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February 18, 2014

PUBLIC ACCOUNTS

COMMITTEE

The Committee met at 2:30 p.m. in the House of Assembly Chamber.

CHAIR (Bennett): Good afternoon, everybody.

We are live right now not from Sochi, but we are live. Anyway,

this is a hearing of the Public Accounts Committee of the Province of

Newfoundland and Labrador. My name is Jim Bennett, MHA for the St. Barbe

district, and I am the Chair. This is a continuation of a hearing that we were

doing previously, some months ago.

For people who are not familiar as yet with Public Accounts

hearings, the Public Accounts Committee has witnesses come before it to provide

explanations and background information on matters that have been dealt with by

the Auditor General in the Auditor General's report. We have members of the

Auditor General's staff here, we have members who have appeared voluntarily as

witnesses today to provide us with certain information, and we have the

Committee members.

I am going to ask the Committee members if they would each

introduce themselves starting with we have a new Vice-Chair.

MS PERRY: Tracey Perry, Member for Fortune Bay Cape La

Hune.

MR. K. PARSONS: Kevin Parsons, Member for Cape St. Francis.

MR. S. COLLINS: Sandy Collins, Member for Terra Nova.

MR. CROSS: Eli Cross, Member for Bonavista North.

MR. MURPHY: George Murphy, MHA for St. John's East.

MR. OSBORNE: Tom Osborne, MHA for St. John's South.

CHAIR: From the Auditor General's Office

MR. WALTERS: Scott Walters.

MS RUSSELL: Sandra Russell, Deputy Auditor General.

CHAIR: The individuals from the Department of Natural

Resources

MR. YOUNG: Eric Young; I am the Director of Forest

Engineering and Industry Services.

MR. FORWARD: Hi. My name is Gary Forward. I am the

Supervisor of Industry Services with the Department of Natural Resources.

MR. EVANS: Jim Evans; I am the CEO of Forestry and Agrifoods

Agency.

MR. BOWERS: Good afternoon.

I am Wade Bowers, Assistant Deputy Minister for the Forestry

Services Branch.

CHAIR: We expect to be joined momentarily by Mr. Paddon, the

Auditor General, who has just stepped out.

The witnesses who appear before us were previously sworn, so it

is not necessary to do so again. Actually, I neglected to mention Ms Murphy, who

is our Clerk, is sitting at my right.

We are looking forward to probably a relatively short day. We

intended to start in the morning, but weather delayed most people's travels

including my own so we are fortunate to be able to have the second half of the

day available to finalize this matter.

We are now joined by our Auditor General, Mr. Terry Paddon.

Unless anybody has any questions, I would start with questions

and we tend to go into ten-minute increments and alternate between government

members and an Opposition member.

Mr. Osborne.

MR. OSBORNE: Thank you, Mr. Chair.

I will start my questions and some of these may be repetitive,

based on questions that were asked during the previous hearing. I am just

wondering what feasibility studies were done when determining that a wood pellet

plant would be viable in Newfoundland and Labrador.

MR. EVANS: The department did commission, and I believe it

is in the supplementary information. I will refer to my colleagues on that

question, if you do not mind.

MR. YOUNG: I guess I can have a stab at that question.

The diagnostics and the feasibility studies were part of all the

application process for FIDF. Anyone who wanted to apply under the FIDF had to

have a technical diagnostics done of their operations. The question, I believe,

is revolving around the pellet plant, which would be for Company A on the

Northern Peninsula. In that case, there was a diagnostics that was performed on

their operations, which would have factored in all of the ongoing situations

around what was happening on the Northern Peninsula.

At the time in question, I cannot remember exactly the date, but

when the initial proposal was put together, the idea of a pellet plant was

tabled by the proponent, by Company A, as a means of finding an outlet for

small-diameter wood that could not be sawed. At the time, Corner Brook Pulp and

Paper were unable to purchase wood from the Northern Peninsula, pretty well

shutting down all of the sawmill industry. For that reason, the consortium on

the Northern Peninsula of operators got together and discussed it.

