STANDING COMMITTEE ON PUBLIC ACCOUNTS
Mr. Russell MacKinnon
MR. CHAIRMAN: Good morning, ladies and gentlemen. We will convene the meeting. It is now 8:01 a.m. For those who don't know, my name is Russell MacKinnon, MLA for Cape Breton West. I am the Chairman of the Public Accounts Committee. Our guest this morning is Mr. James Livingstone, former CEO with Nova Scotia Resources Limited and Mr. Livingstone will be our guest for this morning. Also in attendance, we have Mr. Roy Salmon, our Auditor General, to my immediate right and also Colleen Denomme from Hansard.
I will introduce members of the committee. First, starting with the New Democratic Party caucus, we have Mr. Darrell Dexter, the member for Dartmouth-Cole Harbour; Mr. John Holm, the member for Sackville-Cobequid; and in the second row we have Mr. Howard Epstein, the member for Halifax Chebucto; to my immediate left, in the Progressive Conservative caucus, we have Mr. Brooke Taylor, the member for the beautiful Colchester- Musquodoboit Valley; also next to Mr. Taylor is Mr. James DeWolfe, the member for Pictou East; Mr. David Morse, the member for Kings South; in the second row we have Mr. William Dooks, member for the Eastern Shore; and Mr. William Langille, the member for Colchester North.
With that, first of all, starting off, Mr. Livingstone, you have been a guest before the Public Accounts Committee before so you don't have any questions with regard to procedure or process?
MR. JAMES LIVINGSTONE: No, it is pretty straightforward.
MR. CHAIRMAN: Okay, so you can start off.
MR. LIVINGSTONE: Good morning, ladies and gentlemen. I must confess to being a little bit sluggish this morning. It is now 5:00 a.m. Calgary time so if I am a little slow in answering your questions, please be patient. My brain and my mouth will eventually get coordinated.
I have a short presentation to make and then I will answer questions as honestly as I can on the subject the members wish to ask. There are a few points that I want to make clear. First of all, I was asked to appear before this committee, I never requested an appearance and I paid all of my own expenses and costs to appear. I do not belong to any political Parties, nor was my appointment as President and CEO of Nova Scotia Resources a political appointment. I was approached by an international search firm concerning NSRL. I never applied for the position, I was asked to apply and was selected from over 10 other candidates for the position. Every employer has the right to dismiss an employee and I have always accepted that. My only complaint was the manner in which it was handled. As you know, I reached an out-of-court settlement and that certainly took care of my complaint.
This morning I will give you an overview of NSRL and what the two options are for NSRL based on my business experience. Then I want to tell you what I believe is missing in your offshore oil and gas business, something all Nova Scotians want. Nova Scotia Resources Limited, when did this Crown Corporation get into the taxpayers' pocket? The answer to this question is simple. The first day it was created. The company was started with debt, not cash nor equity, just plain old debt.
Crown Corporations were in vogue during the 1970's. Nobody trusted major oil companies and with rising oil prices. Alberta, Saskatchewan, British Columbia and the federal government all had Crown Corporations. They were created as windows on the industry. Unfortunately for the taxpayers of Nova Scotia, NSRL was created without any capital. It was understaffed and with a board of directors that had political experience but very little oil and gas experience. Using debt, the company bought offshore Nova Scotia properties from British Columbia's Crown Corporation and a company called East Coast Energy.
A serious amount of debt was incurred when NSRL became a 50 per cent partner with LASMO in the Cohasset/Panuke project. What I want to make clear is that the Cohasset/ Panuke project is exactly what a Crown Corporation should be, that is to be the catalyst to get your offshore going. NSRL did that but, again, they did it with debt. Poor management and engineering by LASMO resulted in huge cost overruns in both the capital and operating budgets.
I became President and CEO in April 1993 and the company was $466 million in debt. When I was hired, my mandate was to get NSRL into shape so that it could either be sold or made into a publicly-traded oil and gas company. Changes were made in the board of
directors and more experience was added to the management team. A business plan was developed and approved by the board of directors but, unfortunately, politics got in the way of good business sense. The only way the Liberal Government could avoid rejecting the NSRL business plan was to dismiss the board of directors. Within minutes of the termination of the board on February 25, 1995, I was also fired. NSRL was put up for sale but, unfortunately, they apparently could not find any suitable buyers.
Canada's largest brokerage firm, RBC Dominion Securities, was impressed with NSRL's business plan. On October 7, 1994, their vice-president wrote me a letter. Let me quote from that letter, "RBC Dominion Securities has an established record in dealing with the oil and gas sector and in the privatization of government owned entities. NSRL is uniquely positioned to develop into a strong offshore Nova Scotia focused oil and gas company and we would be pleased to be involved.".
To save time, when I finish my presentation, I will answer questions you may have, particularly on the following issues concerning NSRL: the Downe Barry deal; NSRL's tax pools; NSRL's Western Canada properties; NSRL's joint venture with Trans Canada Pipeline, called Sable Gas Systems; the Cohasset/Panuke project; and the hiring of Rothschild to sell NSRL.
I would now like to talk about what Nova Scotians should do with NSRL. There are only two options: sell it to Mobil or Shell, or do a reverse takeover of a publicly-traded oil and gas company to allow NSRL to access equity capital. The province cannot afford another Crown Corporation risking taxpayers' hard-earned dollars. The first option of selling NSRL to Shell or Mobil is the easiest to deal with.
For some reasons, unknown to me, and one which makes no business sense, the Government of Nova Scotia and NSRL agreed to the following in December 1997. "NSRL and Nova Scotia agreed that should NSRL wish to dispose of its interest in the SOEP either by an asset sale or as a result of the sale of the shares of Nova Scotia Resources (Ventures) Limited, then NSRL shall first provide Mobil and Shell with a right of first refusal.". Companies that who might have been interested in buying NSRL will not waste their time because there is right of first refusal. Perhaps this committee can determine why the Government of Nova Scotia agreed to this clause.
What do I think Mobil or Shell will pay for NSRL? I would estimate about $40 million, which is roughly the discounted value of NSRL's 8.4 per cent share of SOEP's cash flow. What would this do for the taxpayers of Nova Scotia? Well, it would reduce your $10 billion deficit by $40 million, which is a drop in the bucket. Ownership of the SOEP would be 100 per cent foreknown, which you may or may not care about. Accepting an offer from Mobil or Shell would stop the bleeding for the taxpayers of Nova Scotia which is of vital importance. NSRL's 8.4 per cent share of the natural gas production will be lost forever to Nova Scotians.
The questions this Public Accounts Committee must investigate are as follows. Why did Mobil or Shell not pay money to acquire this first right of refusal, why was it given for nothing and who approved that decision? Did Mobil and Shell obtain first rights of refusal from Imperial Oil or Mosbacher Operating Limited if they wished to sell their companies? One point is very obvious and this is the serious interest Mobil and Shell have in NSRL. They certainly do not want another company to acquire these rights and they are not prepared to purchase them in a competitive situation. With the recent Exxon acquisition of Mobil and if Exxon purchases NSRL's 8.4 per cent interest, they would have approximately 65 per cent of the Sable Offshore Energy Project.
Ladies and gentlemen, the Canadian taxpayer put billions of dollars into the offshore during the 1980's under the National Energy Project. The sole purpose of the NEP was to get Canadian companies involved in the exploration and development of our Canadian offshore. Today, 91.6 per cent of SOEP is controlled by multinationals.
Let me now talk about the second option for NSRL and that is a reverse takeover by NSRL of a publicly traded oil and gas company. This business strategy would do the following for NSRL and the taxpayers of Nova Scotia; it would eliminate Mobil and Shell's first right of refusal, allow NSRL to access equity or stock market capital instead of taxpayers' money, no more taxpayers' money going into NSRL. NSRL would have a fully operational management team with exploration, operational and financial experience in the oil and gas business. NSRL would not be a one-play company with only one offshore play. NSRL could be headquartered in Nova Scotia and be listed on the Canadian Stock Exchange. Nova Scotians would have a choice whether to buy stock in NSRL. Right now as taxpayers, they have no choice. And the $700 million invested in NSRL by the taxpayers would not be completely lost as would be the case in a sale to Mobil or Shell.
To achieve this type of reverse takeover of NSRL will not be easy. It will be complicated and will require a major leadership role for the Government of Nova Scotia. Members of the Legislature will have to do what is in the best interests of all Nova Scotians and not what makes political sense or what the back-room boys want. One important point I want to make is that the bureaucrats in the Nova Scotia Government have no experience in this area and should not be involved. The disgraceful performance of Rothschild Canada in the previous sale of NSRL proves my point. The Government of Nova Scotia must decide immediately what it wants to do with NSRL. Selling to Mobil or Shell is the easiest way to do it and governments usually like to do what is easy.
However, if the government wants to do what I feel would be in the best interests for all Nova Scotians and develop NSRL into a strong publicly-traded oil and gas company, here is the formula. Hire a financial expert from Bay Street to find an oil and gas company interested in doing a reverse takeover of NSRL. Again, this will not be easy and you should only pay fees based on success. The Government of Nova Scotia converts the $700 million in debt into preferred or common shares that could be redeemed at a future date by NSRL
and allow NSRL to function as an oil and gas company and not as a political puppy. Plainly and simply, NSRL will be debt free and listed on the Toronto Stock Exchange.
Here is where things become interesting. The Government of Nova Scotia could take the following action to make sure NSRL is attractive to potential shareholders, including shareholders in Nova Scotia. Let NSRL select one million acres of potential exploration lands onshore Nova Scotia. Return to NSRL the gas distribution rights for the Province of Nova Scotia. Through negotiations or through the court system, the Province of Nova Scotia should recoup its right to own 50 per cent of the offshore pipeline for the Sable Offshore Energy Project and their 50 per cent of the transmission line within the province. The 50 per cent ownership would be given to NSRL. NSRL would then pay SOEP, Maritimes & Northeast partners, their cost to construct these pipelines. NSRL would also pay Trans Canada Pipeline the money they spent on the Sable gas system in the 1980's. Believe me, it would not be hard to raise the money to pay for the offshore and onshore transmission pipeline costs.
The new NSRL would look like this: Debt free, listed on the TSE and, hopefully, Canadian owned and managed. Cash flow from SOEP of approximately $25 million per year for 25 years; this amount of cash flow would allow NSRL to drill 125 wells a year onshore Nova Scotia at an average cost of $200,000 each. The gas distribution for NSRL would be very profitable provided the government abandons the 62 per cent requirement for gas service within the province. The return on capital for the offshore and onshore pipelines is, I would estimate, between 12 per cent to 14 per cent; again, another excellent source of cash flow for NSRL. Strong management with these assets could grow NSRL into a company all Nova Scotians would be proud of.
This formula is not new. It is proven with Allan Blakeney's Saskatchewan Energy or Peter Lougheed's Alberta Energy. These are two examples of where business sense prevailed over political agendas.
I want to conclude my presentation this morning by telling you honestly and frankly what I think is wrong with NSRL and your offshore oil and gas development. One word describes the problem and that is "leadership". Being a leader is not an easy thing to do. There are times when you are not popular with the business community, with the labour movement and the political establishment and, yes, the media. Alberta and Saskatchewan have done well in the oil and gas business because of Allan Blakeney and Peter Lougheed.
Look back to the early 1970's and the early 1980's when Lougheed decided that the people of Alberta were going to be the principal beneficiary of oil and gas development within the Province of Alberta. Here are some of the comments made about Peter Lougheed in Peter Newman's book, The Blue-Eyed Sheiks:
"Lougheed has no real friends among the executives of the major oil companies in Canada. An executive of one of Calgary's largest foreign-controlled oil company said: Blakeney is accessible, but Lougheed is very difficult. In Calgary's corporate towers, the Premier is sometimes referred to as litmus Lougheed because he went in blue and came out pink. His grab for the spoils of the OPEC increase by raising provincial oil royalties, his takeover of Pacific Western Airlines and the creation of the Alberta Energy Company were all seen as dangerously leftist tendencies.".
Both Blakeney, Lougheed, their Energy Ministers and provincial bureaucrats were not servants hired for the oil and gas industry. Oil and gas companies do not own the reserves, they only rent them. To explore and develop is not a right but a privilege; a privilege that must provide a fair economic rent for this non-renewable resource.
Mr. Chairman and members of your committee, I want to remind you of what the Canada-Nova Scotia Offshore Petroleum Resources Accord, signed on August 26, 1986, stated. It wanted one, "to achieve the early development of petroleum resources in the offshore area for the benefit of Canada as a whole and Nova Scotia in particular.". Two, "to recognize the right of Nova Scotia to be the principal beneficiary of the petroleum resources in the offshore area, consistent with the requirements for a strong and united Canada.".
Where was the leadership in approving a very poor royalty deal? Alberta's average royalty is about 24 per cent. Where was the leadership in giving away Nova Scotia's right to exercise a 50 per cent ownership of the offshore and onshore pipelines? Nova Scotians have no guarantee of natural gas except for NSRL's 8.4 per cent interest and they have no advantage at all when it comes to gas pricing for transportation costs.
The Memorandum of Understanding agreed to in December 1997 between the Government of Nova Scotia, SOEP, and Maritimes & Northeast contains a clause that just shocks me. Under the section entitled Regulatory Approvals, here is what it states:
"Each party agrees that it shall not seek any review, appeal or rehearing of the joint review panel's recommendation contained in its October 27, 1997 report or any decision or regulatory approval associated with SOEP or M & NPP which is consistent with such recommendations and each party further agrees that it should not support any third party in connection with any review, appeal or rehearing of any such decision or regulatory approval which may be sought by any third party.".
Both NSRL and the Government of Nova Scotia have agreed not to support any legal challenges to the joint review panel's decision. There are two legal challenges to this panel's decision; one by the Union of Nova Scotia Indians and the other by the Industrial Cape Breton Community Alliance Group. Can you imagine a government elected by the people, for the people, agreeing that no matter what Mobil, Shell, Imperial or Maritimes & Northeast
have done in the regulatory process, they will support these companies over the people of Nova Scotia? That is not leadership, that is a puppet.
The petrochemical industry is of great interest to many Nova Scotians, particularly those living in the Strait of Canso area. Lougheed solved the feedstock problem by legislation. The Gas Resources Preservation Act contains a condition that allows the board to require liquid extraction before removal of gas from the Province of Alberta. The exact wording of the condition is, "Notwithstanding any provision of any contract for the purchase or other acquisition of gas, the board may require the extraction of any substance or substances, except methane from any gas before its removal from the province pursuant to this permit.". To me, that is why Alberta has a growing petrochemical industry today.
What did the Government of Nova Scotia agree to? Simply put, you have to replace the ethane removed with an equivalent quantity of energy meeting pipeline quality specifications. With that condition, I doubt you will ever see a petrochemical industry in Nova Scotia. The Government of Nova Scotia should have legislation describing the minimum BTU value at which gas can leave this province.
Let me conclude by telling you that your committee should examine all the documents related to NSRL. It is a Crown Corporation, not a private company, and the shareholders are the taxpayers of Nova Scotia. You should know what the revenue, cost and profit will be for NSRL involvement in SOEP. You should examine the costs of the offshore and onshore pipelines and the profit it will make over the next 25 years. Find out what the gas distribution business could bring in profits for NSRL.
NSRL has one job left to do and that is to be the catalyst to get exploration and development started onshore Nova Scotia. To do it, NSRL will need equity capital, not taxpayers' money. An onshore oil and gas industry can provide tremendous economic opportunities. Just look at what it has done for Alberta and Saskatchewan.
