR: Just to follow on, I think it was in the same section in the strategy that you were referring to earlier. If you do look at them from a strict numerical point of view, what Nova Scotia has achieved as a percentage of what it does, what business it's in, those numbers are closer to two-thirds of the spending on these projects being done here in Nova Scotia. When we look at the industrial benefits, opportunities, we're looking at it from two perspectives. How do we maximize the use of the industrial capacity of the service sector that we have now to get these contracts to participate? To get that 66 per cent to 100

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per cent. But, we're also looking at how do we move, when you talk about what our capabilities are, how do we move that line forward? Is there a business model for getting into the tubular steel business? Is there a business model for building compressors here? How do you advance the capabilities of the Province of Nova Scotia? So, not only move the number up, but move the limit that we're trying to reach.

The final point, when you referred to people suggesting that there are ways to change this system - when you think about something as complicated as putting together a Sable Offshore Energy Project with $3 billion in capital expenditures and inventing a system that probably doesn't exist anywhere else on this planet, as to how you count who supplied what to that project and where it was made and who worked on it, it's not surprising that is a very complicated and very time-consuming effort to try to come up with these numbers on local content. If someone is willing to suggest ways of improving that, we're always willing to look at that to see if it makes sense from everybody's perspective, but it is a very cumbersome process, make no mistake.

MR. STEELE: When the Canada-Nova Scotia Offshore Petroleum Board was set up, they adopted this particular methodology so everybody knew what it was. This is the method that we've been using to count the amount of Nova Scotia benefit. I grant you, steps are being taken. It is increasing slowly - if you look over the numbers, at the end of 1999 the cumulative Nova Scotia content was 30.4 per cent. The following year, 32.9; the year after that, 35.2 per cent; and at the end of 2002, it was 35.9 per cent. So, it is growing, growing slowly, but it is growing and that's great. What I'm concerned about is that I think that I hear and see more effort now being directed to changing the counting methodology than to actually increasing the number. I see the industry wants to change it one way, I see the government saying, when we talked about being the principal beneficiary, we didn't really mean the principal beneficiary, we meant we wanted to take advantage of all of our potential, whatever that is. So with a number like this, Mr. McFadyen, in your opinion, has Nova Scotia been the principal beneficiary of the Sable offshore project?

MR. MCFADYEN: Just a comment first on the growth in those numbers and the reason why they are growing now is as Sable shifts from a capital-intensive phase to an operating phase, our capabilities to provide the services in that area are much greater than some of those capital components as I described earlier. That's why those numbers are starting to grow. In fact, if you look at the breakdown of the operating expenditures, the vast majority - I don't have the number right in front of me, but it's well up in the high percentages - of the services that are being provided now on an operating basis to the Sable project. Clearly, as we move into the operating phase, I would say clearly that Nova Scotians and Nova Scotia businesses are the principal beneficiary of those.

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[8:30 a.m.]

As my colleague, Paul Taylor said, we continue to work with the industry to make sure we're expanding our capabilities to capture more of that. The producers, I think, by and large work hard with the local supply community to help them identify and find those opportunities to provide additional services. It makes economic sense for the producers if they can, to source those products and goods and services locally. It's usually a much more economic approach than if they have to bring them in from the Gulf Coast or Norway. They work hard to try to find local supply sources that can provide them, which is why we said in the opening comments, we're also working with local companies on quality control and quality assurance to make sure we're providing the highest level. That's part of the objective of building our capacity.

Being the principal beneficiary means we also have to put in the effort to make sure we have the skills, the quality and the competitive ability to provide those. I think we're doing quite well.

MR. CAMERON: If I could just follow up with that, a quick couple of facts here. We're beginning to be able to do some analysis on exploration as well and to see how we're doing on that side of the business. We're seeing the same picture that we're seeing on production and operations - that we're getting a larger bit of the business as the industry matures.

That is the root of the difficulty we have in an industry that has a whole series of components and one large component we focus on a lot is construction. Because it's construction, it's a cross between construction and manufacturing really. You have to set up facilities to then manufacture a product that you don't know that you're going to manufacture again for another five years. The private sector will certainly make those investments when they see that the horizon shows a number of repetitive projects, which is why exploration is the key to the energy strategy.

In terms of the benefits reporting that you've talked about, I think that we recognize that one of the key aspects of getting that data and the reason why we want it as much as anything else is to be able to accurately measure what's going on in the Nova Scotia economy for economic modelling. It's for that reason that I don't think you will ever see a departure in any way from us being able to get the data that we need to be able to accurately model. People can look at different aspects of the same situation, we can talk about where our potential is compared to how far we've gone, we can compare what the oil and gas sector means for the rest of the economy, but we're going to continue to need real detailed data for people to be able to draw their own conclusions and for us to be able to accurately model. I don't think that we're ever going to go totally in the direction that industry has looked at. We've got to have that capacity to measure.

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MR. CHAIRMAN: Thank you Mr. Cameron. Mr. Steele, I didn't catch your eye there, but your time has elapsed. You'll have to come back in the second round. The next 20 minutes belong to the Liberal caucus, the MLA for Dartmouth East. Good morning, Dr. Smith.

DR. SMITH: Good morning, thank you very much. I'd just like to say to the visitors this morning, it's their lucky day because I'm pinchhitting here this morning. Certainly, energy has not been my strongest hand, so you pretty well . . .

MR. CHAIRMAN: But you've always had lots of it.

DR. SMITH: Thank you. So, you can pretty well relax, it will be more or less just questions that the ordinary person on the street might ask. Seriously, I did have the opportunity, again pinchhitting, to have the briefing on the release of the energy strategy. I think that was December 2001 and we were given the opportunity here in the Cabinet room. I always remember - it was sort of interesting that I got scrummed later and it's actually in this folder, some of the quotes. I can't believe that they were so good when I knew absolutely nothing of what I was speaking about. Someone said to me that nothing has really changed, it was the same whether it was health or community services or whatever.

In my area of Dartmouth East, it's been very much in the forefront of activity. There has been a lot of activity, there's no question. There's jobs in this area and I agree with your statements that it would be unreasonable that companies would not use local services where they could. It's bound to be more effective.

Anyway, I'm representing our caucus - I'll do as well as I can this morning and maybe I can just take back to them some of the fruits of the discussion this morning. We have concerns that maybe this energy strategy has really become more of a discussion paper and we expressed concerns at that time about lack of timelines and dates and I know it's difficult.