One individual stepped forward, Company A, with the idea of

perhaps looking at a pellet plant on the Northern Peninsula. That started the

process of their application into the FIDF. We secured the services of

FPInnovations to visit his operation and to do a diagnostics of his operations

around the sawmill. Obviously, they could not diagnose on the pellet plant; it

was not in existence then. That did enter into the discussions.

In the report that was presented to us from FPInnovations, the

large bulk of it revolved around the idea of sawmill improvements and the

addition of new kilns because the facility did not have the ability to dry wood

at the time; and the idea of the pellet plant was there. As a committee, we

reviewed that proposal and the diagnostics. As part of our due diligence, we

contacted the Canadian Wood Pellet Association.

Four or five years ago when all of this started, we were fairly

new into it and it was our first opportunity to try to learn more about the wood

pellet industry. There is a lot to learn. It is not as simple as what most

people would think it to be around markets, around making pellets itself, too.

We tried to bring in some experts from outside to guide us in our decision

making.

At the time, I think the Chair of the Canadian Wood Pellet

Association, Jim Swaan Gary, I believe?

MR. FORWARD: John Swaan.

MR. EVANS: John Swaan. We had a small workshop in Deer Lake

at the time. We discussed this proposal and he presented some information around

the whole wood pellet industry. I guess it was from that point forward that the

project started to proceed and we started graphing up a submission for Cabinet's

consideration.

MR. OSBORNE: Okay.

Some of the questions that I am going to ask are probably most

of us around, or at this hearing today understand the answers, but this is a

public meeting and for the benefit of others. I believe it was $11 million

provincial money put into this wood pellet plant. There was ACOA money put in as

well. Are you able to identify the total amount of public investment into this

project?

MR. EVANS: Yes, and that was some of the supplementary

information that we did go back and retrieve. There was some additional

information, as suggested, that we did receive. The total amount, excluding HST,

was $9 million from the Forest Industry Diversification Fund. In addition, there

was another $1 million for the Green Fund. I do not have the exact ACOA

contribution, but there was a total of $9.268 million, excluding HST.

MR. OSBORNE: Okay. So with the HST it would be just over $11

million?

MR. EVANS: Excuse me?

MR. OSBORNE: With the HST it would be just over $11 million

in total?

MR. EVANS: Yes. I have not done the math on that but another

13 per cent on top of that, yes.

MR. OSBORNE: Okay.

MR. YOUNG: Just to clarify Jim's statement on that.

The question was, how much of government money was put into the

project? A lot of people get mixed up. There is more than one project. There are

actually four projects that were combined. So you have to keep that in mind.

The total amount that was invested by the Government of

Newfoundland and Labrador was $10 million. Seven million was earmarked for three

things. It was for the pellet plant, the construction of a pellet plant, sawmill

modernization, as well the construction of two new kilns, as well as a scaling

office and that sort of thing.

Two million dollars was allocated towards a regional wood yard,

which benefitted all of the contractors on the Northern Peninsula. That came up

to $9 million. Another million was earmarked by the Green Fund, which was

administered by a different group than us. That was earmarked directly for the

pellet plant itself. The total amount of contributions that went into the

Northern Peninsula back then was $10 million in total, but it was for four

projects.

Am I right, Gary?

MR. FORWARD: Yes.

MR. YOUNG: The question about the HST being added on to it,

that really had no bearing on the question. It was a $10 million investment

before HST would have been entered into it. That was the amount that was

invested.

MR. OSBORNE: Okay.

Just a question on the HST it was identified by the Auditor

General that the department reimbursed Company A with approximately $1 million

related to claims, including HST. Should that not have been a federal

reimbursement, as opposed to a provincial reimbursement?

MR. EVANS: Yes, that would be a federal reimbursement, the

HST; but when the original question arose we made the HST an eligible expense,

so that was an error on our part, or an omission, so we went back and we

continued to calculate and receive their invoices. The total invoices for the

project, excluding HST, were $10.33 million. The proponent could then apply for

an HST exemption on top of that.

MR. OSBORNE: Okay.