As I said earlier, you have two options. I strongly suggest you select the second option and build NSRL into another Alberta Energy. Thank you for the opportunity to speak in my home province. I would be pleased to answer any questions you may have.
MR. CHAIRMAN: Thank you, Mr. Livingstone. At this point I will turn to the NDP caucus and ask if they have any questions.
The honourable member for Sackville-Cobequid.
MR. JOHN HOLM: Mr. Livingstone, you certainly have given us a lot to ponder over. Maybe if I could just ask this very first question. I know that you have been keenly following what has been going on in Nova Scotia. I guess you have not been employed
directly in the province for the last number of years. What is it that motivates you to keep following this as closely as you are and to keep bringing these issues forward?
MR. LIVINGSTONE: Well, I was born, raised and educated in the Province of Nova Scotia. The taxpayers put me through university. The good Lord gave me an opportunity to acquire expertise in the oil and gas business, and I feel obligated to share it with my home province.
MR. HOLM: I am going to start at the tail-end and then maybe we can work back to some of the issues in the early days. There are a lot of topics, whether it be the pipeline, LASMO, the tax pools, a lot of those issues that I would like to get into later on this morning. First of all, looking toward the future, as I understand it, as of the end of September NSRL had a debt of $705 million. That debt is projected to be $740 million by the end of the calendar year, not the fiscal year but the end of the calendar year.
You have made a number of suggestions as to ways Nova Scotia may be able to move forward and try to recoup some of that. I must admit that some of the things you have raised today, I have also raised in this House, and I haven't understood why certain things were done.
Just dealing on the last points, and that has to do with what the Lougheed Government did with regard to, as you put it, requiring in the legislation was the BTU value and the fact that they would have the right to remove the condensates and so on from the gas. From your understanding though of the court decision back in 1983, the Supreme Court decision, does Nova Scotia - we would for onshore - have the legal authority by legislation to do that?
Just as a way of background, the government had introduced legislation last spring that would have them given that kind of authority, and then there was an amendment to that legislation that just passed through this House this fall which basically says that none of that has any force of effect unless the Governor in Council so proclaims it, because now we have these signed agreements with the SOEP partners that were signed at the end of July.
Do we have that legal authority to require that?
MR. LIVINGSTONE: I am not a lawyer. All I can tell you is that I would think you would have the right, the province under the Petroleum Resources Accord, where Nova Scotians are to be the principal beneficiaries of the development of this resource, to determine what the BTU value of your gas is going to be leaving the Province of Nova Scotia. That means basically, in common language, that what you have the right to export out of the province is methane; the rest would stay here to develop a petrochemical complex, if you so desire.
The way your agreement is set up now, that will never happen. The clause in there that you have to replace what you take out with more gas, how would you do that unless you are one of the partners in SOEP? Where would you get the gas? I don't think there is anything legal that stops you from putting the requirement on what your pipeline gas specifications would be.
MR. HOLM: In terms of volumes, and you have been following the play offshore and so on in terms of what is coming onshore, and I am sure you have looked at the kind of breakdowns of, I think it is called, sweet gas referred to, how close are we to having the volumes of concentrates and so on that would be - I am not talking about a massive petrochemical industry - to have sufficient feedstock to be able to develop a petrochemical industry here?
MR. LIVINGSTONE: I think you have to look at what is happening around you. Offshore Newfoundland is starting to find that there is natural gas there also. I think where you are in Nova Scotia, you should have those numbers that you are asking me about done by a professional consultant.
MR. HOLM: Okay.
MR. LIVINGSTONE: They should tell you, I think you are on the first phase of the project, you are getting close, but I am sure with the second phase, depending on what the spec on the gas is that you may be in the neighbourhood of a petrochemical complex. There are new technologies today where you require less feedstock than you did before.
[8:30 a.m.]
MR. HOLM: Maybe I will move back a bit and start off, I guess, really with your firing from NSRL. You entered into an out-of-court settlement on that firing. Could you tell us the reasons that were given to you for being told your services were no longer required?
MR. LIVINGSTONE: The main reason given to me was four or five days after, I wasn't given a reason when I was fired. My lawyer was able to get a reason from the government, I think, three or four days after that. The main reason was that I ran it as if it were an oil and gas company not a Crown Corporation.
MR. HOLM: I am sorry?
MR. LIVINGSTONE: The main reason I was given was that I ran it as if it were an oil and gas company and not a Crown Corporation.
MR. HOLM: Wasn't that your mandate?
MR. LIVINGSTONE: That is correct. My mandate was to run it as an oil and gas company.
MR. HOLM: I don't know how much you wish to go into this area or not, but you have made accusations or you referred to, being run like a puppet, suggesting political interference and so on. Just prior to your dismissal, what was scheduled to be happening? Was that around the time of the business plan being brought forward for NSRL?
MR. LIVINGSTONE: Yes, if I remember, it is almost five years now but I can remember the day the board was going to meet. Some of the items that were on that agenda were, three that stick out in my mind, the business plan, a recommendation that I receive a significant bonus for my performance coming from the audit committee of NSRL, and the other item that was fairly controversial was the situation with Trans Canada Pipeline, over the back-in provisions and their agreement with Sable Gas Systems.
MR. HOLM: How much money had PanCanadian invested in the front-in costs for PanCanadian?
MR. LIVINGSTONE: I am not following your question.
MR. HOLM: Am I correct in that in the late 1980's and prior to the decision, I think it was in 1989, to not go forward with any development of the offshore at that time. PanCanadian and NSRL had an agreement.
MR. LIVINGSTONE: Trans Canada.
MR. HOLM: Trans Canada, excuse me, I misspoke. Trans Canada had an agreement. Trans Canada had, I believe, been front-ending the initial costs.
MR. LIVINGSTONE: Yes. There was an agreement between Trans Canada Pipeline and Nova Scotia Resources Limited. It was completed in 1983, where Trans Canada would advance all the costs of engineering and doing the work on the offshore pipeline and the onshore pipeline within Nova Scotia. The total amount of those expenditures, I think to 1985, was about $18 million Canadian.
MR. HOLM: Okay. It is your contention that had Nova Scotia followed through with that original agreement that that would have been a cash cow to NSRL?
MR. LIVINGSTONE: Most definitely.
MR. HOLM: The rate of return, am I correct that the transmission companies normally get in the range of 12 per cent rate of return on the capital investment?
MR. LIVINGSTONE: That is correct 12-14 per cent.
MR. HOLM: Had you ever done any projections on the projected profits that NSRL would get from that pipeline?
MR. LIVINGSTONE: No. October 1994, the pipeline was given to Mobil and its partners.
MR. HOLM: So you had no idea what it was anticipated to cost?
MR. LIVINGSTONE: No.
MR. HOLM: Would $500 million be a reasonable price, that it would have cost the province about $500 million probably on the pipeline?
MR. LIVINGSTONE: I think that is very high. It has been a while since I have looked at offshore pipeline construction costs, but roughly I would use $1 million a mile, which would put the line at around $200 million probably. I think $500 million is out of the ball park.
MR. HOLM: So $200 million, half of which would be a provincial responsibility.
MR. LIVINGSTONE: Exactly.
MR. HOLM: And from that half, let's say, the province put in $100 million, just to use easy numbers, 10 per cent of that, we should have made about $10 million a year.
MR. LIVINGSTONE: Yes. With your return, it is a guaranteed investment. Once the project is approved and it is up and running, there is really no risk to that investment. That is a great place for a province like Nova Scotia to put its Workers' Compensation money, for example, rather than getting 3 per cent or 4 per cent for your money, you get 12 per cent, 13 per cent or 14 per cent.
MR. HOLM: You have experience from developing oil and gas fields, both before and since. When the regulatory agencies are setting the tolls and the rate of return, do they take into consideration the interest payments and so on as part of the capital costs?
MR. LIVINGSTONE: Yes, it is all rolled in. You allow to make money on your capital, plain and simple, and that is what it is.
MR. HOLM: One of the reasons I am going back to that is that you are suggesting as part of your presentation that perhaps the government should be looking at possible court procedures whereby we could regain the 50 per cent ownership of that in the transmission.
Part of really where I am coming from is I am trying to figure out how this province, which has over a $10 billion debt, plus we have let's say in another month another $740 million with NSRL, what are the avenues to generate revenues that can help to pay down that debt?
MR. LIVINGSTONE: Well, I can't help you with the $10 billion one, but I can help you with the $740 million. The $740 million, you have it, whatever you do with NSRL. No one is going to buy your debt, it's as simple as that. What you need to do is make NSRL into something that is very attractive to shareholders. You need a new source of capital for NSRL. It cannot be taxpayers' capital. What you want to do is put as many assets into NSRL as you can so you can address shareholders who will invest in the company.
MR. HOLM: Okay. I am going to pass for a few minutes.
MR. DARRELL DEXTER: You have suggested that NSRL could recoup somewhere in the neighbourhood, I think you used the figure 50 per cent of the offshore pipeline rights. How do you see that happening? How could it happen?
MR. LIVINGSTONE: Well, through negotiations or through a court challenge, one of the two. You have one in court now. You are being sued by Trans Canada Pipeline for not honouring the deal. I am just amazed that the Nova Scotia Government can take those assets that they pledged over here, under the name of Sable Gas Systems, and then give them away over here under the name of Sable Offshore Energy Project. So you are already into a court situation. I think you want to review all the documents relating to how this was given away.
MR. DEXTER: Isn't it a no-win situation for the Province of Nova Scotia at this point? Either it goes to TCP or it remains where it is?
MR. LIVINGSTONE: Not necessarily. You have two court challenges to the National Energy Board panel's report. Let's look down the road, and let's say if those court challenges were successful and the ruling was that a new application had to go in and a new hearing had to be held, then I think you are back to square one and the province can decide what it wants to do with its 50 per cent backing.
MR. DEXTER: I guess I don't really understand why it is that you appear to be advocating paying Trans Canada Pipeline?
MR. LIVINGSTONE: Well, I think you have to pay them; you had an agreement with them.
MR. DEXTER: A deal is a deal.
MR. LIVINGSTONE: A deal is a deal, $18 million. Let's go back. You were ready to develop this gas in the mid-1980's. Mobil and its partners walked away because energy gas prices were too low, but the work was completed. NSRL participated in that project and Trans Canada Pipeline has always taken the position that that project was never terminated and it should move forward when gas prices came back and this project was put on the table.
MR. DEXTER: I want to touch on, just for a second, something that my colleague started with, but I just wanted to drill down a little deeper, if you will pardon the analogy. You said that you were let go from NSRL because you wanted to run it like an oil and gas company instead of like a Crown Corporation. That is an explanation, but it is pretty superficial. Could you give us some detail? Could you tell us what exactly it was that you were doing that seemed to be offensive to the government at the time, and why it was that they chose to take the action they took?
MR. LIVINGSTONE: I guess there are a couple of issues; it was not just me. I think a point a lot of people missed when this happened was that the board of directors was fired first. So here you had a board of directors, a lot of them experienced oil and gas people who liked the business plan, approved the business plan for NSRL, and what the business plan really was, a way to get NSRL off the taxpayers' roll and over into the public-equity markets. It would have meant that NSRL would have been an independent company, headquartered in Nova Scotia, operating like a regular oil and gas company with really no political control, and I guess this might have been offensive to the government at the time.
MR. DEXTER: So you say that was purely a philosophical difference of opinion?
MR. LIVINGSTONE: Business philosophy. The board and myself were not interested in the political agenda, we were interested in the business agenda.
MR. DEXTER: I guess as an extension of that, did you find that it was the government's intention at that time to interfere in the operation of the company?
MR. LIVINGSTONE: We had a lot of problems at the board level.
MR. DEXTER: Can you provide us with some examples?
MR. LIVINGSTONE: Yes. I guess the best example, one that really got the ball rolling was when Nova Scotia Resources entered into negotiations with PanCanadian to monetize or sell some of our tax pools; a very simple deal. We had gone to western Canada and talked to a number of interested companies. I thought PanCanadian was offering the best value. I got the board of directors behind us to approve it and then when we went forward with it, the government would not approve the piece of authority we needed. We were issuing debentures for over a year, and we needed the government's approval. That got caught up in the political mire and the pools never ever got monetized.
MR. DEXTER: Many people who are going to see this, either through Legislative TV or through Hansard, will not understand what tax pools are, and monetizing tax pools is a fairly specific industry style term. I wonder if you could explain that just a little bit and then what you understand the rationale was for not doing what was recommended?
MR. LIVINGSTONE: Tax pools are created when you spend money and do not make money. It is simple; it is a loss. Up until about 1996, you used to be able to form what they call a joint exploration corporation where one company would put in producing properties with a cash flow coming from them. If you do not protect that cash flow from tax, then you pay corporate income tax of roughly 46 per cent on it. So what you were allowed to do under the joint exploration rules was to take NSRL's tax losses, put them with what we call an income stream from PanCanadian producing properties and protect that revenue from tax. In return they would pay you some factor of the 46 per cent; in our case I think it was 18 per cent or 20 per cent that we were going to get for each of our tax-loss dollars.
The important part of the thing was we put through a $50 million transaction, okay, so we could get the rest of the tax pool grandfathered in case the legislation changed. We had all the work done. The board of directors was agreeing with it with the exception of the chairman, Mr. MacKay. A couple of the directors got frustrated with his approach and resigned over it. The minister would not carry it forward, wanted a detailed business plan which - we stopped the tax pool deal - we gave to them. The business plan was approved by the board in September, but the government never ever ruled on it. Before the tax pool deal could be done, PanCanadian got frustrated with it and dropped it. We just could not get the government to agree to give us the one piece of paper we needed.
MR. DEXTER: So that I am clear on this, essentially you could have recovered 20 per cent of your losses as a result of the deal with PanCanadian just off the top?
MR. LIVINGSTONE: Exactly.
MR. DEXTER: This opportunity was lost to NSRL because the legislation changed?
MR. LIVINGSTONE: That is correct. The Joint Exploration Corporation was terminated in the federal budget of 1996, I think.
MR. DEXTER: What do you understand was the reason for the government's hesitation?
MR. LIVINGSTONE: The only reason I can come up with, and shared by the oil and gas members on the board, was that Bob MacKay wanted to teach us all a lesson that he had political control over NSRL.
MR. HOLM: Just another question, had you arranged, or NSRL arranged to sell them directly or were you going through a company to sell the tax pools?
MR. LIVINGSTONE: No, we were doing it ourselves to save money. We did not have a third party involved.
MR. HOLM: Did the government object to the sale of the tax pools or did they object to you selling them directly?
MR. LIVINGSTONE: We could never get a reason out of them. All we could get was that you needed a business plan.
MR. HOLM: Was it suggested to you that they should be sold through any particular company?
MR. LIVINGSTONE: The minister at the time was out West trying to sell them himself. I had some follow-up calls from companies in the West who had been talking to Don Downe, who was the minister at the time, about the tax pools, which disappointed me and kind of upset some of the board members.
MR. HOLM: You mean he was out himself going around to different oil and gas companies trying to flog the tax pools?
MR. LIVINGSTONE: That is correct. There is correspondence on file at NSRL that shows that.
MR. HOLM: Is that a job normally for the minister to be doing?
MR. LIVINGSTONE: Well, if he was going to do it, I guess there was no need of me being there.
MR. HOLM: But he did not have any companies involved, or he was not trying to sell them through a particular company, having companies doing the work on the government's behalf?
MR. LIVINGSTONE: He was talking with them.
MR. HOLM: I am not talking about to sell them to, but I am talking about acting as the agent to sell them?