I guess from my experience, the oil companies are pretty powerful groups, I sort of liken them to the pharmaceutical industry that I've had a look at over the years, both in my work life before politics and also here. I admire them that they're international companies, they're flexible. We are not a big part of anybody's market. We are less than a million people here in this province and also they can pick up and go and we were very aware of that as a Liberal Government in the early days. We had the performance of the accord, the $200 million that received a lot of criticism and it was a bad start, you know, roads to nowhere, all that sort of thing and so those early days I think left a bit of a bad taste with the taxpayers of Nova Scotia as the previous government, prior to our government in 1993, and how that money actually was used. So we sort of got off to a bit of a bad start there.

I think, just from my sitting in Cabinet and listening, you know, I was impressed that when you're playing poker with the large conglomerates, it's a pretty challenging task and I'm

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sure that is still going on today obviously here because we're looking at the new projects. People say to me, well, you know, what's coming, what's new. We saw the groundwork laid for Tier I in the Sable Offshore Energy Project and then where are the new projects. Gas distribution certainly has been a concern. I was over in Dartmouth when the streets were being torn up with great fanfare and all of that and then we know that after this government approved the Sempra franchise, then things sort of came to a halt. So the people naturally are wondering. Those are tangible benefits that they see, the province gaining the actual gas, and people are calling me regarding taking training so they could be in a position to start small businesses that could convert furnaces and all of the other utilities that they could use there.

So we had a start, we have started in whichever way, whether there's some warts on that or not, but what areas of the regulatory process seem to be bogging down the system. Some people use the term a regulatory nightmare and you alluded to that, Mr. McFadyen, initially and is it crippling the industry from getting off the ground and getting into new projects. I want to talk later about some of the direct impact on Guysborough and Richmond Counties and some of those where the Sable partners are threatening to sue the province and the tax revenues aren't being realized in those municipal units, but that's sort of another issue, but in the larger scale of things and what some people refer to as a regulatory nightmare and threatening to cripple the industry before it really gets off the ground, could you comment on that?

MR. MCFADYEN: Certainly the regulatory issue is a very important one and that's why I stressed it in my opening remarks. It's an area of concern. It's an area where we want to make sure that we're providing an efficient and an effective regulatory regime to be competitive. At the same time that doesn't mean foregoing the necessary regulation on the environmental, health and safety and all of those aspects, just making sure we do it in a smart way, and I don't think we're at the point where it's crippling the industry. Certainly progress is still being made. It's an area though that we want to make sure that we're providing a competitive regulatory regime for the industry so that it's not seen as an impediment to their continued participation off of Atlantic Canada.

It really is a partnership approach between particularly Newfoundland and Labrador and Nova Scotia and the federal government to look at ways that we can improve that regulatory regime, to provide industry with certainty both around the timelines once they've entered the process and a certain degree of certainty of outcome, that if they've met all the criteria in terms of going through that regulatory process and then they can have some confidence that the decision will be rendered based on those inputs.

So that in broad strokes is the issue and where we want to go with it. We want to make sure, as I said, that it's not an impediment to ongoing interests of the oil companies in Atlantic Canada and I think it has been flagged as an area where right now we have perhaps a bit of a competitive disadvantage. So what we've established as a result of the Atlantic

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Energy Roundtable is a fairly significant process. As I said, it is a partnership of the three levels of government, the producing industry, and the service and supply sector.

There's a steering committee that has been formed which I, along with my colleague from Newfoundland and Labrador, Brian Maynard, and a federal ADM co-chair and that steering committee is undertaking a significant body of work to look at the issue surrounding our regulatory regime and ways that we might be able to look at improving it, to streamline it, to make it more effective and to make it more efficient. There are a number of working groups and activities underway and I might ask Bruce Cameron just to briefly summarize some of those.

MR. CAMERON: The one on the regulatory issues, we've looked at defining the problem of where we stand internationally and understanding whether we have a detailed knowledge of the processes and that has led us to sort of three different tasks. The first one, how are we doing in Nova Scotia and Newfoundland today, can we improve the processes that we have and that's leading to a lessons-learned workshop that involves about 30 different government agencies - well, I guess it's about 20 government agencies - and departments and another 10 operators who have had experience in the East Coast offshore, to be able to look at in some detail over a couple of days what we can do better.

This isn't about changing policies necessarily. It's not about changing laws or even regulations, at least not initially. It's simply a process of getting down and looking at detail and whether there's a way to do things more efficiently because we've got some experience now. We're really doing the first look-see after something close to 15 years of detailed activity and saying do we now have enough knowledge to be able to do things better and it should be no surprise that we all expect that there are things that we can do better.

We're looking internationally to see how other jurisdictions are handling similar things because we don't think that we have to invent the wheel here. We're not the only place in the world that's doing offshore oil and gas developments and we're going to bring those two together and bring back to the steering committee and to the ministers in the Fall a plan that shows how we can make detailed progress. Some of it is not very glamorous, but some of it is very, very necessary.

I will give you an example. Right now people do environmental assessments on exploration wells that can run over 100 to 150 pages. A lot of that is simply repeating each time from the previous application and then peppered throughout it are the well-specific things that happened on that particular project. Somebody has to read through the whole document each time in order to understand it. So the review of various federal agencies is extensive and the work is, quite frankly, mind-numbing.

If you can then sit down with those agencies and work together a way to have a model for how to organize that information in a way that the new part is very clear and you can go

[Page 14]

through a checklist, then you're in a better world but, unfortunately, up until now, we've had people who have been so busy trying to approve the applications, they haven't had time to sit back and think about how to create that model.

So those are the sort of very detailed things that we're going through to work out ways that we can do this more efficiently and effectively, that will make real differences in time and money on how to move the offshore, but again it's nothing that's ever going to have a headline. You probably will never hear about this again from a public point of view, but it is the very detailed kinds of things that will make a difference.

[8:45 p.m.]

DR. SMITH: Thank you very much. I think it's terribly important what you've just said, Bruce, on this whole issue of learning the lessons and also to look at areas like Guysborough County of our province and Newfoundland, that we all have great affection for, and the challenges that they're facing and how important these initiatives are. So how we do business and how we have this framework set and the lessons that we learn and we quickly adapt them into seeing positive results is crucial to people in transitional changes. Industrial Cape Breton would be another example. We all watch the whole energy field, and I agreed with you earlier when you mentioned the various sectors, developing electricity and power is so important, oil and gas, wind, solar and hydro, rather than dwelling on how the stage was set and where we have come since then.