In doing the analysis on the feasibility of the wood pellet

plant, the pre-feasibility study had identified the fact that Canadian

consumption of wood pellet products was low and that the European market for

wood pellet products was growing at a much faster rate than the North American

market for wood pellet plants.

What type of analysis did you do on the future projected market,

both residential and commercial; and if you could break it out into residential

and commercial for me on the market ability within this Province and within

North America, as well, on wood pellet products?

MR. BOWERS: In the initial application there were

projections: a ten-year projection on transportation, marketing issues, storage

issues for pellets, as examples. The initial application looked at really three

areas of potential markets, local markets, in Newfoundland and Labrador, but

also to some extent in Atlantic and internationally as well.

So, at that time in the first instance of review, the Committee

considered that information, but later followed up with more questions to the

proponent to get a better insight into the market conditions. Throughout that

evaluation it became clear that there was more potential, really, in the

international market than there was, say, locally, because uptake receptor

capacity was pretty low locally and the markets at the time were generally

favourable given a number of factors.

Some of those factors included the exchange rate with the weaker

Canadian dollar against the Euro at the time, the price of pellets was high at

the time, and transportation costs were relatively low. You could, for instance,

ship lower volumes and make that feasible. So, all of those considerations were

taken initially as holistic conditions of the marketplace.

There was no detailed breakdown based on local Atlantic Canadian

conditions as such, except for the fact that our own in-house research, our

discussions with the Wood Pellet Association of Canada, and with the proponents

submission indicated that the best possible scenario and the highest potential

would come from the international marketplace. The decision was made at that

time to focus on international export.

CHAIR: We should move on to Ms Perry now.

MS PERRY: I do not have many new questions for you; I

thought you guys did a great job at the last hearing. I did want to ask as a

follow-up to one of the questions that Mr. Osborne just asked in terms of the

$2 million spent on the regional woodyard, how is that project working out? Is

the woodyard still in operation? Is it something that is being used by the

loggers in the area?

MR. FORWARD: The reason that the woodyard was created in the

first place was that at the time in 2008 Corner Brook Pulp and Paper decided

that they were not going to receive any more pulpwood from the Northern

Peninsula; hence, Company A's sawmill could no longer operate.

The woodyard was created to keep wood moving on the Northern

Peninsula to support all the harvesters that were there. The idea was to

accumulate the wood in the woodyard and then when a pellet plant became

operable, it would draw down on the wood that was in the woodyard. The woodyard

was very successful. It kept industry operating during the construction of the

plant.

As well, we had devised a

schedule of harvest with the

harvesters in the region, so all the wood that was harvested by these harvesters

went into the woodyard and the industry continued for that year. It was very

successful and it really kept industry going during that period.

MS PERRY: Okay. Thank you.

That is it for me, Mr. Chair.

CHAIR: Mr. Murphy.

MR. MURPHY: Thank you very much, Mr. Chair.

I want to come back to the whole aspect of the business plan. I

guess this would be for Mr. Bowers, probably. It sounds like you have a handle

on it according to the first couple of questions. The ten-year projections you

were talking about when it comes to wood pellets, those projections at the same

time, when they were talking about the markets everywhere, and the variables

that were out there, for example, like the changing Canadian dollar and that

sort of thing, were those variables talked about in the business plan at that

particular time? Were they brought forward?

MR. BOWERS: In the initial business plan, there was limited

information on all of those factors. That was in fact the reason we went back

with our redirect to get better insight. Through a series of discussions with

the proponent, by the time we got to preparing a presentation of funding then

those factors were examined and understood.

One of the factors, just to give you an example of what we

considered, was the pricing at the time. If you look at the pricing of

transportation and storage, for instance, of pellets prior to shipping, we had

estimates there that needed to be compared to the potential profits that would

come from selling in the open market. That was understood at that time.

As an example, $42 to $46 a ton for the transportation and

storage cost versus $200 or $230 a ton in the open market, so the numbers were

very much in favour of going forward on that basis.

It was a process of gathering information through time because

all of that information was not readily available on the marketplace or on the

assessment of cost. We had to go back through a series of redirects to derive

what those numbers would be.