MR. LIVINGSTONE: He sent a company in to see me about the pools, I am just trying to remember, in the fall of 1994, Coopers & Lybrand, a fellow from Halifax here. I think he was Don Downe's personal accountant or something. He sent him in to see me and
he brought in a guy from British Columbia with Coopers & Lybrand who was a tax pool expert and said, you know, they would be interested in taking over the account and trying to sell the tax pools for a fee. I told them, thank you very much, but we were quite capable of handling that ourselves.
MR. HOLM: So what you are saying then is, if the minister of the day was trying to sell them himself and also sent an accountant from Coopers & Lybrand in to see you that obviously the government was not philosophically opposed to the sale of the tax pools, but just who or how they were being sold?
MR. LIVINGSTONE: That is what we thought after we realized this seemed to be an important issue with the government. We accelerated our efforts to sell the tax pools and that is how we came up with the PanCanadian offer.
MR. HOLM: What would the commission have been for a company to sell the tax pools? Is that around 7 per cent?
MR. LIVINGSTONE: For most transactions in the oil business, there is a 5 per cent to 7 per cent commission.
MR. HOLM: So if you were selling $50 million at 18 per cent, that is $9 million. So 5 per cent of that would be about $450,000?
MR. LIVINGSTONE: Roughly, yes.
MR. HOLM: The commission that would have been paid if it was sold through a private company that was recommended to you versus selling them yourself?
MR. LIVINGSTONE: That is correct. The other thing would be then, on your bigger pools, the remaining ones, the company, no doubt, would tell you they set up the structure that got approved by the federal government to sell the pools and they would want their commission on all the pools.
MR. HOLM: If that initial $50 million had been sold, as the board wanted to do - would the remaining, now it is up to close to $740 million, of course it would have been less than that if you had had the money to pay it down from the sale of some, but - would all of those tax pools still be available for sale today?
MR. LIVINGSTONE: I am not a tax lawyer but I would say, in my opinion, you are usually allowed a grandfather clause and I think you would have been able to get a grandfather clause out of Revenue Canada to protect your pools.
MR. HOLM: But this wouldn't have been a unique situation to Nova Scotia, others have, of course, sold tax pools and so if one can grandfather, others can grandfather as well?
MR. LIVINGSTONE: Until your pools are used up. I don't think you would have been allowed any new pools but your existing pools would have been grandfathered.
MR. HOLM: On LASMO, of course Nova Scotia was involved in a 50/50 partnership with LASMO on the Cohasset/Panuke and you make comments that you found out there was mismanagement and that LASMO wasn't running things very well. Of course, the LASMO operation has subsequently been taken over by PanCanadian Resources, or they purchased it. Were there any deals in the works around the time of your firing that might have seen LASMO's share of the Cohasset/Panuke fields being transferred to Nova Scotia and what had precipitated those discussions and why didn't they go forward?
MR. LIVINGSTONE: Let me start by saying when I took over as President and CEO of Nova Scotia Resources Limited in April 1993, I was very concerned about the situation of the Cohasset/Panuke project. I carried out an audit, both a financial and technical audit of the operations and found out that there was no fraud, it was just a case of mismanagement. The technical audit showed that cost overruns were caused by just that, mismanagement.
In August 1993, I sat down with the President of LASMO Nova Scotia and told him, there are two ways we can proceed, we can go to court and sue you for mismanagement or we can settle this. I preferred not to go to court. I advised the minister, Don Downe at the time, and in August we met with the President of LASMO and we concluded what I term as the Downe-Barry deal. Richard Barry was the President of LASMO at the time. Basically that deal said, when LASMO left, when they determined that commercially they had gotten all the oil they wanted out of this project, which was looking like the end of 1996, that everything remaining would be 100 per cent Nova Scotia Resources Limited.
We had done some work that summer on the Balmoral field and showed LASMO that we thought that field was developable. So that was one of the other conditions we wanted and LASMO agreed to give us Balmoral, 100 per cent, plus any remaining oil that was left at Cohasset/Panuke and, of course, 100 per cent interest in the equipment and facilities owned by the project. They would also agree to leave their $17.5 million worth of abandonment costs on deposit with the offshore board.
MR. HOLM: Nova Scotia then, presumably, would have been taking some risks though. We didn't have any guarantees that the Balmoral field would be developable at that point in time, did we?
MR. LIVINGSTONE: There is always risk in the offshore business. I didn't think the risk was as great as some of the other aspects of that project. I thought Balmoral was probably less risky than the Panuke field, for example.
MR. HOLM: Why was that agreement turned down?
MR. LIVINGSTONE: It was after my time, you will have to ask the government. We had advanced that agreement to a stage where there was actually a written agreement between the two companies.
MR. HOLM: So it would have been turned over for nothing to Nova Scotia at that time, according to the agreement.
MR. LIVINGSTONE: Exactly.
MR. HOLM: When Nova Scotia didn't exercise that option, what happened to the LASMO properties? How much did PanCanadian Resources, do you know, pay for those?
MR. LIVINGSTONE: What I read in the paper was about $60 million.
MR. HOLM: So that $60 million is $60 million that would have come to Nova Scotia if we had exercised the deal and then wanted to sell it.
MR. LIVINGSTONE: That is correct.
MR. HOLM: How much time left, Mr. Chairman?
MR. CHAIRMAN: You have approximately 33 seconds.
MR. HOLM: I think with 33 seconds before I go into another line, I will forgo my 33 seconds and I will come back.
MR. CHAIRMAN: The honourable member for Pictou East for the Progressive Conservative caucus will now commence.
MR. JAMES DEWOLFE: Mr. Livingstone, thank you for coming down to share your thoughts with us. We very much appreciate that. We certainly understand that you lead a busy life and to come down here and rehash this old mess that we are in here must be hard on you to deal with as well.
I would like to start essentially at the beginning, very briefly, and talk about when you started. You have already indicated how you managed to find your way back here. It is obvious to me, and I would like you to share with the rest of the committee your background in the industry and your education and so on that qualified you for this job in the first place.
MR. LIVINGSTONE: Okay. I will start with my education. I graduated from Dalhousie University in 1973 with a Bachelor of Arts degree, majoring in Economics. I joined Gulf Oil in the mid-1970's, held various positions in downstream distribution, marketing and refining. In 1980, when the Port Tupper Refinery closed, I transferred to Calgary, moved into what we called the upstream sector, that is the drilling, production end of the business. I went to the Beaufort Sea with Gulf in 1983-84. I stayed with Gulf until 1988. I left Gulf and went in the service sector side of the business, started a company called Fedmet Tubulars.
When I left Gulf, I was asked to chair, at the request of the native people in northern Canada, their Environmental Review Board. From 1989-93, I had two jobs, President of Fedmet Tubulars and Chairman of the Environmental Impact Review Board for Northern Canada. During that time, I conducted two public inquiries into offshore drilling. So I have public hearing experience.
In 1993, a head-hunter approached me and asked me to consider a NSRL position, which I did. I started here, I think, mid-April 1993. I was employed until February 25, 1995.
MR. DEWOLFE: Thank you. Would it be fair to say that the other two officials, Robert MacDiarmid and John French also possessed a fair amount of expertise in the business?
MR. LIVINGSTONE: Yes. Robert MacDiarmid our VP of Finance, is probably one of the five best people, I would say, in this country when it comes to tax pools. Robert is a tax lawyer and a chartered accountant, very knowledgeable. Without him, we wouldn't have been able to directly sell the pools. John French is very knowledgeable in marketing.
MR. DEWOLFE: So it formed quite a team.
MR. LIVINGSTONE: It did.
MR. DEWOLFE: The three top officials.
MR. LIVINGSTONE: Yes, we supplemented with some experts from around the world, reservoir engineering, drilling and operational people from the United States and the U.K. on a need-be basis.
MR. DEWOLFE: Okay, now I am going to move right along to after your dismissal. There were some replacements put in place for these three top officials. There were Bob MacKay, Heather Robertson and Zatzman. In your opinion, did you consider them to be quite knowledgeable in the oil and gas business?
[9:00 a.m.]
MR. LIVINGSTONE: None of them; Zatzman or Heather Robertson had never worked in the oil and gas business.
MR. DEWOLFE: Never?
MR. LIVINGSTONE: Never. Bob MacKay was a public relations individual for PetroCanada and had a cursory knowledge of the industry and that would be about it.
MR. DEWOLFE: Who would you think made those choices to put those three individuals into those most senior positions?
MR. LIVINGSTONE: The Government of Nova Scotia.
MR. DEWOLFE: Any one specifically, that you would say would be the proponent of these three individuals?
MR. LIVINGSTONE: Usually the chairman of the board has a lot to do with who the directors are. Mr. MacKay was the chairman of the board.
MR. DEWOLFE: Yes. It sounds like it may be a dumping ground for Liberal hacks?
MR. LIVINGSTONE: Well, I think (Interruption) that is better for the people of Nova Scotia to decide.
MR. DEWOLFE: It appears we have the three most senior people in place here that have little or no experience in the oil and gas business?
MR. LIVINGSTONE: Well, I think you have to go back a little bit to what had happened at the board. We had two resignations from the board based on political interference in July 1994. Two people resigned from the board. These were replacements for those people.
MR. DEWOLFE: Now just moving along here, I am interested in the western oil and gas properties. I noted that the sale was for $4.7 million. Rothschild had valued the wells that we had out there, the properties, between $7.2 million and $7.9 million. That was in January 1995. I wonder in the evaluation, was that sort of the fair market value? Would that be in that range of $7.2 million or was some other kind of value equated with that?
MR. LIVINGSTONE: When I was still at NSRL, the Western Canadian properties were worth roughly $10 million to $15 million, depending on what prices you were using. I'll give you an example; in September 1994, we sold one property for $5 million, just one of the
properties we had out West. We sold it for 210 per cent over value of what it was on the books. When I heard they sold the Western Canadian properties for $4.7 million, I just couldn't believe it.
MR. DEWOLFE: You couldn't understand it?
MR. LIVINGSTONE: I couldn't understand it at all. I found out from a bank, the bank phoned me and asked me. They were prepared to loan 100 per cent value on the property at that price.
MR. DEWOLFE: Any idea or guesstimate of why that was done?
MR. LIVINGSTONE: Well, I think you had a company that never sold an oil and gas property before in their life, Rothschild, selling it. That is the only reason I could come up with. Why you would use them when there are people who do this day in and day out. They sell companies, properties, they are experts at it. Why you would pick somebody out of Toronto to sell that is beyond me.
MR. DEWOLFE: Were you involved with any company at that time that would be interested in those properties?
MR. LIVINGSTONE: K2 looked at it, but we were removed from the bidder's list.
MR. DEWOLFE: Can you explain why that happened. Why were you removed? Were you willing to pay more than that? Would you be willing to . . .
MR. LIVINGSTONE: We were looking at all the oil and gas assets of Nova Scotia Resources at the time. We raised close to $100 million in Malaysia and we were looking at buying NSRL. Of course, the Western Canadian properties would have been part of that.
MR. DEWOLFE: It appears then that the property was dumped?
MR. LIVINGSTONE: My opinion on it is that if you are selling to an insider, who the company was, George DeBoon was running it for Nova Scotia Resources for the last number of years, that you get a fair market assessment. You bring somebody else in to give you a fair market evaluation, that the price you are accepting is a fair price.
MR. DEWOLFE: Just along the same lines, we are talking about some of the resources of NSRL, noted in the special audit report, and also in a letter you sent down through at one point. The 100 per cent interest in the salt caverns in the Strait area was not mentioned in the assets. I wonder if you would comment on that?
MR. LIVINGSTONE: I don't know what happened with the salt caverns. Nova Scotia Resources Limited had acquired them behind the old Gulf refinery there. They are very valuable today for storage of liquids and gas. I think it would behove your committee to find out what happened to them. I have no idea what happened to them.
MR. DEWOLFE: I was trying to find out what happened but I didn't find out yet. When I was reviewing reams of information here over the past number of days it seems things were happening, decisions were being made outside of NSRL. Would that be a fair statement?
MR. LIVINGSTONE: Very fair; accurate, too.
MR. DEWOLFE: Very accurate. I wonder if you could outline some instances that show this was going on, for the benefit of the members in the room?
MR. LIVINGSTONE: What was taking place really was that we were starting to find out the government had a different agenda than what the board of directors had. During my tenure at Nova Scotia Resources Limited the government had gone through two boards of directors. When the first board of directors was dismissed, the second board of directors at their first board meeting wanted Minister Don Downe present, and as in the minutes of that meeting, they asked him point blank how that company was to be run. They were told it was to be run as a business with no political interference, to run it as a business. They proceeded to do that.
The first crash occurred when we butted heads with Mr. MacKay over the tax pools. The second one occurred when we tried to get the business plan approved. We couldn't get meetings with the Minister of Finance; Downe didn't have time for us, things got very tense between myself and Mr. MacKay over the running of the company.
At the June meeting the board of directors made it perfectly clear to Mr. MacKay that he was a non-executive chairman, for example, the only difference between you and the rest of the board members is that you chair four board meetings a year. One of the members pointed to me and said, that is the man who runs NSRL. Do you understand that, Mr. MacKay? After that meeting things changed. The first thing that got off the track was the tax pools. We were all taught an important lesson on who Mr. MacKay was. He was running NSRL, not the board, not the president.
We had to hire a lawyer named Jim Cowan to come in and referee over who was going to run NSRL. A meeting was held in Toronto and Mr. Cowan produced a report that said the president and CEO under corporate governance, like most companies, the president and CEO runs it. But life became pretty tough after that. Afterwards we found out that behind our backs, Carey Ryan and Bob MacKay were sending companies invitations to see if they wanted to buy NSRL, which I found very disappointing.
MR. DEWOLFE: Thank you. I yield the floor to my colleague.
MR. CHAIRMAN: The member for Colchester-Musquodoboit Valley.
MR. BROOKE TAYLOR: Thank you and good morning Mr. Livingstone. For a few moments I would like to focus, Mr. Livingstone, on the contract you had, the memorandum of agreement between you and the government, Nova Scotia Resources Limited as the corporation. If you don't mind, could you tell me who was representing you when this contract was drafted?
MR. LIVINGSTONE: I represented myself but of course, as you can see from the contract I had a lawyer draw it up. KPMG was representing the province.
MR. TAYLOR: I am a little curious as to the terms of settlement and no doubt they comply with the termination clause in your contract, Mr. Livingstone. Could you tell us what the terms of settlement were and what date that actually took place?
MR. LIVINGSTONE: First, let me mention something that is not in the contract and I didn't think it was fair to put it in the contract, and that was that KPMG was asked to meet with the Premier at the time, Donald Cameron, and Liberal Opposition Leader, John Savage. I was given a personal guarantee by both of them, through KPMG, there would be no political interference in the running of NSRL. With that I agreed to sign the contract.
With regard to the terms of my severance, we were engaged in a series of discoveries and these finished in September. We discovered the Chairman, Mr. MacKay, for about one week, and after that settlement negotiations commenced. I settled on a term of $500,000, the majority of it being paid for punitive damages.
MR. TAYLOR: According to the termination clause as I understand it, Mr. Livingstone, if the termination was done by the corporation you were to receive 24 payments relative to your last month of service and that would equate to approximately $300,000, Anything over and above that would have been paid for punitive damages?
MR. LIVINGSTONE: The settlement was just a lump sum settlement. Punitive damages was in lieu of no public apology. I wanted a public apology for what happened and the government was not prepared to give it. The $500,000 became the public apology.