I did mention earlier about the issue of taxes and the ground rules in the Guysborough-Richmond area, relative to Point Tupper and the plant. The issue of the Sable partners threatening, as I understand, to sue the province, relative to clarification on the tax revenue or the tax base in that area, could you comment on that? Could any of the panel comment on that? What is the status of that? When can we look forward to clarification, because people feel that without this being clarified, again, it's an example of the ground rules not being set clearly, and would it inhibit other people developing or coming into the area? I think it's crucial and it's important to the people. The companies are taking care, as well as they can, of their own shareholders, but who's taking care of the taxpayers of Nova Scotia, particularly in these communities that have major infrastructure needs?

MR. MCFADYEN: I'm going to ask my colleague, Paul Taylor, to respond to that.

MR. PAUL TAYLOR: There are two aspects to the issue you raised. One is the assessment/municipal taxes applicable on the Maritimes & Northeast pipeline running through the province, and the municipal taxes payable on the Sable Offshore Energy facilities located in Guysborough and around the Strait area. The issue on Maritimes & Northeast has indeed been resolved by way of a regulation that was passed by the government which specifies how high-pressure steel pipelines in the province are assessed, and then of course the municipalities then apply their applicable tax rates to that assessment and the taxes are paid.

[Page 15]

The issue with respect to the Sable facilities, as I understand it - this issue, by the way, is under the jurisdiction, if you will, of Service Nova Scotia and Municipal Relations, they are the lead agency for the province on this subject - the Sable Offshore Energy partners have indeed appealed the assessments that have been applied to those facilities. I would expect, at this point in time, the agency and the company are continuing to talk about that assessment. I don't think anybody wants to see the process drag through the courts or through an assessment process, an appeal process that ends up in a contested settlement. I think the parties want to resolve this issue.

It is a very complicated issue because of the nature of the facilities, the size of them, the capital that's been put in place and the amount of tax revenue that would flow from them. I don't want to put words in the mouth of the energy company itself, but they very much want to see the money flow into the municipalities, because they realize it's a very significant amount of money for the future of those municipalities. They want the issue settled, as does the government, to bring the type of stability you're talking about, so the next companies in line, who are developing projects, can see how the system works and plan around that.

All I know at this point in time is the appeal has been filed, it has not been settled for those facilities. Service Nova Scotia and Municipal Relations is continuing to deal directly with it.

DR. SMITH: Those are important issues. They might seem small in the scheme of things, but I think they are crucial to the attraction of other people doing business, as well. As you know, as we all know, as Mr. Cameron mentioned earlier about the headlines, you don't necessarily get the headlines you want, and sometimes irritations and things that are going through a proper process - and you mentioned the appeal process - can still get some pretty negative headlines. It's a concern of ours and it's a concern of the local area, we know that from our communications with that community.

MR. CHAIRMAN: Dr. Smith, you have two minutes.

DR. SMITH: Goodness, I thought I was going to have to switch to health or something. We could talk about health and safety, that's always an important issue. Speaking about the community, though, it has been encouraging to see so many new families come into our community here. This is part of a broader issue, and it's not a question really. When you look at the numbers of families and the impact on housing alone, if you look at the people who have come into the Bedford community because it's easy to access the airport and others, it has been a very positive initiative.

This brings me to the training issue. I know community colleges have gone through a major change themselves, I think it's been a great opportunity for them. In fact, a few years they were training people for jobs when there really weren't many jobs, and trying to adapt to this new technology and to what the needs are. Maybe I will just hand over the last of my

[Page 16]

time, just to comment on the training programs and what the needs are and how they might be met in training and programming.

MR. MCFADYEN: Mr. Chairman, the training has been a very big part of what we've invested in as a department - previously the Petroleum Directorate and now the department - over the last several years. It covers the broad spectrum of opportunities that exist in the offshore, working with both, particularly community colleges and the universities, to put in place the training capabilities and skill sets to meet the future needs of the offshore industry. In the last two years, or from January 1999 to March 2001, the department had invested some $13 million in a variety of training programs.

I will just, perhaps, give a couple of examples: the development of the Petroleum Engineering Technology program at the University College of Cape Breton and the Instrumentation Engineering Technology program at the Marconi Campus in Sydney. Just this week, we've also announced another investment for the Nautical Institute in Port Hawkesbury, to invest in a dynamic positioning trainer. Dynamic positioning is a process by which you can keep a rig or a drill vessel on-site over a well by various thrusters, et cetera, attached to those vehicles. We're investing in a training simulator at the Nautical Institute so that Nova Scotians can develop those skills, being able to navigate and keep a drill vessel or a drill rig on-site.

Those are just a few examples. As I mentioned during my opening, we also have our partnership program with industry to give students internship programs, working with companies. As I mentioned, 70 students were employed last year with 40 different employers. It's clearly very important, a critical part, and it comes back to building our capacity and our capability to make sure Nova Scotians have opportunities, have the skill sets to meet the needs of the offshore industry. We estimate, right now, that there's in the order of 2,050 directly employed in the oil and gas sector in Nova Scotia, and about 80 per cent of those are native Nova Scotians. So I think it's evidence that our training and programs are starting to pay dividends.

MR. CHAIRMAN: It's 8:56 a.m., and the next 20 minutes go to the government caucus.

The honourable member for Pictou East, Mr. DeWolfe.

MR. JAMES DEWOLFE: Good morning, gentlemen. This morning we talked about regulations and excessive regulations, and the steps that the department is taking to address these. With regard to the federal government, what are they doing to help efforts in the streamlining of regulations through organizations like the Canada-Nova Scotia Offshore Petroleum Board?

[Page 17]

MR. MCFADYEN: The current activities underway on looking at the regulatory system are a partnership amongst the two levels of government, our colleagues in Newfoundland and Labrador, ourselves and the federal government. This all came about as a result, primarily, of the Atlantic Energy Roundtable last year, which was hosted by the federal Minister of Natural Resources Canada. He had three of his federal ministerial colleagues with him. The provinces participated in that, the Ministers of Energy from the Atlantic Provinces.