MR. MURPHY: Okay.

So when they were coming out with the business plan, though, was

that part of the problem, really, why the final plan was not completed at the

end of it, that the information was changing?

MR. BOWERS: Yes, you are right. Part of the issue was we

rapidly entered into 2009-2010 in the banking downturn and some of those

conditions that I described there changed on us very rapidly. All of a sudden

these earlier estimates then had to be adjusted, and then we were making

decisions on whether it was feasible or not, given those changes that had

occurred.

At the end of the day, the assessment and the analysis by the

economic development officers on that file indicated that it was feasible. It

was still viable to go forward. There was no question, but the numbers were

somewhat different than they were in 2008, for instance.

MR. MURPHY: At that particular time, when the feasibility

option was still there, I take it at that particular time the transportation

costs overall we are talking about the transportation costs, for example, to

bring the product down to Corner Brook and Stephenville for shipping. I want to

come forward a bit now up towards 2010-2011 because, of course, the

transportation costs did change and, of course, the problem with the plant up

there now, they are talking about having to export directly from Roddickton.

I am wondering, at what point did they realize there was a bit

of a problem here, that they would need an export facility put in there? In

other words, more government money was probably going to be needed at that

particular point in order for the project to carry on. Was that particular

aspect, the possibility of rising transportation costs, brought up to the

department at that particular time in the ten-year assessment that they would

have done? Did they talk about that possibility?

MR. BOWERS: I cannot recall if there was a specific time

when people realized that, but if I go back to the first scenario where we

looked at say $42 to $46 a ton, any port, let's say from Port aux Basques to St.

Anthony, would have potentially worked under that scenario.

Then as the numbers changed, well, the greater distance from

production meant the less probability of making a profit because of

transportation costs. So it is basically scaling back as those numbers change. I

do not recall which specific point someone said, or came to realize: Well, this

is only feasible now, let's say out of St. Anthony or out of Roddickton as

examples.

There were some other considerations around that conclusion.

Apart from the cost, there is the infrastructure itself, whether you could get

in large enough ships with bigger volumes to offset those additional costs.

Those discussions went on, but as to the exact date, I do not have that in front

of me; that date, or dates even.

MR. MURPHY: Okay.

So as far as we know right now, we do not know if that was

talked about, for example, upon first approval of the monies being paid out for

the project. We do not know if that was covered.

MR. BOWERS: I think it is fair to say, and my colleagues

could correct me on this, that the various scenarios were discussed, the what if

scenarios. Obviously, if we could transport from a source at the site or near

the site, that would be more preferable, that would be better. That was talked

about, but I am not sure there was an analysis on a given day on that particular

issue.

MR. MURPHY: Okay.

When they presented their plan, did they have a reference, for

example, of the people they would have gotten the best advice from when it came

to this, or did they go anywhere outside to get help with their business plan as

regards to putting together the ten year?

MR. BOWERS: The department assisted, actually, in directing

them to consultants. They had their own contacts in Europe, for instance, with

companies in Europe. There is an organization called Forest Product Innovation,

FPInnovations, which is a federal government group that works very closely with

the Canadian Forest Services with Natural Resources Canada. They were consulted

a number of times, as were some other experts on the cost of pellet production,

the cost of transportation.

I would say, just as an aside, that maybe the Wood Pellet

Association of Canada would be the primary point of contact for that kind of

information.

MR. MURPHY: Yes, okay.

I was just wondering, because in the Auditor General's report on

Page 303, it says here in the first bullet, we can go there sorry the second

bullet, "there would be issues with transporting the wood in a cost-effective

manner which would be an impediment to the company".

I am just wondering if anybody, for example, at the company

might have brought this up to the government, if they might have been looking

for additional assistance there, or if the possibility of the shipment facility

from Roddickton might have been talked about then.

MR. BOWERS: In some of the redirects back and forth to the

company, to the proponent, Company A, the department did discuss some of those

constraints. We wanted to feel comfortable as a department that the point of

shipping, the storage facilities, and the cost factors were such that this would

be a viable enterprise. Those kinds of discussions occurred, department to the

proponent.