MR. TAYLOR: That is actually what I am trying to get at, the termination clause in terms of compensation to you should you be fired or have the position terminated, which did happen, essentially says that you would receive 24 payments of the previous month's salary, previous to the termination. That works out to $300,000 so is it fair to say to Nova Scotians that you received $200,000 from the previous government because they failed to say they were sorry?
MR. LIVINGSTONE: I think it is fair to say it was due to the way they handled the situation.
MR. TAYLOR: We won't split hairs on that one but I did want to get a figure. I guess in my mind, perhaps not in other peoples', I believe that it cost $200,000. I hope you don't mind me getting a little personal as far as your expenses go, at the request of the chairman the corporation was kind enough to give us copies of your expense statements. Quickly going through them we see charges for dog kennel fees, golf greens, tuxedos, Christmas liquor, et cetera and that is fine and dandy and probably complies with the contract too. It looks like 1995 expenses have not been submitted and again, that may have been an oversight of the good folks at NSRL, they perhaps didn't advance it along, but did you submit expenses for 1995?
MR. LIVINGSTONE: Yes and they never paid them.
MR. TAYLOR: What did those amount to?
MR. LIVINGSTONE: They are listed there, the second last page under expenses.
MR. TAYLOR: Oh, $2,611 and it was never paid?
MR. LIVINGSTONE: That is correct.
MR. CHAIRMAN: What was that amount, I am sorry?
MR. TAYLOR: Twenty-six hundred and eleven dollars. Mr. Livingstone, why wasn't that paid? I am sure you were told.
MR. LIVINGSTONE: No, I was terminated and when I was terminated I submitted those expenses and the government wouldn't pay them.
MR. TAYLOR: I see. That is rather strange. Just to shift gears a bit, during your presentation you talked about the fact that Canadian taxpayers have invested considerable millions, in fact billions, into the offshore project, and you indicated that at least in your view, the province had two options, either sell it to Mobil or Shell or put it out on the stock market, which you thought would be very complicated.
In terms of Shell and Mobil having first right of refusal - and of course you say, well we should go perhaps ask the government why they made that concession or agreement - I guess I am interested in knowing, if in fact that agreement wasn't signed, in your view, this first right of refusal, do you suppose that other companies would be interested, with Shell and Mobil already the major stakeholders in the company? Do you still think that there would be some incentive for other companies to want to become involved?
MR. LIVINGSTONE: Most definitely. Somebody will buy your cash flow stream, that is what you have out there now, an annuity. That is what you have. When the gas starts coming ashore, it is going to deplete over 25 years, and you will get cash flow from it. They are going to pay that on the discounted basis.
MR. TAYLOR: Mr. Chairman, if I can, I would pass it on to my colleague.
MR. CHAIRMAN: The honourable member for Kings South.
MR. DAVID MORSE: Mr. Chairman, again Mr. Livingstone, as everybody else here in the room has indicated, we very much appreciate your coming here, indeed, at your own expense which was very kind of you. I know that you have a busy schedule. The discounted cash flow from the Sable gas, could you give us a number as to what you think that would be worth?
MR. LIVINGSTONE: I think it is in the ballpark of $30 million to $40 million.
MR. MORSE: And we paid what, $300 million?
MR. LIVINGSTONE: You paid $300 million?
MR. MORSE: Well, I remember reading in the documentation that a lot of the $466 million debt that was there when you took over as president came from the gas exploration.
MR. LIVINGSTONE: That is correct. You would have over $200 million just in gas exploration costs, and then another $170 million that you just paid for your working interest in the project. Your total exposure in the project, I would say you are getting fairly close to $500 million.
MR. MORSE: For that 8.4 per cent ownership?
MR. LIVINGSTONE: That is correct.
MR. MORSE: Which is worth $40 million?
MR. LIVINGSTONE: Today if you asked somebody, that is probably what you would get. No one is going to buy your debt. People don't buy debt.
MR. MORSE: No. But I think it is important to quantify those numbers.
MR. LIVINGSTONE: Yes, I agree.
MR. MORSE: And you have done that for us. Thank you. You made an interesting suggestion at the start; you said that we have two options. We can either accept what - I guess, the former government dictated to us that we can either sell NSRL to Shell or Mobil, they have been given a right of first refusal. I think you indicated that they were given that right gratis.
MR. LIVINGSTONE: I have never seen anything that said the company received any remuneration for it or special consideration.
MR. MORSE: At what time was that right ceded to them? During your time as president or subsequent?
MR. LIVINGSTONE: It wasn't when I was president.
MR. MORSE: Okay.
MR. LIVINGSTONE: Not that I know of anyway.
MR. MORSE: Who would have approved that decision? I suppose it would have been the former government's Cabinet? Or would it have been a recommendation of the Natural Resources Minister?
MR. LIVINGSTONE: If you are running it as a corporation under the Corporation Act, it should have been the board of directors of Nova Scotia Resources. If they so wished, they would have sought advice or approval from the major shareholder who would have been the Province of Nova Scotia.
MR. MORSE: But that would have been the new board?
MR. LIVINGSTONE: That is correct.
MR. MORSE: That is the board without all the expertise that you had built up during your term as president.
MR. LIVINGSTONE: That is correct.
MR. MORSE: Okay. Maybe I should stand corrected on that, I think you indicated they did have expertise, it just was not in the area of oil and gas.
MR. LIVINGSTONE: Yes. The time-frame for this right of first refusal, based on documents that I have read, was around December 1997, under the memorandum of understanding. I think for Nova Scotians, it is not a good situation when you have two ex-Mobil employees on the board. I think it is a question you gentlemen might want to dig in to.
MR. MORSE: That is a very interesting scenario.
MR. LIVINGSTONE: Both drawing a pension from Mobil.
MR. MORSE: Are there any conflict of interest guidelines for members of the board of directors?
MR. LIVINGSTONE: Yes, there were. I brought them in. When I was president, I found directors consulting to the company, I put a stop to the practice.
MR. MORSE: Perhaps, would ceding such an option contravene those conflict of interest guidelines?
MR. LIVINGSTONE: I am familiar with the ones for a publicly-traded company. It is pretty tough to sit there if you are drawing a pension from Mobil Oil and discuss a project that involves Mobil Oil. I found it strange that situation would occur.
MR. MORSE: You are very diplomatic, Mr. Livingstone, but I think that we understand what you are saying to us. Now the second scenario, given that we had taken NSRL off the open market by giving the right of first refusal to just two potential bidders, or effectively taking it off the open market, was to take over a publicly-traded company, you called it a reverse take-over. This being where NSRL buys a company that is out there presumably on the Toronto Stock Exchange or some stock exchange and in essence acquires their expertise, also by doing that, they acquire a source of equity capital to finance future developments. Correct?
MR. LIVINGSTONE: That is correct.
MR. MORSE: In your submission, you also mentioned that this would make the company debt-free, and perhaps trade it on the TSE. Would that allow NSRL to monetize their existing tax pools, under that situation?
MR. LIVINGSTONE: Yes, it would. By NSRL taking over the company, the tax pools stay in place.
MR. MORSE: I noticed the tax pools were valued at about $40 million in here. If you had sold them, and when I say you I mean as president of NSRL, but by going this route, we would get full value for that, what is it, surplus $300 million in tax pools?
MR. LIVINGSTONE: I think you have to look at the situation you have with your cash flow stream coming from the offshore. What NSRL can do, being a private company listed on the TSE, having those tax pools, it can shelter all its income, tax-free. So every cent it brings in from the offshore, its cash stream, would be tax free. In other words, if it made
$25 million a year on that investment, they would not have to pay the corporate tax of 46 per cent. It would have $25 million to plow back into the future of the company.
MR. MORSE: A tremendously profitable arrangement, so long as there remained -. I mean it is a deficit on the balance sheet, that is what we are talking about. That would probably do us for a good many years.
Mr. Chairman, I suspect that my time is just about up, I can . . .
MR. CHAIRMAN: There are two minutes left in your time.
MR. MORSE: Oh, well.
MR. CHAIRMAN: The honourable member for Colchester North.
MR. WILLIAM LANGILLE: I would take over please. I had a few questions I wanted to ask Mr. Livingstone. What you just said a few minutes ago really struck home with me. I am going to zero in on that right now. I want to go into detail a bit, if you could. As the two board members on NSRL, from Mobil Oil, you say they are drawing pensions from Mobil Oil now, the former members?
MR. LIVINGSTONE: I would imagine they worked there for 30 some years. They were both pensioned off, so they would be drawing pensions.
MR. LANGILLE: They are previous employees of Mobil.
MR. LIVINGSTONE: That is correct.
MR. LANGILLE: Who is the other player with NSRL?
MR. LIVINGSTONE: To my knowledge, he is with Home Oil, which is not involved in this project here at all.
MR. LANGILLE: How many board members altogether?
MR. LIVINGSTONE: There would have been roughly six or seven board members.
MR. LANGILLE: These two members that you speak of, they are on the board now?
MR. LIVINGSTONE: No, they were replaced when the Progressive Conservative Government came into power.
MR. LANGILLE: They were. Okay. Were you there when they were put on board?
MR. LIVINGSTONE: No, I had long left; I was long gone by that time.
MR. LANGILLE: So how would you feel if you had a company and two other people were put on the board from another company?
MR. LIVINGSTONE: Well, I have no problem with them being put on the board as long as they weren't involved in the project we were discussing, or had declared a conflict and didn't engage in any of the discussions.
MR. LANGILLE: Yes. I guess my time is up. Thank you very much.
[Mr. David Morse assumed the Chair.]
MR. CHAIRMAN: I would like to recognize the honourable member for Cape Breton West, for the Liberal Party.
MR. RUSSELL MACKINNON: Mr. Livingstone, I too would like to thank you for coming here today and sharing your thoughts on this most important issue.
The first question I have is with regard to your concern about political interference with the NSRL board. I notice on your last appearance before Public Accounts in October 6, 1993, you appeared to welcome the direct, hands-on approach of the then Minister of Natural Resources, the honourable Donald Downe. Am I correct in that assumption?
MR. LIVINGSTONE: Hands-on approach? Could you be more specific?
MR. MACKINNON: Well, I am just going by your own words. You liked his style and you liked the fact that he wanted to have a hand-on approach with NSRL, to know all the activities of the board and to be involved. You liked that style and apparently you had a meeting starting at 9:00 o'clock in the morning and went to 12:00 o'clock the next morning, shortly after midnight.
MR. LIVINGSTONE: I think we had a meeting at 9:00 in the morning, but the minister, when he first became in charge of NSRL, yes, he wanted to know everything that was going on.
MR. MACKINNON: Would it be a fair assumption to state that unless you had full control of the situation you would rather somebody else assume that responsibility, or take control, or take the lead, I believe, is the word?
MR. LIVINGSTONE: I am not following you.
MR. MACKINNON: Well, it comes down to the issue, as you indicated, of leadership. The ultimate responsibility is that being the government. I am going to quote your words on Page 10 of the Public Accounts Hansard on that date, "I am not comfortable with something that I cannot lead, so I have left it up to the government to carry the ball on that side of it.". That "side" of the issue being with regard to Nova Scotia Resources Limited as being the lead agency for the Province of Nova Scotia. So are you not in effect acknowledging that ultimately the Minister of Natural Resources, who wants a hands-on approach, has been a welcome participant in your activities?
MR. LIVINGSTONE: Would you give me the page you are on?
MR. MACKINNON: Page 10.
MR. LIVINGSTONE: Exactly what are you referring to?
MR. MACKINNON: Well, under questioning from Mr. Leefe, the then member for Queens, " And Nova Scotia Resources Ltd. continues to be the lead agency for the Province of Nova Scotia?". MR. LIVINGSTONE: "I would not say that we are the lead agency." - and then you go on to say, giving the rationale, and then stating - "I am not comfortable with something that I cannot lead, so I have left it up to the government to carry the ball on that side of it.". MR. LEEFE: "So that responsibility has been transferred to the Department of Natural Resources.". MR. LIVINGSTONE: "It was really always there. I mean they were part of the original study team . . .", and so on.
In a later intervention, you welcome the hands-on approach by Mr. Downe, whom you referred to as being similar in business disposition, on how he likes to involve himself in business transactions.
MR. LIVINGSTONE: Well, let's deal with what is on Page 10. I think what we are talking about there was a study that was done by the government relating to power generation. My comment there, you are taking it out of context. What it is saying is we weren't the lead agency in that study, it was carried out by the government, between the two of them.
[9:30 a.m.]
MR. MACKINNON: I understand that, but equally so, through you, Mr. Chairman, Mr. Livingstone, you are acknowledging that ultimately it is the government's responsibility, who makes the final decision, and is responsible for NSRL, am I correct?
MR. LIVINGSTONE: That is correct. They are the major shareholder.
MR. MACKINNON: So if the government decided to exercise its responsibility on any decision making, then it is really not interference, it is intervention. You have already acknowledged that the board that was in existence prior to 1993 that was commissioned under the previous Progressive Conservative Administration was released and a new board was put in place. I think that is what you were saying at that particular juncture anyway.
MR. LIVINGSTONE: Let's just back up here for a second. The important thing here is that NSRL was set up under the Corporation Act which gives it a board of directors. The board of directors is what management is accountable to, not the government. If the government does not like the decision of the board of directors, it can always overrule it, but the board has to be allowed to make that decision.
MR. MACKINNON: So ultimately any major decision that you would make would be vetted by the board of directors, is that what you are saying?
MR. LIVINGSTONE: That is correct.
MR. MACKINNON: Would that involve the commission of major expertise to the corporation?
MR. LIVINGSTONE: Not necessarily.
MR. MACKINNON: So you feel in your capacity, you would be the one to make that value judgment, you may or may not apprise the board, or you may or may not apprise the ultimate body who would be responsible, that being the government? Is that what you are saying?
MR. LIVINGSTONE: Depending what it involved and the level of expenditure.
MR. MACKINNON: So were there any written terms of reference that would guide you on that?
MR. LIVINGSTONE: When I got there, there were not. We put in controls on how much money I could spend without board approval.
MR. MACKINNON: I notice when you did come on board, the question was raised about the quality of the advice that you were receiving. I believe it was raised by my former colleague for Bedford-Fall River, the honourable Francene Cosman. Her concern was the fact that you were surrounding yourself by the same advice that had been in place prior to your coming to NSRL and her question, and I think rightfully so, was how can you be assured any better quality performance when you are surrounding yourself by the same ones that you in your dissertation indicated were part and parcel of a lot of bad decision making, i.e. Mr. French and Mr. MacDiarmid?
MR. LIVINGSTONE: A lot of the problems with NSRL were not caused by John French or Robert MacDiarmid.
MR. MACKINNON: Did you make that decision yourself?
MR. LIVINGSTONE: After I watched them work and saw the experience they had, yes, I made that decision.
MR. MACKINNON: Did you bring that to the board?
MR. LIVINGSTONE: Yes, I did.
MR. MACKINNON: Did you bring it to the board prior to you signing their contracts?
MR. LIVINGSTONE: I told the board that I had them under probation and that I would make that decision if I was going to keep them or let them go.
MR. MACKINNON: But that was not my question. My question was, did you apprise the board of that prior to or subsequent to you signing their contract?
MR. LIVINGSTONE: I cannot remember. I was without a board for quite awhile. I had no board when I signed their contracts, to be honest with you.
MR. MACKINNON: So any decision by Mr. MacKay, who is chairman, I assume he was still a member of the board, or at least he had that position, even though the rest of the board was not in place, so he would have been the ultimate spokesperson for NSRL vis-a-vis government decision making? Is that correct?