Right now, we're fairly comfortable with the level of commitment of the federal government, in working on this file. We see them as a partner, we see them engaged in the process, and we see them working hard to look to solutions, to look to outcomes that we can improve the system. There are a number of features of the regulatory system still that are within direct federal purview, things like the Canadian Environmental Assessment Agency - that has a big role to play - and the National Energy Board. So there are some federal agencies that are also very important as we continue to make progress. We see greater engagement on their part as we go forward, I think, as a result of the momentum that was built up by the Atlantic Energy Roundtable.

So right now, we see them as a committed partner, we see them as an engaged partner, and we're doing all we can to make sure that we keep them committed and engaged in that process. Bruce works at a different level than I do, and I think he can maybe just comment on some of the activities at the working committee level.

MR. CAMERON: The fact that we're doing oil and gas exploration in an ocean environment automatically makes it one of the most complex things that we can do, that's recognized around the world. But in Canada, where I can speak of more directly, what has happened over the last 10 or 15 years is we're gradually building up activity in the offshore area, while at the same time the federal government has been on another agenda about protecting the environment and dealing with oceans' planning.

They've started to do a number of things on the Oceans Act to start doing integrated management on the oceans, they've passed a Species at Risk Act that has special application in the offshore area, there are aspects of the Heritage Act, they have the Canadian Environmental Assessment Act that is coming into play. The Department of Fisheries and Oceans has about three or four different Acts that apply, the Habitat Act, as well as the Oceans Act, and there are some other aspects of navigable waters in some circumstances and so on.

[Page 18]

You have all of these interests that have very legitimate national purposes, and yet they are not well integrated at this point in being able to deal with an ocean's use that is not well understood within the general world of the oceans. They have, in their own world, a responsibility and a requirement to get people up to speed. A lot of what we've been doing in the last little while is just simply helping to build a greater understanding.

[9:00 a.m.]

For instance, one of the issues that's very active right now is the impact of drilling in the oceans. What we've now got is quite a bit of experience in the Canadian context on what the impact of drilling is. It is very limited. There's now detailed evidence available to say that when a drill bit goes down, the immediate impact is maybe 50 metres in most cases, and for some impacts no more than 500. You then have to work through the science of being able to defend that.

One of the initiatives that we're working with industry right now is how to gather all of that data together and to have it reviewed independently so that the regulators - many of them federal - will have the confidence in that information that they can then make their decisions that, okay, this is not what we thought it was. That's very detailed work, but it has to be done right to have the information for them to make the decisions.

That's some of the, as I say, behind-the-scenes work that's going on in committees, trying to help support the science that's needed to build it as an integrated approach. It takes a little bit of time, but I think that what we're seeing is that industry is beginning to see some progress on these issues as well. Whereas maybe six or eight months ago you were seeing a great deal of frustration, now you're seeing an attitude of, okay, work is being done, now let's see some results.

MR. DEWOLFE: Thank you. In following along with your remarks, in your opening statement you talked about the impact study off the shores of Cape Breton Island. When I think of that, I think of the fishing industry because I'm from Pictou East and I have fishing villages along the coast in my constituency, the Northumberland Strait. Certainly one of the overlooked themes in the energy strategy was its focus on environmental responsibilities as it relates to the development of the resources. Could you highlight some of the steps we're taking in this industry to co-exist with other industries? I'm thinking about down in the Gulf and you see I don't know how many oil rigs, drilling platforms and production platforms are down there, but it's a tremendous amount. You see the fishing boats fishing right alongside these massive rigs down there in the Gulf and there's a co-existence going on between these industries down there.

I realize we're in the early stages of this, there's some panic - I don't know if that's the proper word - encouraged in the Northumberland Strait with regard to oil exploration. I think it's essentially unfounded, because you see this co-existence happening in other areas

[Page 19]

and they seem to be fishing away, oblivious to what's happening in the other industry. I think that's a great thing. Perhaps you'd like to comment on that.

MR. MCFADYEN: Certainly. As you say, in the Gulf, I think there's been something like 40,000 oil wells drilling down there. I don't know how many active platforms there are today, but there's certainly - and the North Sea is very similar. But a new industry moving into an area is always an area for concern. I think the biggest job we have to do is moving to that co-existence, as you described it. I think that's a process of making sure that, to the best of our ability, we're answering the questions that the fishing and other users of the oceans have in terms of the impact of the industry. That's why things like working with the ad hoc committee in Cape Breton, investing in science - I think science can help us answer a lot of the questions before we start developing - a dollar-invested science can provide a lot of comfort around what the real impact is. That's what we're trying to do.

We're certainly becoming more aware of that issue. We're spending more time and effort on it. We're going to be investing, as I said, $50,000 in a major study with respect to the whale habitat in and around the gully this summer with respect to some of the seismic tests. It will be about a $600,000 research program. I think it will provide very useful baseline data in terms of what is the impact of those kinds of things.

I'm going to ask Bruce to speak a little bit more about the Cape Breton situation because he was very much involved with the ad hoc working committee there and some of the science work that was done to try to start to address some of those concerns and get the information out into the fishing community and other users of the marine system to say, here's what we understand, here's what science tells us, here's why we think co-existence is manageable. At the end of the day I think where we identify risks, then clearly we have to look to some risk management strategies long term to assure those other users of the oceans that if there is any damage that that will also be looked after. Bruce, do you want to add a few comments?

MR. CAMERON: The work of the ad hoc committee was an interesting process. We started in the summer of last year and there was a great deal of skepticism because it really was a multi-stakeholder process. We had people from municipalities, Cape Breton labour, we had a provincial government representative, federal, four fishing industry groups, an environmental group and so on. We tried to work through the issues, but at the end of the day, the critical part was understanding the science. So there was a scientific review and we helped ensure that there were some outside people who were supported by the non-governmental organizations - the environmental groups, the First Nations and so on - that they were able to get some scientists who would sit in on that review so that they had some confidence in the results.

[Page 20]

We had a very interesting report. What we were able to see from the scientists looking at it was that some of the issues that people thought were top of mind and were critical, were able to be taken off the list as major issues in Cape Breton; let's put those aside and let's focus then on some ones where there might be some risks and that got us to the heart of the matter. There is nothing you can do today that is risk free. You can't get out of bed without having a risk. It's gets down to the heart of what's an acceptable risk.