In the initial application, apart from the projections and the

possible port selections, that was not scoped out in detail. That was one of the

questions the Auditor General pointed to, and we concur with that. That we had

to go back for more information, but at the time of the presentation of funding,

we had a lot of that resolved.

MR. MURPHY: Okay.

When it comes to the scope here in that particular bullet, I am

just wondering, has the department done anything to make sure that it was going

to be looking out for things like that in the future?

MR. BOWERS: I will make a comment, and maybe Jim can add.

One of the things that I think came from this process again,

the point that we concur on with the Auditor General is the degree of

monitoring around these large projects needs to be enhanced. We have been very

concerned about going into these kinds of projects into the future without a

proper accountability framework set up where we can look at the objectives and

milestones and outputs.

MR. MURPHY: Yes.

MR. BOWERS: We are very aware of the need to look at that

monitoring side much more rigorously. There is a commitment on the part of the

department to address that, obviously, going into the future.

MR. MURPHY: Okay.

I wanted to ask another question, too, as regards to the numbers

of employees that were talked about in the plan, the realization about the

number of employees they were talking about. I wonder if you might have a

specific breakdown of exactly where the 322 employees were going to be coming

from.

The reason I ask that is because of a company in Nova Scotia the

other day that shipped off 25,000 tons to Belgium, but they only had thirty

employees. I am wondering about the disparity of the numbers here when it comes

to what I am hearing out there.

MR. EVANS: I can start the answer and maybe Wade or someone

can fill it in.

I think with the Nova Scotia company, I do not know the details,

but the majority of the jobs in this case would be from the harvesting sector:

harvesting, trucking, forwarding, and in-woods processing. The pellet mills

themselves generally, depending on the size, certainly, would employ thirty, to

forty, to fifty people. Then you get more in shipping, transportation, and those

things.

My thought would be the majority of the jobs on the Northern

Peninsula my recollection in the numbers is the majority came from the

harvesting sector. I do not have an exact breakdown here.

MR. MURPHY: Okay.

MR. FORWARD: I would just add that this project on the

Northern Peninsula was really supporting the entire forest industry in the

region. Not only were there jobs from a pellet plant, there were also jobs from

the sawmill industry. There were also jobs, as Mr. Evans has mentioned, from the

forest industry, from the harvesting, and also all the trucking associated with

bringing that product to market. In reality, it was the entire forest industry

we were talking about with the 322 jobs.

MR. MURPHY: Yes. Okay.

There is nothing else I can think of right now, Mr. Chair, if

you want to pass that on to one of the government members.

Thanks, gentlemen.

CHAIR: Mr. Parsons.

MR. K. PARSONS: I know I have asked this question before,

but I just want you to explain. I know at the time the markets you talked about

were international markets and we talk about the domestic markets, basically

here in Canada, and we all know what happened in 2008 with the economy right

around the world. Perhaps you can explain to us what effect it had on the whole

industry, the pellet industry itself, because I know due diligence was done in

looking at these markets before and, like you said, the international market

was where you wanted to attack. Just explain to us what happened to those

markets and why the downturn had such an effect on the pellet industry.

MR. BOWERS: In 2008, in particular, and going into 2009, the

forest sector itself came under huge stress and duress in the marketplace and

the Canadian pulp and paper industry in particular went into a downturn. There

are a lot of reasons for that downturn; it is related to stronger competition in

some parts of the world where countries are growing trees in, say, ten years

versus seventy years to grow a good black spruce in Newfoundland. So,

competition is much tougher than it used to be. The exchange rates always affect

us daily.

There were a number of factors, as I said, from a competitive

standpoint. The pulp and paper sector and the forest sector in general went into

a sudden downturn. Sawmills and pulp mills today in most of the world, in

Scandinavia, in particular, the US and Canada, are more tightly integrated with

the pulp and paper sector. So, the pulp and paper sector and the sawmills are

working in harmony through an exchange of saw logs for chips and so forth. So

when one dimension is affected, it ripples completely through the system.