MR. LIVINGSTONE: That is not correct. Mr. MacKay came on the same time as the rest of the board members did, in March 1994. Until then he had nothing to do officially with NSRL.
MR. MACKINNON: Is it not correct that you signed the contract for Mr. French and Mr. MacDiarmid without notifying the board first?
MR. LIVINGSTONE: I had no board to notify.
MR. MACKINNON: Did you not notify the minister?
MR. LIVINGSTONE: I did not think there was any requirement to notify the minister. They reported to me and it was just a human resource thing.
MR. MACKINNON: Just a human resource issue to commission two people who were part and parcel of what you have described as an agency that failed in its decision making. For a minister who stated to you, point blank, that he wanted hands-on and wanted to be notified of all activities, would you not consider that to be a major decision?
MR. LIVINGSTONE: No, I would not.
MR. MACKINNON: You would not, okay, thank you. Is it not correct that you predated those contracts so as to avoid the wage rollback legislation that was introduced by the Savage Administration?
MR. LIVINGSTONE: Predated them?
MR. MACKINNON: Yes.
MR. LIVINGSTONE: No, not that I recall.
MR. MACKINNON: What was the date they were signed?
MR. LIVINGSTONE: I cannot recall; I do not have it in front of me. Sometime between the time I got there in April and sometime probably, I think it was the December-March period.
MR. MACKINNON: Is it not correct that you engaged the services of legal counsel to question as to whether you should be receiving your bonus, as to whether your wages would be affected by the wage rollback?
MR. LIVINGSTONE: I had nothing to do with my bonus, it was to see if my contract was caught up in the wage rollback.
MR. MACKINNON: Who paid for the services of that legal counsel?
MR. LIVINGSTONE: First of all, I should correct that, I did not contract it. The vice-president contracted it to see if my contract was caught up in it; naturally NSRL paid for it.
MR. MACKINNON: So NSRL, the taxpayers of Nova Scotia, paid for you to determine as to whether your personal services contract was affected by a particular piece of legislation?
MR. LIVINGSTONE: My employer, who was NSRL, paid to get a legal opinion on whether they should roll my wages back.
MR. MACKINNON: Did you notify the government of your intent to seek legal counsel at NSRL's expense?
MR. LIVINGSTONE: Yes, I told the minister.
MR. MACKINNON: Before or after?
MR. LIVINGSTONE: Before.
MR. MACKINNON: Do you have any documentation to support that?
MR. LIVINGSTONE: I do not have it, but you could check at NSRL to see if it is there.
MR. MACKINNON: Mr. Livingstone, you have a company - and it goes back to the issue of expertise; to be honest, through you, Mr. Chairman, I have no knowledge of the oil industry, I am just a simple layperson trying to provide an honest assessment of the situation as I find the questions arising - you made reference to a company by the name of K2 Energy. Am I correct to assume you are a major shareholder in this corporation or you have substantial interest?
MR. LIVINGSTONE: I have shares in the company, that is correct, options and stock.
MR. MACKINNON: In what year did you become involved with this corporation?
MR. LIVINGSTONE: March 1995.
MR. MACKINNON: March, that would have been just shortly after your termination with NSRL?
MR. LIVINGSTONE: That is correct.
MR. MACKINNON: Did you have any relationship with K2 prior to?
MR. LIVINGSTONE: No, I did not. I did not even know the name of the company.
MR. MACKINNON: I see. Has that company showed a profit since 1995?
MR. LIVINGSTONE: Like most exploration companies, we have not.
MR. MACKINNON: So 1995, 1996, 1997, 1998 - and I cannot guess for this year because it is not completed yet - what you are saying is every year that you have become involved in the company, it has not shown a profit, is that correct?
MR. LIVINGSTONE: Pardon me?
MR. MACKINNON: Every year that you have been with the company, the company has not shown a profit?
MR. LIVINGSTONE: The company has reinvested all its money into exploration.
MR. MACKINNON: That was not my question. My question was, has it not shown a profit?
MR. LIVINGSTONE: That would be correct.
MR. MACKINNON: Is it not also correct that K2 saw shares decline by 16 cents in value in 1997, and in 1998 its shares declined another 14 cents?
MR. LIVINGSTONE: Mr. Chairman, if you want me to talk about K2 - I thought I was coming here to talk about NSRL - I do not mind answering the man's questions.
MR. MACKINNON: Absolutely, Mr. Chairman . . .
MR. CHAIRMAN: . . . of relevance here.
MR. MACKINNON: No. There is. I will, Mr. Chairman. It comes to the issue of credibility and competency for an individual who is proclaimed to be an expert on the natural gas and the oil exploration industry here in Nova Scotia and has made a number of very strong assertions about the competency of other individuals, some whom I generally consider to be experts in public policy decision making as well as the oil and gas industry, of which I know little. So I am simply trying to establish an issue of credibility. Mr. Livingstone has held himself up as an expert in the oil and gas exploration and, if allowed, I will lead straight to the point as to where we are going with this in terms of the gas and oil exploration and expertise.
MR. CHAIRMAN: I would ask you to answer the question. I suspect that if the line of questioning is of a concern to any of the other committee members, they will have their chance to further explore this. So I would ask you to answer the question.
MR. LIVINGSTONE: Sure, K2 is no different than any other junior oil and gas company. Cash flow is up and down, depending on the price of oil. Our company is involved in a unique play in the United States, in northern Montana, and we are proving up cash flow
every day, so it is just a matter of time, like any other exploration company, before we get profitable.
MR. MACKINNON: So I guess it is fair to assume then, despite the fact that the company has never shown a profit since you became involved with the company and the stock shares have declined in value, am I also correct to assume that the servicing on your debt has increased by between 400 per cent and 500 per cent?
MR. LIVINGSTONE: No, you are wrong there.
MR. MACKINNON: In the last fiscal year?
MR. LIVINGSTONE: We don't have any debt in K2 Energy.
MR. MACKINNON: You say no?
MR. LIVINGSTONE: Yes, we have no debt; we are debt free.
MR. MACKINNON: Debt free, okay. Now, is it safe to say that you are operating (Interruptions) Mr. Chairman, I will table the auditor's report and I will let my colleagues to the left make their own decisions.
Is it safe to state that your operating deficit has increased by 100 per cent over the previous fiscal year?
MR. LIVINGSTONE: No, I don't think it is safe to assume that.
MR. MACKINNON: I am close, though, aren't I?
MR. LIVINGSTONE: No. Tell me what you mean . . .
MR. MACKINNON: Well, if you have an operating deficit of $2.3 million and it goes to $4.6 million, I would think, according to your auditors, that that simply would be the case, unless my math is terrible.
MR. LIVINGSTONE: Well, I didn't bring my financial statements with me for K2.
MR. MACKINNON: I can provide you with your own financial statements, if you so wish, and I will table them, Mr. Chairman.
Mr. Chairman, Mr. Livingstone has indicated that one way to alleviate the debt load to the taxpayers of Nova Scotia is through equity, through the form of debentures and selling common shares and so on. Is it not also correct that, during that particular period of time, in
the last fiscal year, in fact in December 1998, it was proven to give you a rather substantial raise in this despite the fact that the company shares, stock values, were declining and despite the fact that your Western Canadian interests didn't show a profit? So from a layperson's point of view, what we are doing is spinning numbers on a very marginal situation on the hopes that your investments in Montana would prove to be, in the long term, profitable. Am I correct on that?
MR. LIVINGSTONE: No, you are not correct on that. First of all, I took a $60,000 pay cut in January this year. We have one of the unique land positions in the United States. We are in the process now of drilling a tin well program; we are still drilling right now.
You were right in one area, Mr. MacKinnon, you know absolutely nothing about the oil and gas business. (Laughter)
MR. MACKINNON: Mr. Chairman, I would respectfully submit, by these financial documents and the audited statements from the auditors of this company, I would certainly question the credibility of this particular witness as an expert in oil and gas; certainly in economics, maybe, because his number plays are pretty good. I will table the documents that show his salary.
[9:45 a.m.]
MR. CHAIRMAN: Could I ask that, perhaps we have explored this somewhat and I have allowed you some latitude in this . . .
MR. MACKINNON: Yes, thank you, Mr. Chairman.
MR. CHAIRMAN: . . . and I understand what you are trying to establish but perhaps we could get back more to NSRL.
MR. MACKINNON: Mr. Livingstone, before I go on to the Auditor General, you made a bid, or K2 made a bid for NSRL back in September or October 1995. That bid was unsuccessful and I want to quote your comment, Livingstone said he had enough of Nova Scotia politics and will find other assets in Alberta to invest the $50 million U.S. he rounded up to make a bid for NSRL. Am I correct in my assumption that you have, for all intents and purposes, divested your Canadian interests for the purposes of investing in Montana?
MR. LIVINGSTONE: That is correct.
MR. MACKINNON: So, in essence, you have no Western Canadian interest in the natural gas and oil industry.
MR. LIVINGSTONE: That is correct.
MR. MACKINNON: But yet, you are not registered on the United States Stock Exchange, you are registered with the Canadian Stock Exchange.
MR. LIVINGSTONE: That is correct.
MR. MACKINNON: So we are using the Canadian tax system to further your ventures in the United States. Am I correct on that?
MR. LIVINGSTONE: Mr. MacKinnon, you know very little about the oil industry and I think you know less about the financial community.
MR. MACKINNON: Well, Mr. Chairman, it does go to the issue of credibility and the credibility is, we have a witness who comes halfway across Canada . . .
MR. HOLM: Credibility of whom?
MR. MACKINNON: Mr. Chairman, in fairness . . .
MR. CHAIRMAN: I recognize the member for Cape Breton West.
MR. MACKINNON: In fairness, we sat and listened to Mr. Livingstone's dissertation. I will table his salary: 1998, $180,000; it is an increase over 1996; $150,000 and so on. So I will table this if I could get a copy back. That seems a little different than what Mr. Livingstone has just stated. I can only go by the documentation that was supplied by his company and the auditors.
MR. CHAIRMAN: Could you direct your questioning more around matters of Public Accounts.
MR. MACKINNON: Yes, the issue of his ability, the $50 million bid for Nova Scotia Resources Limited. Going back to his inability to communicate with the agency to which he is ultimately responsible, for example, the Nova Scotia Government. If there wasn't a board of directors in place and he took it upon himself - without terms of reference, despite the fact that a Minister of the Crown indicated that he wanted to be fully apprised of activities to ensure quality control for government expenditure - to expend considerable amounts of money at his own discretion, that to me, as a taxpayer, I would be concerned. That is why I have concerns, if we have a company that has never made a profit and has raised quite a fury about not being given a fair shake in being able to put a bid on Nova Scotia Resources Limited, it begs me to wonder what, in fact, has transpired from within. That is why I raise the issue, Mr. Chairman, and I think that is a legitimate concern.
MR. CHAIRMAN: I think we spent about 12 minutes or so on this issue.
MR. MACKINNON: We have 18 minutes to go, then.
MR. CHAIRMAN: No, about 12 minutes on K2. I am wondering whether perhaps you could direct your line of questioning more to Nova Scotia Resources Limited. I understand the point you are trying to make with the committee.
MR. MACKINNON: Well, I believe I have, Mr. Chairman, indirectly through the issue of credibility. Mr. Livingstone, have you had any formal training in the area of gas and oil exploration other than your hands-on experience, for example, working at a particular job site, whether it be Gulf, or wherever? I know you have given a dissertation but you have a Bachelor of Arts and I have noticed with Nova Scotia Resources Limited, for example, you made reference to the 34 million barrels of oil from the Panuke-Cohasset field and you felt that 34 million barrels was what was there. To confirm that, because you had heard so many other different figures, that - and I quote your own words - I brought in one of the best reservoir people in the world and he agrees that LASMO's initial assessment, that 34 million barrels is what is recoverable.
My understanding to date is that we have recovered well over 44 million barrels and it's still pumping. So that, connected with K2, who I understand according to your own annual statements, most of your expertise is third party expertise. So I am just wondering about the basis for which you derive a lot of your assumptions? Are they your own or are they based on professional expertise?
MR. LIVINGSTONE: Based on professional expertise and experience, Mr. MacKinnon.
MR. MACKINNON: So you would readily agree that your assessment back on October 6, 1993 was erroneous?
MR. LIVINGSTONE: No, it was preliminary.
MR. MACKINNON: Preliminary?
MR. LIVINGSTONE: That is correct. If you read the business plan for NSRL, if you would take the time to do that . . .
MR. MACKINNON: Oh, yes I have.
MR. LIVINGSTONE: . . . you would see that we revised it upwards after we had some of this world-class reservoir of engineering done on it to a much higher level that we thought we could extract more oil out of Panuke-Cohasset and Balmoral.
MR. MACKINNON: The business plan that you refer to, 1994 to 2000, that was a business plan that was put together by NSRL, am I correct?
MR. LIVINGSTONE: Correct.
MR. MACKINNON: And submitted to the Nova Scotia Government, . . .
MR. LIVINGSTONE: Approved by the board of directors first and then submitted to the Nova Scotia Government.
MR. MACKINNON: Was it approved by the Nova Scotia Government the first time around?
MR. LIVINGSTONE: It fell in a black hole and nothing happened to it.
MR. MACKINNON: Was there a reason given?
MR. LIVINGSTONE: No, it was going to be looked at by Cabinet and by the time I left in February, Cabinet hadn't gotten around to it.
MR. MACKINNON: Now a number of the concerns that you raised, I think, were eventually dealt with by the Auditor General. There were three primary concerns: one with regard to the monetizing, which by the way, I seem to get a different message from you today because on Page 10, October 6, 1993 of Hansard, you state - with regard to the tax pools - "Well, I think you have a problem. I don't think you can sell your tax pools." You seem to be conveying a different message but I am not sure if that is because you are suggesting that you are not an expert in tax pools and you aren't sure of what to do or what, but there is that, plus the . . .
MR. LIVINGSTONE: Let's deal with that. What are you questioning on Page 10?
MR. MACKINNON: Well, my question really at this point, Mr. Livingstone, is not for you, it is for the Auditor General. The three primary concerns that were raised, through you, Mr. Chairman, by Mr. Livingstone, Mr. Auditor General, were subsequently addressed by yourself. I was just asking if through Mr. Livingstone's dissertation today, has there been anything that would change your mind on your assessment?
MR. CHAIRMAN: Mr. Salmon.
MR. ROY SALMON: Through you, Mr. Chairman, we are dealing with events over a period of time. My audit of 1996 was concerned with three particular situations. We examined a great deal of evidence at that time and we formed conclusions and I have not changed my mind on those conclusions.
MR. MACKINNON: Mr. Chairman, I have one minute left? Thank you. Mr. Livingstone, you indicated during your presentation earlier today, concern about Canadian content and so on. I guess I am going to localize it even more because my concern is even more so Nova Scotia content. You were kind of chastising the government, as I interpret it, just a little, for not putting greater emphasis on that but yet on Pages 16 and 17 of your dissertation on October 6, 1993, when questioned about Nova Scotia having staff on the various ships, you justified by suggesting that the level of expertise just wasn't here in Nova Scotia and that would create problems. You were supporting non-Nova Scotia content, in essence. So I am just wondering why the contradiction in your philosophy.
MR. LIVINGSTONE: There is no contradiction, Mr. MacKinnon. You can't put people in jobs they can't handle. I think you may remember the Ocean Ranger and we all learned that experience. That is what that comment was about. You are mixing apples and oranges here. The ones I made towards ownership of your offshore, who controls it and who owns it. What I referred to in Hansard is that people have to be qualified to work in the offshore. Being a Nova Scotian is nice but if you don't have the skills and you can kill everybody else on the rig or the ship, it doesn't help anyone.