Where the committee spent a great bit of its time is looking at the science and the scientists said, by and large - let's see if I can get this right - there was not expected to be a significant risk from exploration offshore Cape Breton, at least to the seismic stage because that's what they looked at. But there was a small risk in a couple of areas of a large impact. By that they meant that if there was a behavioural change by one fish species - they didn't expect there would be, there's only a small risk there would be a behavioural change - that the fish would swim somewhere where they would get themselves into some trouble. They didn't expect that to happen, but if it did happen, there could be some consequences to that fish stock. They identified a couple of areas where that might be the case.

But they said then, we've given you the science, this is the best that we know. You have to make a judgment as to whether that's an acceptable risk or not. That's the heart of the matter. All the people who see the opportunities in the offshore - new jobs, new business opportunities and so on - they see the benefits and they're willing to take a risk. The people who are directly involved in the fishing industry who think that they might be affected, even that small chance that they might be affected, are least willing to take the risk, because they don't see the direct benefits coming to them.

In a long-term way, one of the issues that we talked about a little bit was our children, the people who are involved in the fishing industry today. It's not a real growing sector, it is an area where people are making some very good livings, but their children might not be involved in it. Actually, it was some of the fishing people who made the point that as time is going by, the fishing industry is becoming more specialized, more mechanized, more high-tech and less likely to provide a future for the children in Cape Breton. So everybody came to grips with the fact that if we were going to seize growing sectors of our economy and if we could do it properly and responsibly, that would be a good thing. At the end of the day, though, some groups on the committee said that the risk was unacceptable and other members said that it was and ultimately a regulator had to make the decision.

Let me just close by saying that despite the fact that we were split on where we should go in terms of the exploration, the committee was unanimous in saying if exploration goes ahead, start doing these things, do the Environmental Effects Monitoring, make sure that you have whale observers on-board the ships, make sure that you don't do it before November of this year so that much of the fishing activity and the spawning is over.

[Page 21]

There were a whole series of things that we recommended to the CNSOPB that the board accepted and even imposed some of their own ideas about making sure that nothing happened within 10 kilometres of shore. The Environmental Effects Monitoring is the long-term way of going to create a reality cheque. We make scientific assumptions, we assume there's a small risk and then you do the effects monitoring to make sure that you are actually on track. That's where we are going to see a lot more emphasis in the future in the Nova Scotia offshore.

MR. DEWOLFE: Mr. Cameron, the fisheries industry in my constituency is very important. It's a very prominent resource-based industry in Pictou East, fishing villages just dotting the shores along my constituency. I just want to ensure that the risks are minimal. You mentioned the seismic work. I don't know what type of seismic work they do now. I understand that there is a seismic operation where they use compressed air rather than a shot and it has less impact on the fisheries but I have also been told that the shot-type seismic operation, the fish tend to move away but then they come back very quickly, within a couple of hours. Do you have anything on those studies that would ease the minds of the fishermen in my area?

MR. CAMERON: Sure. In the past, a lot of the seismic exploration was created by dynamite. Today, you are right, it's done through compressed air. The program that is proposed for the Gulf area of Cape Breton I believe is seven days in duration. It's one of the shortest, most sharply focused seismic programs that you are likely to see. What that is, is because they have already done seismic in the area, they have already discovered a resource and they want to see if it is over on the Nova Scotia side.

When you take a look at what the impact of seismic is on fish, the difficulty is you have to start making distinctions between what kind of fish, what are they doing at that time and also, how close are they to the seismic? There is a growing body of knowledge about behavioral impacts, seismic, on various species. What is not well understood at this point is to what extent different species act differently under those circumstances, so that's why the Environmental Effects Monitoring side of it is very important. You are not going to know what the impact is unless you are out there measuring it. For instance, a relevant issue in the Gulf area is the behaviour of the hake stock, what might happen during seismic exploration. Quite frankly, it's going to be timed so that that stock is relatively finished, is the prediction, but they are going to have to do some other things to make sure and they will have to monitor to make sure that their assumptions were correct, if they go ahead.

MR. DEWOLFE: A question that I had in mind, we may have to come back to in the second half because my time is starting to run out. I have about a minute and a half left, I think, Mr. Chairman. I'll touch base on it now with regard to the impact of the federal government's decision regarding the Kyoto Protocol, what effect that will have, what impact that will have on the Province of Nova Scotia. I know that probably requires some lengthy discussion, but I would like to come back to that in the second half, if we could.

[Page 22]

[9:15 a.m.]

MR. MCFADYEN: Maybe if I could make a couple of brief comments now, Mr. Chairman.

MR. CHAIRMAN: Sure.

MR. MCFADYEN: Clearly, the Kyoto climate change debate has been going on in Canada for the better part of a decade now. As we all know, last December the federal government made the decision to ratify the Kyoto Protocol. They did that, I think, without - at that point in time - the endorsement, generally speaking, of the provinces. The concern of the provinces related to the fact that it wasn't clear, if we were going to ratify, what the plan was to get there. I think that's still a general concern today in terms of a well-defined plan, in terms of understanding how we're going to get there, and what the impacts are going to be on different provinces, different regions, different sectors to the economy. That debate is, I guess, in some ways being re-engaged now and there are processes re-emerging, whereby we're going to start re-engaging and looking at some of those issues.

Generally speaking, I think there was a sense of disappointment in some ways, that the federal government went ahead and ratified without that plan in place and we're having now, to go back to start to work with them to see how that might be. Until some of that work is a little more clearly advanced, it's difficult to come up with a specific assessment of what the impact might be on Nova Scotia, per se, or some of our industries, until we understand what tools, et cetera, that are going to be used but I would be pleased to explore that a little more with you in a few minutes if you wanted to.

MR. CHAIRMAN: Thank you, Mr. McFadyen. It's 9:17 a.m., we're going back to my colleague, the member for Halifax Fairview for nine minutes each, which will allow a bit of a wrap-up in our order of business. I would be negligent if I didn't take the opportunity to introduce you to the member for Colchester-Musquodoboit Valley. I'll have your reason for lateness on my desk later. (Laughter) The next nine minutes belong to the NDP caucus, Mr. Steele.

MR. STEELE: Mr. Chairman, one of the things that always amazes me about this committee is how quickly the time passes when I'm asking questions, so I'm going to use my nine minutes for some short snappers. I would appreciate some relatively brief answers, as brief as the subject matter allows. Mr. McFadyen, what is the projected royalty stream over the next two or three years?

MR. MCFADYEN: I'm going to ask Sandy MacMullin to respond to that one.

MR. SANDY MACMULLIN: Mr. Steele, in the fiscal year ending 2004, it's $27 million; in 2005, $33 million; 2006, $82 million.