What we were faced with during that downturn was a situation

where if we had not brought in a program to support the competitiveness of this

industry, the sawmill industry in particular, most likely that industry would

have died for the most part. We would not have had a number of strong,

integrated sawmills in the Province today; there is no question. At the same

time, there is a great risk that we would have lost the pulp and paper sector as

well because of the integration.

If you look back at the criteria of the FIDP and what came out

of that program, we have two mills that are highly productive today, they are

much more innovative, they have been modernized, and they are working better,

employing people, producing more than ever before.

The third mill, Company A, we are still working with Company A

to try to make that viable. We are confident we are going to get there with that

company as well, the company on the Northern Peninsula. There were some

extraneous factors around that operation we talked about the fourth facility a

minute ago; that was one of them which made that challenge more difficult than

the other two; but the bottom line is we probably would not have an industry

today without this program. This was a very successful program that helped carry

that industry through the toughest of times for the forest sector.

We are beyond those times now. Today prices are up. Prices are

good today for the lumber industry in particular. We are competing in Atlantic

and even in the Eastern Seaboard better than we have ever competed before.

Things are positive and a lot of that came from the decisions here to go forward

in support of this industry.

MR. K. PARSONS: Basically it is a successful investment,

what you are saying, in the forest industry because the economy at the time was

in a downward spiral and it needed that boost.

Just getting back to Company A, and we look at the pellet

industry, what do you see in the future for the pellet industry? We do have a

state-of-the-art facility right now. I think it can be up and running in a short

period of time. I am just wondering where the pellet industry is in the future.

Is it something that is not going to be viable? Where is it?

MR. BOWERS: If you look at the product line and what we call

the full value chain of forestry from upstream harvesting all the way to

downstream with new products, pellets are not at the top of that chain in terms

of value. We recognize that. There are other, more novel, and more lucrative

products out there, but pellets are certainly a viable product to produce. They

are in demand; they will be in demand, according to our intelligence, for the

next twenty or thirty years, from everyone we talk to.

There is also the fact that fibre will see an increased demand

in a variety of forms, including pellets. The demand for wood fibre, even though

the pulp and paper sector is declining, is increasing and it will increase over

the next ten to twenty years. A lot of people need cellulose and lignin

products.

Pellets have their place on that value chain. They are not the

highest, they are not the lowest, but it is a viable product and it is a product

that you can make a profit with given the facilities that we are promoting. We

are seeing evidence of that in the Eastern Seaboard in the US; we are seeing it

in other parts of Canada.

Pellet plants in BC, for instance companies like Pinnacle, are

producing pellets in plants in BC, shipping them down the West Coast of North

America, through the Panama Canal, and to Europe. They are five times the

distance from the marketplace than we are and they are still making profits. We

see that continuing.

MR. K. PARSONS: I have just one question. I know, Mr. Young,

you wanted to answer a question there when he asked a question about

transportation and they were talking about differences between having it locally

there right on site versus where we were with shipping it out of Stephenville or

Corner Brook.

Is there a preferred reason for it coming from Corner Brook or

would it be better to do it right there in Roddickton?

MR. YOUNG: Just to go back to the discussion we had from the

gentleman's question earlier around transportation, I think the question was

around local versus export markets. We really did not touch too much on the

local market; we did speak on the export market.

Really, there are three markets around the pellet wood industry.

There is a local market for residential use, which is a bag market, or there is

a bulk market for local industry. That would be for industrial conversions,

where you would move pellets industrially in a larger fashion. That is kind of

one market here.

It has not really been developed here in Newfoundland yet. It is

kind of like the chicken and egg sort of thing; you almost need pellets being

manufactured before you start seeing companies doing a conversion into burning

them versus burning oil or electricity. There is a bit of a stall, I guess, on

the industrial conversion around here in Newfoundland.

The residential market here in Newfoundland is quite well; it is

doing quite modest gains every year. We probably started off in an industry of

probably only 100 or 150 stoves here in Newfoundland and that since has grown to

probably 1,500, probably more, maybe even around 2,000 now.