MR. CHAIRMAN: I would turn the Chair back over.
[Mr. Russell MacKinnon resumed the Chair.]
MR. CHAIRMAN: Now I guess we can turn our time over to the NDP. We will go in 20 minute intervals so that each caucus will have sufficient time for cross examination, I guess.
The honourable member for Dartmouth-Cole Harbour.
MR. DARRELL DEXTER: Mr. Chairman, as you take your place, I wanted to, I guess, extend my congratulations to you on an ample display of your abilities and certainly showing us exactly how your mind works. It was enlightening, to say the very least.
I have a couple of questions and I want to go back to something that was raised by my colleague from the beautiful Colchester-Musquodoboit Valley. He pushed a little bit on the whole idea of punitive damages and people would know that punitive damages falls into that category that are often asked for but very seldom granted and the reason for that is that in order to get punitive damages, you have to show not only that somebody caused you harm, but that they intended to cause you harm. In other words, it is wilful. They have to set out to deliberately cause you harm. It is no small matter when punitive damages are awarded or agreed to because it says something about the character of the decision that was made in its very essence because it goes right to the idea that somebody kind of deliberately sets out to harm another person's reputation, that they do it with malice, they plan it and they execute it.
The way that you go about mitigating for those kinds of damages is through an apology. When Mr. Taylor asked you, he said your salary would have been about $300,000 and there is a balance there of about $200,000. So if you said that the whole contract was paid out, and I think what I kind of got from you was that wasn't really the case because you would probably consider more of that award to be punitive than compensation, or that may be the way that you feel. At the very least, $200,000 of that was in lieu of an apology. Isn't that right?
MR. LIVINGSTONE: That is correct. Punitive damages.
MR. DEXTER: To string it back one more time, that was a $200,000 apology.
MR. LIVINGSTONE: As I said in my opening comments, I don't disagree with anybody getting fired, the employer has that right. It was the manner in which it was handled. It was very vindictive. I was not given the opportunity to even call my family. My daughter found out about it on the school grounds in Bedford. My other daughter found out at Dalhousie University. My mother and father, who are in their 70's, heard it on the radio. I wasn't even given the opportunity to phone anybody. Within minutes of being fired it was put on the wire service across this country; in my opinion they tried to slander me so that I would never get a job in the oil industry again. They were unsuccessful.
[10:00 a.m.]
MR. DEXTER: Thank you. You mentioned, with respect to the sale of what you called the western properties, you said that you just did not understand why it was that the value was not received for those properties. Maybe I am wrong, but I thought I heard you say something about dealing with an insider with respect to the sale of the properties. I didn't quite understand what you were saying about that.
MR. LIVINGSTONE: The gentleman who bought the properties, George DeBoon was on a full-time consulting contract to NSRL to run the Western Canadian properties.
MR. DEXTER: He was the ultimate purchaser . . .
MR. LIVINGSTONE: He was the ultimate purchaser.
MR. DEXTER: . . . and he would have reason to know exactly what the value of those properties are?
MR. LIVINGSTONE: More so than anyone else.
MR. DEXTER: You said you were called by the bank and that ultimately these properties, they indicated to you that they were willing to finance the properties at 100 per cent?
MR. LIVINGSTONE: Exactly. They were very pleased with the price.
MR. DEXTER: To your knowledge, is that the usual practice of the banks in these matters?
MR. LIVINGSTONE: You have to have awfully good properties to get 100 per cent financing.
MR. DEXTER: Is it not the usual practice that banks require equity in the purchase of properties?
MR. LIVINGSTONE: They usually like to double-cover themselves. If they are loaning $5 million, they can sell the properties for $10 million. It is as simple as that.
MR. DEXTER: I want to ask you, is it correct that that sale was never tendered?
MR. LIVINGSTONE: There was a data room opened, so there must have been some kind of a bid process in place. I am not sure how it happened, but all I know is that George ended up with the properties.
MR. DEXTER: Does Alberta still have a provincially-owned energy company?
MR. LIVINGSTONE: No, over time they have sold their shares and now Alberta Energies is not owned by the government.
MR. DEXTER: Why is that?
MR. LIVINGSTONE: It is just the plan of the company, to get it up and running, to get Southern Alberta involved in the oil and gas business, to have an eye on the industry, and when that was achieved it was time to turn it over, and they did that.
MR. DEXTER: Some of the things that you said this morning, to me, are quite astounding because they very much parallel another story that occurred in this province over the last little while about political interference in the day-to-day management of a company that belongs to the province.
What you have said, in a nutshell, was that the minister's office or the department interfered with the day-to-day operation of the company, that political friends of the government were appointed to the board with little or no experience in the oil and gas
industry, that decisions were made by the department, or the minister, that cost the province hundreds of millions of dollars. Is that fair?
MR. LIVINGSTONE: That is a fair assessment.
MR. DEXTER: I think one of the more serious things that you have said is that the minister tried to introduce what would essentially be a toll gate on the monetizing of the tax pools to allow a company and an accountant that he knew, his personal accountant, to skim off 7 per cent of the value of the tax pool. Is that a fair assessment of what you said?
MR. LIVINGSTONE: There is no percentage agreed to. I can't . . .
MR. DEXTER: But some percentage?
MR. LIVINGSTONE: He wasn't going to do it for nothing, that was for sure.
MR. DEXTER: You said that properties were sold under value to insiders. You have said, again, that they wilfully caused harm to your reputation. I think that if these are true, by anybody's estimation this is a litany of indiscretions that would make a person like myself wonder how it would be that any company could operate in a successful fashion in this province.
MR. LIVINGSTONE: I think you have to realize that the oil and gas business is a very technical business. If you haven't got experience in it then you shouldn't be in it, and if you have experience then use it. Don't allow people who are inexperienced to make decisions that cause you grief in the future. You know the examples, I already told them to you: giving up your interest in the offshore pipeline; the onshore pipeline; gas distribution for NSRL; all these things. It is just not right.
MR. DEXTER: Did you know if the minister had any particular expertise in the oil and gas industry?
MR. LIVINGSTONE: I know he didn't.
MR. DEXTER: That you were aware of?
MR. LIVINGSTONE: I know he didn't.
MR. DEXTER: Did Mr. MacKay have any particular expertise in the oil and gas industry?
MR. LIVINGSTONE: Superficial, based on the public affairs side of things and that would be about it.
MR. DEXTER: With whom was Mr. MacKay's involvement, do you know?
MR. LIVINGSTONE: PetroCanada.
MR. DEXTER: Do you know whether or not independent advice was being sought by the minister, or the minister's staff, with respect to these matters?
MR. LIVINGSTONE: Yes, when we did our first business plan to try to get more oil out of the Cohasset/Panuke field, the Government of Nova Scotia hired a company out of London, England, called Indeva, and they did an independent analysis of our proposed preliminary business plan and agreed with our assumptions that we could get more oil out.
MR. HOLM: People in the oil and gas industry certainly move around a fair bit too, do they not, from company to company?
MR. LIVINGSTONE: That is correct.
MR. HOLM: Are you aware of any of the people who were involved in the negotiation, for example, Mobil or Shell, or any of those also having been in PanCanadian Resources?
MR. LIVINGSTONE: Been in who?
MR. HOLM: Excuse me, with PetroCanada? Had they been long-term employees with Mobil, the people the province was dealing with, for example, when the decision was made to enter into the deal with Mobil for the pipeline and those kinds of things? Had any of those people originally come from PetroCanada?
MR. LIVINGSTONE: I don't know who the government was using. The government never consulted with me or the board of directors concerning giving up its rights to the offshore and onshore pipelines.
MR. HOLM: Going back to the Alberta Energy Company, how long did they have that company?
MR. LIVINGSTONE: Oh, they had it for close to, I would guess, 25 years.
MR. HOLM: What was the purpose of that company? What kind of things was it trying to do when it was a public company?
MR. LIVINGSTONE: Well, we had a situation back then where there was very little Albertan or Canadian knowledge in the oil industry. A lot of multinationals were in Alberta, and a lot of things were happening that the government had a concern about. One was - if you
go back in history - the creation of Sarnia. Here Sarnia, Ontario, was developing a petrochemical complex using Western Canadian gas, so a way to get into this business and to find out what was going on was to set up Alberta Energy, and that is exactly what the government did.
MR. HOLM: So, is it fair to say that it was designed to find out - as you already have - what is going on, but also to put in place the infrastructure so that you would be able to get the distribution throughout Alberta, so that Alberta would end up getting the maximum benefits from it and the petrochemical industries and so on being developed?
MR. LIVINGSTONE: Yes, exactly. I think the second situation you saw like that was when they decided to develop the tar sands. The Alberta Government took a very lead role in that and also took an equity position in the development of that technology and they have slowly been selling their interests in that, too.
MR. HOLM: When they sold it off, was it sold off profitably or did they take major hits?
MR. LIVINGSTONE: Huge profits. If my memory serves me correctly, the last chunk of Alberta Energy went out three years ago. The remaining 15 per cent was sold to Albertans and it sold in two hours or three hours; by noon hour the whole sale was done. It raised close to $500 million.
MR. HOLM: So it accomplished the goal that it set out to do?
MR. LIVINGSTONE: Yes.
MR. HOLM: Going back to a few other things too and touching on your suggestions about ways in which things may be able to be done. If we are going to be selling off NSRL for $40 million, even if we get $50 million or $60 million, that is peanuts in comparison to what we have got invested and what we would then have to assume in terms of the debt. As I say, as of the end of December, it is going to be $740 million. So if we only get $40 million for it, we eat another $700 million in debt.
When oil and gas exploration licences are given out in other areas, do the companies that bid on those traditionally pay a fee for the rights to explore in those areas?
MR. LIVINGSTONE: Pay cash.
MR. HOLM: I assume that the rate that they pay would differ from area to area, but what would be a standard, a norm that they would pay - 5 per cent, 10 per cent, straight, just a dollar value?
MR. LIVINGSTONE: In Alberta you pay. You pay, you post them, they are called bonus bids. The average price on land in Alberta, I would say, is probably $85 an acre if you combine Shell gas and oil with deep gas; you would average out to about $85 or $90 an acre. For every acre that you lease from the Crown, you pay that in cash.
MR. HOLM: Again, most of your involvement has been in the onshore versus the offshore, but in other areas where there is offshore development, do the companies also generally doing the bonus bidding pay some cash?
MR. LIVINGSTONE: Just look at the bids that are out in the Gulf of Mexico. Huge amounts are paid for the land off the Gulf of Mexico on a bid basis.
MR. HOLM: What do you see as the potential for onshore development here in Nova Scotia?
MR. LIVINGSTONE: I see it as excellent. Most people in this province do not know their history when it comes to oil and gas. In 1869, in Lake Ainslie, the first oil production occurred. There were nine wells drilled in Lake Ainslie and put on production in 1877 and that was when we had no technology such as 2D or 3D. That was just on seeps. You have had a show of oil in an area called Malagawatch and then up through Pictou and up through there there is tremendous opportunity, coal bed methane and other good geological prospects.
MR. HOLM: And that, of course, is totally under provincial jurisdiction and non-shared?
MR. LIVINGSTONE: That is correct.
MR. HOLM: From the evaluations that you had done now that infrastructure for transportation of resources are available, what has that done to the value of those resources?
MR. LIVINGSTONE: Oil is really not critical because all you need is a tank battery and trucks can pick it up. You have a refinery here in Nova Scotia that can take the oil so it is just a matter of trucking it there. For bigger commercial quantities actually you can build a pipeline, but gas is the problem. You have to have an infrastructure to get gas to the market and now that infrastructure is here in Nova Scotia.
MR. HOLM: So the value of that gas obviously has increased tremendously?
MR. LIVINGSTONE: The value of anything around the pipeline, the interest will increase and, hopefully, you will see some drilling taking place.
MR. HOLM: How much time?
MR. CHAIRMAN: The honourable member has one minute left.
MR. HOLM: In terms then, and one of the things too is to concentrate on trying to figure out where in the heck we can go from here with the kind of situation that we have and the kind of scenario that you mentioned as a possibility, I will say that I mentioned that to the Minister of Finance. I had raised that with him during his estimates and I am told that that is one of about eight scenarios that is under consideration.
If, of course, we were to purchase and to buy another company, an exploration company that is traded on the TSE, and that is certainly a way to get around the whole issue of right of first refusal, this is partly where I was coming from in terms of the onshore resources in Nova Scotia because you had made the suggestion to give them one million acres. That would certainly increase tremendous value for that new company that would be created and would conceivably increase the value for people to buy into it, invest in it.
On the issue, though, of transmission, you had suggested that NSRL maybe take on responsibility for distribution within the province. Of course, the URB has just come down a couple of days ago with their recommendations. How critical to the kind of scenario you were suggesting would be the distribution within the province?
MR. LIVINGSTONE: The more assets you can put into NSRL, the more attractive it is going to be. I have a hard time understanding why a gentleman named Ron Sutherland, who ran a trucking company and built ATCO trailers, can get in the gas distribution business in the Province of Alberta and be very successful at it. He supplies all the gas for the City of Calgary, which has roughly the same population as Nova Scotia, but yet when it comes to Nova Scotia, you have to go outside to get that expertise. I think NSRL had it once, lost it, and I think it would be a big advantage to NSRL if you wanted to - you know, it is the old saying, if you want to put some lipstick on this pig and take it to market, it is not bad lipstick to have.
MR. CHAIRMAN: I now turn our questioning over to the PC caucus.
The honourable member for Colchester North.
MR. WILLIAM LANGILLE: I will just advise that I have to stand now and ask questions because we are sitting in the back row. The Liberal member for Cape Breton West brought up a few things about your company. It is called K2, is it?
MR. LIVINGSTONE: That is correct.
MR. LANGILLE: I must confess I know nothing about your company. I never even heard of it until a few minutes ago. Anyway, you are the CEO of K2, are you?
MR. LIVINGSTONE: That is correct.
MR. LANGILLE: I would assume that this would probably be traded on the Alberta Stock Exchange, not TSE?
MR. LIVINGSTONE: Toronto Stock Exchange.
MR. LANGILLE: It is on the Toronto Stock Exchange?
MR. LIVINGSTONE: Correct.
MR. LANGILLE: So most of your junior oil plays are traded on Alberta, but to get on the stock exchange it takes a considerable research background to make the Toronto Stock Exchange, is that right?
MR. LIVINGSTONE: That is correct, the regulations are much stricter.
MR. LANGILLE: So let's go back to K2. It is not unusual, is it, to have a Canadian company with assets in another country?
MR. LIVINGSTONE: Very common.
MR. LANGILLE: In fact, would there not be a lot of junior oil companies in Alberta, in Canada, that would have assets in other countries?
MR. LIVINGSTONE: There is.
MR. LANGILLE: When you start a company, you raise cash through shareholders and not investors?
MR. LIVINGSTONE: It is called equity, that is correct.
MR. LANGILLE: When you are a junior oil play and in Montana, you lease out properties, is that correct?
MR. LIVINGSTONE: We lease our properties from the Blackfeet Indian Nation.
MR. LANGILLE: Once you lease your properties, then you start your drilling, looking for oil or gas?
MR. LIVINGSTONE: That is correct.
MR. LANGILLE: Are you in the gas, oil or both?
MR. LIVINGSTONE: Both.
MR. LANGILLE: Have you any wells drilled now?
MR. LIVINGSTONE: I hope around 3:00 p.m., to TD our seventh well on the Blackfeet Reservation. We drilled three gas wells and now we are drilling a fourth oil well this year on the reservation.