[Page 23]

MR. STEELE: What is the current reserve estimate for the Sable project that is being used by the province?

MR. MACMULLIN: There are various numbers that had been put in the public domain over the years, it started with 3.5 tcf. There had been numbers that have been projected by Shell, by ExxonMobil. There have been numbers that our Offshore Petroleum Board generates in doing their own resource work. We are using approximately 2.6 tcf, 2.7 tcf.

MR. STEELE: And tcf being trillion cubic feet. My understanding - well, it would be a little over a year now - Shell substantially downgraded its estimate of the reserve, in fact, it might have been as low as 300 billion cubic feet. What justifies the province's estimate of 2.6 tcf, 2.7 tcf, when one of the major partner's estimate is substantially less than that?

MR. MACMULLIN: I think that what Shell would have been saying if they were going as low as 300 bcf, it would have been their share of the total resource.

MR. STEELE: Okay, their share - I don't think that's what they were saying, but let's assume that that's what they were saying - is about 30 per cent so it's back up to 1trillion cubic feet, which was the original. My understanding was 1.1 tcf was the original estimate of the project partnership. I'm actually very surprised to hear that the province is using 2.6 trillion cubic feet or 2.7 trillion cubic feet. It's not a number that I've heard before. It's substantially higher than I've heard before.

MR. MACMULLIN: No, I don't think so. I mean the numbers that have been put in the public domain, originally 3.5, there have been some numbers that have been attributed to ExxonMobil that I've seen in the media, that's 2.8 tcf, Shell themselves have looked at 2.2 tcf. These companies have, let's call it ghost technical teams, they do have members on the SOE team, but they also have some of their own technical people back in their own companies in Calgary and in Houston who look at their own numbers separately and as does our Offshore Petroleum Board that has access to all information. So we are very confident that the numbers that we're using for the Sable project are reasonable and accurate numbers.

MR. STEELE: Mr. McFadyen, it would be three or four years ago now that the provincial NDP brought to public prominence the issue of occupational health and safety regulation on the offshore following the death of a gentleman by the name of Shawn Hatcher and the Hatcher case rather tragically revealed the disarray, there's no better word for it, the disarray on the offshore with respect to occupational health and safety. The latest update to the energy strategy says that it's all going to come together and the word you used is 'soon'. What does soon mean?

[Page 24]

MR. MCFADYEN: Right now the draft legislation is out for consultation amongst the key stakeholders. That process should be completed very soon at which place we will finalize amongst the three governments the final legislation and it would be our expectation that we would be in a position to bring that forward to the respective legislative bodies of the three partners this Fall for some decision.

MR. STEELE: And so can we expect that, assuming that the different levels pass whatever legislation is needed and enact whatever regulation is needed, by the end of the year we could actually have a functioning OH & S regime on the offshore?

MR. CAMERON: You would need to have, for it to be in place, you would need Nova Scotia and the federal Parliament to act and we can't predict the federal Parliament in the next year so I wouldn't make the commitment by the end of this year, but very soon. We would expect the tabling in the Fall and then Parliament's act when Parliament's act. The other thing I would note is that the legislation, if you look at it, has a great deal of detail. It would be fully functioning immediately, but some of the areas that require regulation will take a number of years to develop the full-blown regulations, the flow behind that. There will be interim measures to put regulations in effect.

MR. STEELE: Just in time for the next provincial election, the provincial government held out the promise of some riches from the federal government and some compensation for the Crown share from the oil and gas agreements in the 1980s, this was last reported in the newspapers on March 1, 2003. What's the status of those discussions with the federal government?

MR. MCFADYEN: Paul Taylor participates on interdepartmental process on that, I will ask him to respond.

MR. PAUL TAYLOR: As the deputy said, I participate in a working group inside the provincial government in dealing with the federal government. That working group actually is under the leadership of the Intergovernmental Affairs Agency. They are continuing to lead a series of discussions with the federal government on how the process of realizing the expectations that were originally in the accord under the Crown share adjustment mechanisms are actually put into operation to allow the money to flow to the province.

MR. STEELE: I think the best thing I can do, just to show you how confusing this is for the general public, is to show you headlines that appeared on successive days in the newspapers. You won't be able to read this one, but it says, "Ottawa agrees it owes N.S. offshore bucks." Now, that was the province's version as saying oh, yes, they agree, it's just a matter of how much and then a day later in one newspaper, "Offshore claim still under review - Manley." And this headline, which you will probably be able to read, "Ottawa not admitting to offshore debt to N.S." So let me ask you a simple question, do they or do they not agree that they owe money to Nova Scotia?

[Page 25]

MR. PAUL TAYLOR: They would agree that with the commencement of the Sable Offshore Energy Project that the Crown's share adjustment mechanism comes into operation. Where the discussion continues is how you translate the original intent of the accord into an operating regulation which allows the calculations to then take place as to what the size of the number is. So I would expect the difference of opinion you see reflected in those headlines is an anticipation of where those calculations are going to land.

MR. STEELE: Now, presumably some methodology could be adopted that ended up with zero dollars being owed. What are the prospects of us actually getting any money any time soon?

MR. PAUL TAYLOR: That one goes beyond my level of expertise in terms of understanding the complexities of those calculations but, as I said, the discussions are continuing with the federal government in trying to come up with the mechanism to actually arrive at that number and what that bandwidth is, what the number is, I am not familiar with that bandwidth.

MR. STEELE: An important part of the energy strategy is Offshore Strategic Energy Agreements and there was some talk of entering into one with EnCana over the Deep Panuke project. Has that actually happened? Are there any OSEAs yet or is it just a theoretical concept at this point?

MR. MCFADYEN: There are no OSEAs yet. It was a commitment within the strategy that that was the preference for the government to proceed. The EnCana project, as we're all aware, is in a time-out right now and so any discussions with them right now are also in a bit of a time-out, but we are certainly prepared to sit down at any point in time when EnCana is ready and renew those discussions.

We are in the process of starting to define exactly what the broad framework of OSEAs may look like and as projects come forward, and that's the reality, we will begin discussions with operators in respect of those, but clearly OSEAs are tied into project developments and so we are doing our homework and getting ourselves positioned in terms of what those OSEA frameworks would look like and when the time comes that the projects are at that state of development, we will be engaging the companies in those discussions.

MR. STEELE: My time is up, thank you very much.