The residential market is doing quite well here in Newfoundland,

and it is being sustained by companies outside of Newfoundland. There are four

or five manufactures in New Brunswick, Nova Scotia, and as far away as Quebec

shipping pellets into here into Newfoundland.

So, that is that market. The other two markets that are out

there are the bulk market for energy, so displacing coal and using wood pellets

for energy needs. That is the big industrial users, Drax, and a whole bunch of

other companies in Europe that are using wood pellets as a way of displacing

coal. There are two means of doing that not two means of doing it. The reason

they are doing it is that they are finding that it is cheaper in many instances

to burn pellets than it is to burn coal, and a lot of the European countries

have carbon emission standards they must meet by 2020. The only way they can get

that is to burn pellets versus coal. The emissions on pellets are dramatically

less than would be the emissions of burning fossil fuel such as coal. That is

the industrial energy market in Europe.

The other market in Europe is the residential bag market, and

that is probably the one that we are seeing the biggest gains in, in the last

year or so. My colleague, Gary, just attended a meeting in BC where this was one

of the main discussion points: markets in Europe, where they are going, what are

they at now, and what is the future in the next ten or fifteen years.

Yes, the industrial market will continue to increase. We can

bring you charts and show you what it is looking like for the European market

around that, and there will be significant gains or requirement for demand for

industrial pellets, but what is happening in a lot of countries like Austria,

Denmark, and Germany, we are seeing a real large growth in the residential bag

market, and those numbers are taking off, too. We think, from the industry

advice that we are getting, that they are both going to meet and the demand for

pellets is going to be divided into two markets: the industrial market, and the

residential market in Europe.

We are still behind that in North America. In terms of

residential, it is going to take a lot longer, I think, for us to adapt the

technology around burning appliances that you need for wood pellets, but it is

getting there. We have seen a dramatic increase in Europe in the last six months

to a year.

Gary, I do not know if you want to add anything to that.

MR. FORWARD: One of the reasons why we are not seeing the

same uptake in North America is because of cheap natural gas, like in Ontario

and out West. Pellets cannot compete with natural gas.

As Eric mentioned, I attended a conference, and there was great

interest in the fact that the heat market in Europe has really, really taken

off. A lot of the large industrial users now are starting to change the

configurations of their plant to start to serve the heat market. The heat market

is being driven by the high price of fossil fuels in Europe. People are out

looking for alternatives to these high prices. Both markets look very positive

but the heat market is starting to really take off.

MR. K. PARSONS: Okay. Thank you very much.

Mr. Chair, that is it for my questions.

Thank you.

CHAIR: Mr. Osborne, do you have any questions?

MR. OSBORNE: Yes. Thank you.

Just to carry on, I guess, where I left off. There are many

unanswered questions, including transportation methods. In earlier answers to

one of the other members here today, we talked about the fact that not all

answers were sought in how to transport the wood pellet products to industry, or

not all methods of transportation were scoped out properly.

How could we properly determine the transportation costs if not

all of the homework was done? Did we get a true cost of transportation of

getting the wood pellet products to market, primarily to Europe, if all of the

answers were not provided?

MR. EVANS: I believe we mentioned earlier, in the business

plan there was an estimate of $42 to $46 per ton for transportation. That, in

our opinion, would essentially cover the cost of transportation from any port on

the West Coast, as we said, or the Northern Peninsula. That was supported by the

Canadian Wood Pellet Association and other industry consultants. Our analysis

indicated that was sufficient.

MR. BOWERS: To get at that with more rigour, one of the ways

we could get at that is basically model out a number of scenarios. We were using

the ranges of costs for those transportation issues, and we knew the price of

pellets, for instance. The only way I could see easily to get a better indicator

is to run a number of models or a number of scenarios using upside and downside

on those figures, and as you depart from that you are basically assuming more

risk. So it comes down to managing the risk of the numbers.

If we look at the $42 to $46 range, they are quite favourable.