MR. LANGILLE: Have you had success?
MR. LIVINGSTONE: Yes, sir, we have.
MR. LANGILLE: What would your ratio of success be?
MR. LIVINGSTONE: I cannot really disclose it right now. We have not made it public to the company, but I think next week. I can tell you it is a high rate of success.
MR. LANGILLE: That is understandable. I just wanted to clarify that, that it is not unusual for starting out in exploration to go into debt and not make a profit.
MR. LIVINGSTONE: Well, what you do, you are investing; we are not going into debt, we are debt free. What we are doing is something that is rather unique that a lot of the U.S. oil companies couldn't do, and that is get a 50 year deal with the Blackfeet Nation in the United States. Doing that, we paid them what is a reasonable return for their land, in comparison to what the government gave Mobil and Shell here, 1 per cent, 2 per cent royalties, we pay 16 2/3 per cent plus an 18 1/3 per cent tax for 35 per cent revenue stream that goes to the Blackfeet tribe.
MR. LANGILLE: I just wanted to clarify this, because it didn't seem like you explained everything in full when the member was questioning you. I thank you for that. I want to go over to Page 11 of your opening statement. I would like you to expand on this. In regard to, "The Memorandum of Understanding agreed to December 1997 between the Government of Nova Scotia, SOEP and M&NPP contains a clause. . .", and you state, ". . . that just shocks me. Under the section entitled "Regulatory Approvals". Maybe you could read that clause again and just go into a little detail about why that shocks you.
MR. LIVINGSTONE: Okay. "Each party agrees that it shall not seek any review, appeal or rehearing of the joint review panel's recommendations contained in its October 27, 1997 report or any decision or regulatory approval associated with the SOEP or the M&NPP which is consistent with such recommendations and each party further agrees that it should not support any third party in connection with any review, appeal or rehearing of any such decision or regulatory approval which may be sought by any third party."
I have a hard time accepting the fact that a government would turn its back on its own people and side with Mobil, Shell, Imperial, and Maritimes & Northeast. There are two court challenges to this thing, and this province cannot even support either the Mi'kmaq or the people in Cape Breton who have challenged this thing. Why a government would do that is beyond me.
I can tell you one thing, I don't think you will find it in any other agreements in this country. I know Alberta would never agree to that.
MR. LANGILLE: I guess my time is up. I thank you very much.
MR. DEWOLFE: Mr. Livingstone, if we could just backtrack very quickly, I want to take you back to an earlier comment you made this morning regarding Don Downe's personal accountant being brought in to sell the tax pools. This is a remarkable statement and I am really shocked by it. Who is he? What did he stand to gain by way of commission?
MR. LIVINGSTONE: Well, it would be substantial, all the pools got sold. You would be looking at a commission, I think, of 5 per cent to 7 per cent on those pools. The gentleman's name was Mr. Ormiston.
MR. DEWOLFE: Ormiston.
MR. LIVINGSTONE: That is right, with Coopers here. There are letters on file at Nova Scotia Resources Limited that show some of the problems Robert MacDiarmid had when he was trying to do a deal on the tax pools. He was told that Don Downe had told this one particular company, don't bother paying any attention, it is not going to happen.
MR. DEWOLFE: Five to seven per cent could equate into how many dollars?
MR. LIVINGSTONE: Well, in the deal we were doing, I think $50 million was the first tranche we were taking through; 5 per cent of $50 million is $2.5 million.
MR. DEWOLFE: One other quick question, regarding the 50 per cent ownership of the offshore pipeline. The government gave away our rights to that. What, in your estimate, is the dollar value of this loss to the taxpayers of Nova Scotia?
MR. LIVINGSTONE: I think, rather than guess at it, it is significant. You get your capital back plus 12 per cent to 14 per cent. That is a tremendous investment when you look at what banks pay in interest today. You would have to look at what you are getting on your workers' compensation investments today. I think this province had to guarantee them, if I remember correctly, at 4 per cent when it revamped them. There is no risk there now. There is gas, there is a market, there is a pipeline.
MR. DEWOLFE: Yes, just the stroke of a pen, just that easy. I know our time is limited, and I want to yield to the next person.
MR. CHAIRMAN: You have another 9 minutes.
MR. TAYLOR: Mr. Chairman, I think, if nothing else this morning, some people will very easily discern that because the previous government acted somewhat non-compassionately and, as the witness has indicated, vindictively, the taxpayers in the Province of the Nova Scotia were left on the hook for $0.5 million regarding the out-of-court settlement that was reached.
I wonder if the witness could just go back a little bit. I believe the out-of-court settlement was perhaps negotiated and some common ground was found. I know somewhere along the line, the honourable witness had legal counsel working with him. If you don't mind, Mr. Livingstone, what were you originally looking for in terms of a termination settlement?
MR. LIVINGSTONE: Well, I could go back and just tell you, first of all, the board of directors were not unhappy, they would never have fired me. That is why they got fired. Let's be honest.
MR. TAYLOR: Pardon me?
MR. LIVINGSTONE: In order to fire me, they had to fire the board of directors. The board of directors were not disappointed, they were meeting on that morning to give me a bonus for all the hard work I had done. They went out and hired an independent company to assess that, and they brought in a report saying that I should get 25 per cent of my salary as a bonus for each of the two years, for the job that I had done.
We never got to meet the board; the board was fired at 10:30 a.m. that morning and I was fired at 10:35 a.m. If the government didn't want my services anymore, all they had to do was call me aside and say, look, we will move you back to western Canada, we are getting out of the oil and gas business. Could you give us 90 days of your time to do some kind of a transition, help us sell it and in return we will move you back to Alberta, shake hands and that is the end of it.
None of those discussions were held. They wouldn't even give me a reason. They handed me a letter telling me that I was terminated. It took me three or four days to get the reason. They brought up accountants, went through all my files, my expense account, looking for reasons. They didn't find one. They interviewed the staff, asked for my personal letters, and my secretary said I didn't have any. The day Jim Livingstone started here he said, if you have a problem, come see me personally.
They went through the files for three days, couldn't find anything. Then they came up with these three weak reasons. As I said, it was the manner in which it was handled. What I went for, I was looking for $1 million. If we had gone to court, I think I would have probably been able to get $1-plus million.
MR. TAYLOR: Mr. Livingstone, did you or legal counsel serve notice to the previous government that, in fact, that was the settlement you would be looking for if it went to court?
MR. LIVINGSTONE: My Statement of Claim listed all that out. It didn't give a dollar amount, but that is what my legal counsel and I thought it would be, $1-plus million.
MR. TAYLOR: The morning of the firing, the board of directors thought that you should receive a bonus and, in fact, some bonus you received?
MR. LIVINGSTONE: For the two years, the work I had done turning the company around and all that, they had hired an independent accounting firm to look at it and that is what they had recommended.
MR. TAYLOR: Mr. Chairman, at different times during this morning's meeting, there has been talk of political interference at Nova Scotia Resources Limited. I am not sure if, in my mind, it has been established or, in fact, proven that there was political interference; there have been great implications of political interference. I wonder if the witness could give us a specific example of out-and-out political interference relative to who, what, when, where and how?
[10:30 a.m.]
MR. LIVINGSTONE: Probably the best case of political interference, in addition to what I explained about the tax pools was, we couldn't get the government to give us the one piece of paper we needed to conclude the deal with PanCanadian. That had been approved by the board of directors, it was good for the corporation and we were just stonewalled. They dragged it out long enough that PanCanadian couldn't wait anymore. They had to look after other issues and tax planning.
The other one, I received a letter from Don Downe telling me that I had to turn over the files of the Trans Canada-NSRL agreement between the two companies on the Sable gas system. I informed him that I couldn't do that, there was a confidentiality clause and that I had to get permission from Trans Canada to do that. He ordered me to do it and I refused to do it.
MR. TAYLOR: I appreciate the witness being so forthright, Mr. Chairman, and for the time we have remaining, I would like to yield to the honourable member for Kings South.
MR. MORSE: I thank you for that. Mr. Livingstone, in my former career, you are, what we call, a key man, or perhaps to be politically correct, a key person in a business. You clearly were with Nova Scotia Resources Ltd. When you went there, there appeared to be little structure and a lack of expertise. Some of the things you did were you established spending limits, on your own authority, covering your own position. You brought in conflict of interest guidelines for the board, things that are just automatic but yet were not there. You recruited a knowledgeable board and management. You were well paid for this during your time, as you are with K2, and so I think we should recognize that you bring a tremendous amount to this committee.
Some of the things that have come out of this, just to pull a few in, is that we have a number of about $60 million which was basically given up when we did not exercise the right to take over LASMO's residual assets from Cohasset/Panuke, something that you had negotiated with their president. We may have lost $40 million to $50 million in tax pools, pending what happens. We also know that we lost a substantial amount, to quote you, for the back-in provision on the pipeline. You declined to give a number but you talked about annuities and cash streams.
If, as you quoted earlier, the cost to NSRL for the pipeline was $200 million and if the return was 12 per cent - you said, I think, 12 per cent to 14 per cent was normal, but let's use 12 per cent - and let's say the cost to NSRL was 6 per cent, that means that there was a surplus of 6 per cent. If you annuitize the $200 million, you are looking somewhere in the vicinity of $350 million for the minister just giving away the rights to the pipeline, something that had been negotiated actually, I believe if you check the records, by a former Progressive Conservative Government, correct?
MR. LIVINGSTONE: That's correct. Your accord was a very good piece of legislation. I said it publicly before, that Premier Buchanan deserved praise; I said it in the Senate of this country two years ago, for the accord that Nova Scotia negotiated. Your numbers are in the ballpark.
MR. MORSE: So $350 million is not a bad number, just given away free?
MR. LIVINGSTONE: Over the 25 year life of that pipeline, yes. I think the other thing you want to look at, too, is that if you had the Sable gas system here where it was 50 per cent owned by Trans Canada and NSRL, you had 50 per cent Canadian content on your offshore pipeline.
MR. MORSE: Okay, one last quick one. In your business plan, you showed an estimated cash flow of $336 million for NSRL. That would have made a considerable dent in the $466 million that was on the books in debt when you came on as president. Where are we today relative to your business plan? Now with your business plan, I would take it we should have been about $130 million in debt. I know that there was some conversion to equity
in that plan, but we should have been somewhere in the vicinity of - and I am just going to use $130 million today - $130 million in debt in NSRL. Where are we today, given that we did not take your business plan? What is the debt of NSRL today?
MR. LIVINGSTONE: You are over $700-plus million. Not only are you over $700-plus million, last night when I got this binder from the Public Accounts Committee, I had a chance to look at the budget. You are still out there drilling wells. There is $13 million in this book that has gone into offshore drilling. The abandonment costs have gone up from $17.5 million to $22 million, is what they are carrying. You put $20 million more into offshore risk drilling out there, so I think somebody better tell you what you got for it because it is sure not showing up in the production out there.
MR. MORSE: So we are $600 million behind by not taking your business plan. We have given up $350 million by giving up our rights to get back in on the pipeline. Is there anything else that you would like to throw into this basket? We are close to $1 billion according to what you have given us, political interference by the former government.
MR. LIVINGSTONE: Yes, and the other thing is that you are not developing your onshore potential. You don't have the tools to get a petrochemical complex going here. You have given that away. Can anybody here tell me if you have specifications for gas, what the Btu value of it leaving the province is? Where is your ethane going? Who is going to build a straddle plant to take the ethane out? Why are you giving it away?
MR. CHAIRMAN: I will now turn questioning over to my colleague, the member for Richmond.
MR. MICHEL SAMSON: Not to try to discredit you, Mr. Livingstone, but I can tell you that I have attended several meetings personally, along with colleagues in the Strait area, who have continually been in discussions with a number of people looking to set up a petrochemical industry in this province, knowing what the game is, so I would challenge your statement that there is no one interested in setting up a petrochemical industry here. I am not talking about Mobil, when I say that, so I would caution the statements you are making. In fact, if anything, you are probably doing more damage in making such statements than helping the province, as you indicated your reason for coming here.
I am curious, are you here on a business trip, Mr. Livingstone?
MR. LIVINGSTONE: No, I am not.
MR. SAMSON: This is being paid at your own personal expense, is it?
MR. LIVINGSTONE: That's correct.
MR. SAMSON: You are not claiming this as an expense through K2?
MR. LIVINGSTONE: No, I am not.
MR. SAMSON: Before coming here, did you have any conversations with any member of either the NDP caucus or staff or PC caucus or staff?
MR. LIVINGSTONE: People call me all the time. I haven't had any recent conversations but over the last four and one-half years since I left NSRL, NDP and Conservative people have called me.
MR. SAMSON: Is that elected people or research staff?
MR. LIVINGSTONE: Both.
MR. SAMSON: Before your appearance today, in the last six months, have you been contacted by any member of the NDP or PC caucus?
MR. LIVINGSTONE: Yes, they have called me and asked for expertise, questions.
MR. SAMSON: How recently would that be?
MR. LIVINGSTONE: September.
MR. SAMSON: September 1999?
MR. LIVINGSTONE: That's correct.
MR. SAMSON: Cut me off if I am going too far with it, but can you tell us which caucus it was and the nature of the conversation?
MR. LIVINGSTONE: It was Conservative, but it wasn't their caucus. Mr. LeBlanc, the Minister of Finance, phoned and asked me some questions on NSRL. I told him that I was heading to Cape Breton the end of September and he asked if he could meet with me. I agreed to meet with him. We went over some things relating to Nova Scotia Resources.
MR. SAMSON: Was your impending presentation before this committee discussed at that time with Mr. LeBlanc?
MR. LIVINGSTONE: No, I didn't even know I was appearing.
MR. SAMSON: You have obviously come here with a statement. Was that statement sent to anyone here in the province before your appearance here?
MR. LIVINGSTONE: No.
MR. SAMSON: You brought that fresh this morning.
MR. LIVINGSTONE: That's correct.
MR. SAMSON: Thank you for that. Mr. Livingstone, you say you have a BA from Dalhousie University in Economics, I believe?
MR. LIVINGSTONE: Correct.
MR. SAMSON: That's a three year BA?
MR. LIVINGSTONE: Four year.
MR. SAMSON: At any time during that time, were some of your courses in the oil and gas industry?
MR. LIVINGSTONE: No.
MR. SAMSON: So is it safe to say that the experience you have coming before us today - I believe you have described yourself as an expert - has been hands-on experience and not that of an educational nature?
MR. LIVINGSTONE: It is both.
MR. SAMSON: I am curious, what educational-type courses would you have taken, dealing with the oil and gas industry?
MR. LIVINGSTONE: Over the years, with a major oil company, you get lots of training: offshore safety, blow-up prevention, drilling techniques, all those things.
MR. SAMSON: Business-wise, I guess, in the management of oil and gas exploration, which I believe is what you are claiming your experience is, I am wondering if you have any sort of educational background in the business side, management side of this industry?
MR. LIVINGSTONE: Yes. I have quite a considerable amount of background in it.
MR. SAMSON: I am not questioning your background, Mr. Livingstone, I am just asking you about courses. Do you have certificates, do you have any courses that you have taken in management, in the business aspect? I understand you had a business plan which you drafted for Nova Scotia Resources Limited. I am just curious what educational training you have in dealing with this, if any?
MR. LIVINGSTONE: I have taken numerous courses over the years, through Gulf Oil, when I was with Gulf, in finance, business planning, negotiations, a lot of courses typical of what an oil company spends on its employees.
MR. SAMSON: Who would offer these courses?