MR. CHAIRMAN: It's 9:28 a.m. and the next nine minutes belong to Dr. Smith.

DR. SMITH: Mr. Chairman, just a couple ones left over, and following along with what we've been discussing about shares and the design phase of Tier II, I understand it's 35 per cent benefits now at this juncture and what's the outlook on that increasing? Is there any encouragement that that might be so as we proceed through this design phase?

[Page 26]

MR. MCFADYEN: I think, as we've discussed earlier, that 35 per cent at this point in terms of the capital phase for Tier II is a pretty realistic target. As that Tier II moves into the operating phases, then I think you will see our shares grow as we have seen with Tier I. So I think over time we can expect that as it moves from a capital phase to an operating phase, that those numbers will start to grow as we've seen with other projects.

[9:30 a.m.]

DR. SMITH: My final question would be relative to the 50 per cent back-in option on the offshore transmission line. I think the minister in the House here has addressed that issue in Question Period, I believe. So this option of purchasing or selling that line offshore, can you inform the committee, with the bids, was that an invitation bid, and who did bid? In other words, who had the chance to bid? Has there been a decision made and, if not, when would that decision be made? Were the bids adequate? Any plans that this would be - I hesitate to use the word flipped, because I think that's sometimes used in derogatory ways, but if the province purchased, would they flip it to a private company?

My final one - I will ask these all at once because time will run out and that will be the end of my questions - in your opinion, has any of this bidding process had any impact at all on the EnCana project? You mentioned the time-out phase, which certainly has been of concern to Nova Scotians. Has any of this particular facet of the overall project had any impact on that?

MR. MCFADYEN: First of all, there was a bidding process. We extended invitations to the major players in the pipeline industry that expressed interest in that opportunity. We had a bid review committee and, as we've announced previously, the Highlander Consortium was selected as offering the best proposal for continued discussions with them. As a result of the EnCana time-out on Deep Panuke, though, those discussions are on hold right now, because it was clearly tied into that project. EnCana was certainly aware and were kept apprised along the way of our intentions to pursue expressions of interest with respect to the back-in right. It's certainly not our understanding that that had any material impact on their decision for their time-out at this juncture.

DR. SMITH: Mr. Chairman, I think I will defer my time.

MR. CHAIRMAN: It's 9:32 a.m., and I will give the next nine minutes to the member for Kings West. Good morning, Jon.

MR. JON CAREY: Good morning. This question, I don't know how much information you might have on it, but I have had constituents ask me, and I've pondered as to why, and maybe it's too simplistic, but Nova Scotia Power, it would seem to me, would be a large consumer of gas if they were to use it totally. Was there ever any discussion or is there anything ongoing whereby this company would have had a direct line of some sort for

[Page 27]

the energy coming from Sable and our offshore? Would this not have helped to reduce Nova Scotians' power rates, possibly, and helped to reduce pollution?

MR. MCFADYEN: I will ask Paul Taylor to handle that one.

MR. PAUL TAYLOR: Just to clarify, the first part of your question, was a direct line . . .

MR. CAREY: I don't know enough about energy but, for example, I would think a large user, if they were to produce all of the power for Nova Scotia, that they would have some kind of grid or something that would have come directly to them, rather than looking for 4,000 homes in Dartmouth or something for distribution. Why wouldn't one line be more economical and reasonable?

MR. PAUL TAYLOR: I'm just trying to remember the numbers. Nova Scotia Power, itself, executed a contract for, I think it was 62.5 million cubic feet per day from the Sable project, from the Tier I production. I do believe that contract is for 10 years. So they are, indeed, a large user of natural gas in Nova Scotia. They were the anchor tenant, if you will, that allowed - in essence, they do have a line that comes directly to their plant. They stepped up to the plate when the project was in its development stages.

They agreed, by signing that contract for 62.5 million cubic feet a day, to essentially anchor the Halifax lateral that comes in from the Maritimes & Northeast pipeline to Halifax. That line actually terminates at their Tufts Cove generating station. It was that contract alone that supported the construction of that pipeline and allowed it to be rolled into the main Maritimes line, which is a very significant benefit for, certainly, HRM to have that gas sitting here, terminating in Halifax, to allow a gas distributor to then build a system off that line to service the HRM with gas distribution.

The contract that they have signed, and all the users of Sable gas in New Brunswick and Nova Scotia, Irving Oil and N.B. Power, and N.S. Power, they run the natural gas into facilities that are dual fuelled. If you look at the Tufts Cove station, it has large oil tanks beside the plant that enable them to generate from that station and not use the natural gas at that station. Nova Scotia Power has a system that is fuelled now by natural gas, coal and heavy fuel oil to a lesser degree. They look at the relative prices of those fuels. They also look at the emission requirements that they are capped by, particularly with sulphur dioxide, and they make decisions on a daily and, in the case of natural gas, on an hourly basis as to what they're going to use and where.

They have a degree of flexibility in that utility from a fuel point of view that allows them to move, I think the figure is - if I can remember, the President of Nova Scotia Power used the figure $19 million at the annual meeting, of savings to ratepayers in Nova Scotia from being able to, in periods of high gas prices, sell a portion of that 62 million cubic feet

[Page 28]

into another marketplace at a higher price, and use a lower priced fuel on their system to generate power for Nova Scotians, and use that money to offset other costs in the system.

Natural gas has provided them a direct benefit to be able to control their emissions, to control their fuel costs and provide a flexibility into their generating system that they did not have before. The use of the gas in that Tufts Cove station has certainly been a benefit for the company. It's a benefit for Nova Scotia electricity consumers and it will be an increasing benefit once a gas distributor can make use of that lateral line coming into Halifax to grow its system from.

MR. CAREY: I'm aware the market plays a major role in what they use but I guess what I'm really interested in is, what's the potential for Nova Scotians to really benefit? I'm more concerned about Nova Scotians benefiting than I am Nova Scotia Power. Is there anything coming where they might use more of this and are the environmental laws for pollution and so on going to change this thing, so that they will be more inclined to - I know we don't control and you don't control world markets in oil and so on, but is there anything to indicate that they are going to be using more or totally be dependent on this?

MR. MCFADYEN: Certainly I think if one looks to the future - and we chatted earlier about the Kyoto challenge - clearly one of the options could be for Nova Scotia Power to look to using other fuels other than coal over the long term, so part of the response could be increased gas utilization. At the end of the day though whatever route they choose, clearly, is going to be based on the fundamental economics of what makes sense to provide the most economical and reliable power to Nova Scotians. Over the long term, certainly natural gas is one of the options that is certainly within their portfolio of opportunities to look at for future power generation, and it certainly could come with an environmental benefit.

MR. CAREY: My next question would be, for about four years now I've listened to the Energy Critic for the Opposition continually say that we're not getting our share and that it was a bad deal and all of those things, that probably we'd be better off if we left the gas in the ground. I would assume that you have a business plan and there's a point in business where you either produce or you shut it off. From Sable, I think you said that 35 per cent of the benefits come directly to Nova Scotians. Is there a level that you're looking at that this is a good investment, that we're getting something, or where it should be left in the ground? I've never agreed that it should be left in the ground, but how do you substantiate or get proof that what we're doing is the right thing?

MR. MCFADYEN: Well, I don't know that you can ever come up with definitive proof. I think you can look to the investment that's been made, you can look to the level of activity that's occurring. Leaving resources in the ground, there's an opportunity costing us lots of lost opportunities. I think it's appropriate to bring resources to the marketplace when the opportunity presents itself. Certainly that's part of the strategy we're going to continue to follow. If the market demand is there, if the economics dictate it, then I think it makes

[Page 29]

sense to take those resources to the marketplace because other than that, I think you would risk circumstances changing and the future is very unpredictable. To enter a world of missed or lost opportunities, I think is not a prudent strategy.

As I say, if the fundamental economics are there, and I think we are demonstrating now that - and as I said earlier, I'm quite comfortable with the level of activity that we've got in terms of the state of development of the industry. Not to say that we're not going to continue to work hard with all our stakeholders to ensure that we get more, but I think we're on track. I think we're heading in the right direction and I think the development of those resources is bringing benefits to Nova Scotians in a number of ways.

MR. CHAIRMAN: Thank you, Mr. Carey. I had allowed to 9:46 a.m. with some time not used by the Liberal caucus. Seeing no further questions at this time, I would like to ask our witnesses, Mr. McFadyen, if you could take the lead for a wrap-up for a few moments if you so wish or if any of the other witnesses have other comments to make at this time.

MR. MCFADYEN: Thank you, Mr. Chairman. I just want to express our appreciation for the opportunity to come and speak to the committee today. We've appreciated and enjoyed the discussion, the level of questions and just to conclude by saying that as I said in my opening comments, the Energy Department is committed to working with all our partners and stakeholders to build a vibrant energy industry in this province. I think we're on the cusp of some exciting developments over the next two or three years - not just in the oil and gas sector, certainly there's a lot of dynamism in the electricity sector, the renewable sector is certainly growing. There are also some challenges out there as we've talked about in terms of Kyoto and other issues, but I think it's an exciting time to be part of the energy sector in Nova Scotia and the new Department of Energy is certainly committed to doing all we can to work with all Nova Scotians to make sure that we realize the benefit and opportunity from those developments.

With that, I would like to, again, thank the chairman and the committee members for the opportunity to come and have this discussion today.

MR. CHAIRMAN: Thank you. As it is with tradition, I'd like to take a quick recess so we can bid our witnesses a good day and I'd like to reconvene as quickly as possible for two items of business. We will stand in recess for just a couple of moments, please.

[9:44 a.m. The committee recessed.]

[9:45 a.m. The committee reconvened.]

MR. CHAIRMAN: Could we reconvene please? I'd ask members to take their seats. We have a couple of items of business that we need clarification on.

[Page 30]

First of all, I would assume that members have been made aware, or certainly I know the lead members of each caucus have been made aware, of the remarks which will be delivered in Winnipeg by someone, but we'll come to that in a moment. So, we have reviewed the comments that have been submitted and made a few clerical changes, if I can put it that way, I assume there's no more clarifications on that. Correct? On the comments? Thank you.

Now, I'd like to clarify the status of the Winnipeg conference and the fact that there could be a momentous event happen in between today's session and the makeup of the committee and the meetings which will be held in Winnipeg September 13th - 17th. To follow procedure clearly here, the tradition has been on this committee that the chairman and the deputy chairman attend. For us to have another member of the committee attend, the third caucus, it's necessary to request the funds from the Speaker. So I would like to entertain a motion to that effect, if that's acceptable. Jim, do I see you so moved?

MR. DEWOLFE: I so move the motion.

MR. CHAIRMAN: Are there any comments on the motion? I want to make sure the member for Yarmouth isn't going to have one of his outbursts.

MR. RICHARD HURLBURT: I have my own views but I'll leave it alone.

MR. CHAIRMAN: So, you want to go too, Richard?

MR. HURLBURT: No.

MR. CHAIRMAN: Sorry, I don't mean to draw attention to you. You want to go to Yarmouth, I understand. The deep south as we call it.

The motion is that I will be asking on behalf of the committee for funding to be made available so that the representation in Winnipeg is made up of three members of this committee or as the caucuses decide when that time comes in September. Ready for the question? (Interruption) Yes, you may, Mr. Taylor.

MR. BROOKE TAYLOR: Is the thought that the motion that you're putting in place would of course, carry over to whatever the outcomes of that event you're referencing, whenever that event might be? This motion is still going to be very relevant to the future and maybe the same partners. Just a question I had.

MR. CHAIRMAN: It's a good question. The deputy chairman and I talked about it in advance and that is our understanding.

MR. BROOKE TAYLOR: There may not be a Third Party.

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MR. CHAIRMAN: Mr. Taylor, you're playing mischief here. I'm going to say that I know the committee is ready for the question.

MR. BROOKE TAYLOR: Question, yes.

MR. CHAIRMAN: Would all those in favour of the motion please say Aye. Contrary minded, Nay.

The motion is carried.

I would assume there's no other items of business?

Just as we wrap up, I'd like to thank the members of Hansard. Of course, I'd like to thank the AG staff that regularly come here. The collegiality that I've had the opportunity to share with you as the chairman, but more specifically I'd like to take the opportunity to thank Mora. I want you to know that most of the time things have run smoothly on this committee, it's not because of my tact or lack of, it's because of Mora's professionalism, so thank you very much. (Interruption) In spite of it - you're right, Barry. I'd like to thank you publicly and as I've done personally - thank you, Mora, for your confidence.

Could we have a motion of adjournment, please? (Interruption)

It's been moved. Thank you. We stand adjourned.

[The committee adjourned at 9:50 a.m.]