MR. LIVINGSTONE: They were offered by various institutions. Some of the people came out of universities in the United States to teach us these courses. Some of them were on-site training, that sort of thing.
MR. SAMSON: Can you give me an example of one, to give me an idea of what you mean by that?
MR. LIVINGSTONE: For example, they would bring in a guy named Alan Shumacher out of New York who was an expert in negotiations. He would spend a week teaching us how to negotiate.
MR. SAMSON: I know with most courses you usually get a certificate or something at the end that indicates that you have successfully completed this kind of training. Do you have anything of that nature?
MR. LIVINGSTONE: I imagine, I would have to ask my wife, I don't know if she kept them or not.
MR. SAMSON: With all due respect, one would think, in presenting your biography and that, that one would not want to just use an overall statement of experience, one would want to back that up with concrete facts and have some sort of information that one could actually verify your biography. I am quite surprised to see that you suspect your wife has it hidden somewhere in the attic or in a closet rather than being readily available for potential employers.
MR. LIVINGSTONE: I don't keep it in my desk. I have better things to do.
MR. SAMSON: Who hired you, Mr. Livingstone?
MR. LIVINGSTONE: At Nova Scotia Resources Limited?
MR. SAMSON: Yes.
MR. LIVINGSTONE: The board of directors.
MR. SAMSON: Who would have been the chairman at that time?
MR. LIVINGSTONE: A gentleman named Neil Nichols.
MR. SAMSON: Who would have been the minister at that time?
MR. LIVINGSTONE: I think it was John Leefe.
MR. SAMSON: Who would have been the Premier at that time?
MR. LIVINGSTONE: Don Cameron.
MR. SAMSON: What was your salary when you were hired, Mr. Livingstone?
MR. LIVINGSTONE: It was $150,000 a year.
MR. SAMSON: I take it that was based on a quite similar biography to what we have here that is on the website for K2?
MR. LIVINGSTONE: Yes, I would imagine.
MR. SAMSON: After university, you went on to work with Gulf Oil. I believe you indicated you worked at the Gulf Oil plant in Port Tupper?
MR. LIVINGSTONE: Correct.
MR. SAMSON: What was the nature of your employment there?
MR. LIVINGSTONE: I was in the maintenance department.
MR. SAMSON: What is the status of that operation now?
MR. LIVINGSTONE: Gulf left there in 1980.
MR. SAMSON: When did you arrive there?
MR. LIVINGSTONE: It was 1978.
MR. SAMSON: You also worked up North at a Gulf plant?
MR. LIVINGSTONE: No, they had no plant. I worked with Gulf in Inuvik. We brought in some $700 million dollars worth of the most technologically advanced ice drilling equipment in the world: four ice-breakers and two drilling rigs.
MR. SAMSON: What is the status of that operation now?
MR. LIVINGSTONE: That operation shut down, the Beaufort has been shut down since 1988.
MR. SAMSON: So the operation at Point Tupper you were involved with is now shut down, and the operation up North that you were with is now shut down also.
MR. LIVINGSTONE: That is the nature of the oil business.
MR. SAMSON: I am sure that will give very little comfort to my constituents in Richmond County who used to be employed by the Gulf Oil Refinery in Point Tupper. So you were with maintenance with Gulf Oil up until 1980, and up North you worked on Native relations for Gulf Oil?
MR. LIVINGSTONE: Regulatory matters with Gulf.
MR. SAMSON: How long was your employment out there?
MR. LIVINGSTONE: I think I was with Gulf in the North from 1983 until 1988. Then I was there from 1988 until 1993 as Chairman of the Environmental Impact Review Board for Northern Canada.
MR. SAMSON: What year were you appointed chairman of that panel?
MR. LIVINGSTONE: I think it was 1989.
MR. SAMSON: Who would have appointed you?
MR. LIVINGSTONE: I was appointed by an Order in Council by the Privy Council of Canada.
MR. SAMSON: What government was in power at that time?
MR. LIVINGSTONE: I believe it was a Progressive Conservative Government.
MR. SAMSON: So you were hired by a Progressive Conservative Government here in Nova Scotia . . .
MR. LIVINGSTONE: No, the Native people in Northern Canada had a veto over the chairman, and they picked me and the government concurred with it.
MR. SAMSON: That went through Order in Council?
MR. LIVINGSTONE: That went through Order in Council.
MR. SAMSON: It was a Cabinet decision.
MR. LIVINGSTONE: A Cabinet appointment.
MR. SAMSON: Therefore you were appointed by the Progressive Conservative Government of Brian Mulroney. (Laughter) Okay. Thank you. You went on to work at Fedmet Tubulars?
MR. LIVINGSTONE: Correct.
MR. SAMSON: What is the status of that company?
MR. LIVINGSTONE: It is probably one of the largest suppliers of oil country tubular goods in the oil industry today with annual sales close to $200 million a year. I started that by myself as a one-man show.
MR. SAMSON: Do you still have an interest in that company?
MR. LIVINGSTONE: No, I don't and never did.
MR. SAMSON: Can I ask what your reasons were for leaving that company?
MR. LIVINGSTONE: I was hired away by Nova Scotia Resources Limited.
MR. SAMSON: I am very interested in that comment. You were hired away. That leaves me with the impression that someone went out to lobby your services. How did you become employed by Nova Scotia Resources Limited?
MR. LIVINGSTONE: A headhunter phoned me one day and asked me if I would be interested in a job. I told him, no thank you.
MR. SAMSON: Who would that headhunter have been?
MR. LIVINGSTONE: He was with KPMG in Calgary. I think his name is Mr. Gordon Severson.
MR. SAMSON: You were not interested at the time?
MR. LIVINGSTONE: That is correct.
MR. SAMSON: Why the sudden interest?
MR. LIVINGSTONE: They kept talking to me. I looked at some of the documents they gave me, saw Nova Scotia was in a real problem. Discussions continued. I had a concern about political interference, so I was allowed to write my own contract, which you have seen. Then I was given the assurance by Don Cameron and Opposition Leader John Savage that there would be no political interference in the running of Nova Scotia Resources Limited.
MR. SAMSON: In your bio, it says that you bring a wealth of knowledge - and it finishes off by saying - in turning companies around. I am just wondering if you could give us any examples of companies that you have turned around, and where Nova Scotia Resources Limited fits into that picture?
MR. LIVINGSTONE: When I started up Fedmet Tubulars, it had a $30 million problem laying on the ground, imported defective pipe. I turned that into a profitable company, fought a trade war in Ottawa, won the right to bring in imported pipe made in the United States into Canada. There is the turnaround. I came into Nova Scotia Resources Limited and produced the first two operating profits in the history of the company, $33 million the first year and $50 million my second year.
MR. SAMSON: Is it safe to say that in the actual time where a profit was that this was actually a time that Nova Scotia Resources Limited actually started producing oil for the first time, and that there was actually a revenue coming in, that these were the years that this was actually happening? Is that not a safe thing to say?
MR. LIVINGSTONE: It is not a safe thing to say. Cuts had been made to the offshore and in the operation out there, you would have produced oil at a loss. Cuts had to be made, limits had to be put on. That is how LASMO-Nova Scotia Resources Limited made a profit in the offshore.
MR. SAMSON: Was it the cuts that you brought there that actually allowed them to make a profit? The fact that they were actually producing oil for the first time is not the reasoning behind the profit being finally shown?
MR. LIVINGSTONE: If you don't have your costs under control, producing oil just doesn't make a profit by itself.
MR. SAMSON: You made an interesting comment on some of your frustration here in the province in saying that we have sold out and the previous administration sold out to people from the outside. You gave an example of this trucking company out in Calgary that is now one of the largest suppliers without any previous experience. Yet during your presentation you spoke of government members and the people working for government, and you condemned them for being involved with NSRL because they had no former experience. You gave the same comment to my colleague, the member for Cape Breton West. Yet, on
the other hand, you wonder why we have to go outside the province because we do not have any experience here.
Obviously the government put people in there who were native Nova Scotians who were trying to learn the oil and gas industry and yet you scratch your head and wonder why we do not have the experience, that we have to go outside for experience. Following the comments that you have made, I am wondering, how do you balance your comments with your desire that we use Nova Scotian people to learn the oil and gas industry?
MR. LIVINGSTONE: I think the key place where you need your experience is in government decisions that are made. If you go back and look, the decisions that are being made affect the future of all Nova Scotians for many generations to come. If you do not have that expertise to make those decisions, then you should not make them. You should get that expertise. It does not mean you have to bring them here or anything else and over time people watch how that decision making is made; it is no different in Alberta. My gripe is that you are making decisions here on offshore pipelines and gas distribution and all these things and who is giving you the advice?
MR. SAMSON: You have made some interesting comments here in your presentation of where you see NSRL should be going and where government should be going. I am curious, you indicated you came back here because of your concern for this province and the fact that you are here today is a concern you have for this province. I am just curious as to why you have not either made this public or provided the members of the House of Assembly, or somehow communicated to us, as legislators, these very opinions that you have had so that we could have used this as part of our ongoing debate for developing an oil and gas industry here in this province. Why only today are we hearing the gospel according to Jim Livingstone on NSRL?
MR. LIVINGSTONE: If you wanted information, sir, you could have phoned me like the NDP and the Progressive Conservatives did and I would have been glad to give it to you. You did not. If you want to make your own decisions, then stand by them.
MR. SAMSON: Well, no, that is not what I am saying. I am just wondering, you indicate your commitment to this province and your concern for the future of this industry, yet it is only today that we are sitting in front of the Public Accounts Committee that we get this document and certainly I think there are some very interesting points here. I would have appreciated seeing these a long time ago and I am just curious why there is a commitment to come here to say this, yet there was no commitment for you to make this presentation beforehand. I am just wondering, how do you console those two things?
MR. LIVINGSTONE: I will answer that question. I am looking at two members from Cape Breton. Neither one of you took part in the National Energy Board hearings on this project. You do not feel guilty about that? You never appeared on behalf of the people in industrial Cape Breton or anything else.
MR. SAMSON: I tell you, Mr. Chairman, coming from a gentleman who worked at Gulf Oil that put hundreds of people in my constituency out of work and considering the representations I have made to individuals interested in the petrochemical industry, who certainly are not going to be any further encouraged by your statements today, I want to tell you that I am quite pleased at the efforts I have made and that my colleague has made. Certainly at the end of the day I can hold my head up high for what I have tried to do to represent my constituents and certainly this sour grapes presentation we have heard today from you will go absolutely nowhere to helping this province in my honest estimate. So I will pass the rest of my time to my colleague, the member for Cape Breton West.
[Mr. David Morse took the Chair.]
MR. MACKINNON: My next set of questions, with regard to communications, Mr. Livingstone, through you, Mr. Chairman, one of the big concerns is you raised the issue of interference by the government and I keep going back to the issue of communications. You made some assertions about the board supporting you for a bonus. Was there not a concern that that was in contravention to the legislation at hand? Was that not a concern raised?
MR. LIVINGSTONE: The audit committee got a legal opinion on that, that is correct.
MR. MACKINNON: So even if they wanted to give you $1 million, that would have been contrary to the legislation?
MR. LIVINGSTONE: That is not correct. The legal opinion said it could be paid.
MR. MACKINNON: Is that the legal opinion that you hired?
MR. LIVINGSTONE: No, I just told you, the audit committee got it. I did not sit on the audit committee, Mr. MacKinnon.
MR. MACKINNON: So you didn't even submit that as part of your claim, did you?
MR. LIVINGSTONE: As part of my claim?
MR. MACKINNON: Yes, your legal claim.
MR. LIVINGSTONE: Yes, it was.
MR. MACKINNON: But you didn't get it?
MR. LIVINGSTONE: I got $500,000 and you can calculate it however you like. (Laughter)
MR. MACKINNON: Of which two years was written into your contract. The next issue is with regard to communications. I know this is with regard to K2. You have made quite an issue here with regard to lack of communication and government interference and so on. I am rather perplexed by your statement of May 3rd, 1999 with regard to shareholders' communication. The corporation complies with all continuous disclosure requirements of the Toronto Stock Exchange and relevant provincial security Acts. In addition, the corporation communicates with shareholders by means of press releases. Now, by golly, if I was a shareholder, I would want to know a little more about what is going on in my company, rather than picking up and looking through the newspaper. Is that the way you run a corporation?
MR. LIVINGSTONE: Mr. MacKinnon, that is the way the law requires I run a corporation. If you run it any other way, it is called insider trading and there are strict rules in this country about it.
MR. MACKINNON: I want to go back to your expenses with NSRL. I notice we paid expenses to maintain your dog in Calgary, we paid for golfing fees on a number of occasions, we paid for real estate fees, hotels, meals - rather exorbitant - and we even paid for gifts to Russians. I am just wondering, that total expenditure in the short time you were there, came up to close to $130,000. I notice a lot of these expenditures are supposed to be signed by the employer, which would be you, and then approved by, I suppose, somebody else in the corporation. But not all of those are signed. They are all signed by you but they are not always signed by the second person. Is there a reason for that?
MR. LIVINGSTONE: Yes, there was no second person to sign it. I was the president and CEO.
MR. MACKINNON: So you saw no value in consulting with the ultimate responsibility . . .
MR. LIVINGSTONE: No, the expense accounts all go to the board of directors and they look at them there, every year.
MR. CHAIRMAN: I want to thank Mr. Livingstone for coming here today. Our time is almost done. We have just a little over a minute left and given that you were kind enough to come, I invite you to perhaps give us a brief closing statement.
MR. LIVINGSTONE: This is what I expected I would see when I came before the Public Accounts Committee, the Liberals trying to spend time talking about everything else but what the issues are. If Mr. MacKinnon wants to find out about K2, I suggest he buy one common share and come to the annual meeting and we will be glad to answer any of his questions. I think it shows what is wrong in this province. There is a political agenda here, not a business agenda. Until this changes, you might as well change the curriculum of the schools here and start teaching them Alberta curriculum because that is where your children are going to end up. This province needs leadership and it needs to develop its oil and gas potential. It sure hasn't been here since 1993, I can tell you that.
[Mr. Russell MacKinnon resumed the Chair.]
MR. CHAIRMAN: Okay. We will move on to our future agenda. We thank you, Mr. Livingstone, for your participation here today and we will look ahead to next week's meeting which will be Wednesday, November 24th. I believe we have scheduled a briefing session on the P3 Horton District High School. That would be in the Committee's Office starting at 8:00 a.m. and ending at 10:00 a.m.
[11:00 a.m.]
MR. HOLM: I agree with that. The other thing is this committee may want to consider if we want to have some follow-up meetings relative to the topic that we have talked about today. I know that I would certainly love to get a listing of possible files that might exist within Natural Resources that could verify some of the comments that were made today, assertions that were made today, and before the witness leaves, if he has knowledge of some of those bits of information that this committee may wish to ask for, I certainly would welcome it if he would send it to the committee so that we could consider narrowing in if we wished to ask for that kind of information.
MR. CHAIRMAN: Perhaps what we will do then, if it is generally agreed to by the committee, we will save 10 or 15 minutes at the end of next week's meeting just to focus on this for potential future witnesses, and so on, or any other evidence. If it is okay with members of the committee, if somebody raises a concern between now and next week, perhaps we should make an official request to NSRL, or Natural Resources, whoever. We will at least put in letter form that we would like such and such information. Is that agreeable? As you probably noticed, that is what I did in terms of a number of items that I thought would be helpful to members of the committee.
Is it agreed?
It is agreed.
We stand adjourned.
[The committee adjourned at 11:01 a.m.]