We were comfortable with that. We did not have as much of a detailed description

on market and market potential costs as we wanted. We were confident of the

markets within our own department, but we did not see that reflected as well in

the initial document. That was one of the reasons we went back to the proponent

and said we would like you to build that out somewhat with us, which the

proponent did. Those numbers unto themselves are quite favourable for pellet

production and for the marketplace.

MR. OSBORNE: Everything I am hearing here today would

indicate that this should have worked. Why did the pellet plant not work?

MR. BOWERS: My initial thought on that is we rapidly went

into a condition where those prices that we had forecasted changed. The exchange

rate changed. The fuel costs went up for transportation. It happened very, very

quickly within that year period. All of a sudden these scenarios that we had

anticipated were changing on us. That was one of the reasons we were back and

forth with the proponent over an extended time to try and come to grips with

these changes.

MR. OSBORNE: As a business person myself, in just reading

the pre-feasibility study and seeing there were over 300 producers of wood

pellet products in Europe alone, that the manufacture of wood pellet products in

Canada was exploding, for lack of a better word, in part because of what had

happened in British Columbia in the devastation of their forest with the wood

beetle and so on. Looking at that, and knowing prices are based on supply and

demand, and knowing that supply was increasing at a tremendous rate, how could

you not have determined that the supply and demand ratio would determine that

the cost of wood pellets would sell for considerably less than what you had

determined?

MR. BOWERS: Yes, that is a good point. We did take into

account those competitors and what was changing in that market.

We have to remember, in Newfoundland's case the big advantage we

had with those other players, even though BC did have a lot of surplus with

mountain pine beetle killed wood, is that we have a strategic advantage in

location. Our location set us up for Europe much better than anyone else on the

continent and we could trade off some of that advantage against some of these

higher costs. That was one of the factors in there.

The second factor was in the long-term analysis of the

marketplace we knew there were off-take agreements that were there to be

exploited and to be used. In fact, Company A did have discussions for an offset

contract for the marketplace. The market was assured, it was confirmed. Our

strategic advantage on transportation in particular offset some of those other

considerations, which I agree with you, those are real considerations. It is

something that we did think about and we had to take into consideration.

MR. OSBORNE: What was missing from the formula with this

particular pellet plant if we had strategically, we were closer to the market.

We had that advantage, yet other wood pellet producers in Canada are still in

operation. What was missing with this particular operation?

MR. BOWERS: One of the challenges that came to the

forefront, as we went through time, was the port and shipping issues. In order

to get large volume vessels in, we did not have port facilities that were easily

available without going to say Stephenville or Corner Brook, which was the

initial plan. Then with the transportation costs higher, that was not feasible.

Really, what I am saying is it comes back to whether we could

make St. Anthony or Roddickton a viable place for export. That is still a

challenge today, and something we are working on.

MR. OSBORNE: That brings me back to my initial question.

Looking at the fact that wood product from the Northern Peninsula was not

considered viable for Corner Brook Pulp and Paper because of transportation

costs, yet looking at the ports to transport the product to Europe you would

have to go to Corner Brook or Stephenville. Was that not factored into whether

or not it would create challenges for this particular operation?

MR. EVANS: I will answer the first part of that about Corner

Brook Pulp and Paper. One of the main reasons they discontinued receiving

pulpwood from the Northern Peninsula was transportation and high cost, but it

was also species related. It was balsam fir and they wanted more black spruce in

their mix, higher yields with stronger paper, and cheaper to produce the paper

from black spruce. That was probably the main reason for them. Now, it was a

transportation issue as well.

I will let you finish the rest of it.

MR. BOWERS: Just to add, maybe, to the discussion, as you

suggested, we did consider those factors. One of the solutions we offered and

discussed at the time was some of the constraints around shipping and ports

arises because of bulk shipping. You are shipping bulk product. One of the ways

to address that is to try to ship products in bag form, put in bag lines and

ship bags, which means you could do it more efficiently from ports like

Roddickton or St. Anthony.

In our discussions about that very issue, some of it hinges

around whether we can or should export in bulk or use a bag market, as Eric

alluded to earlier. That was part of the solution. What I am suggesting is it is

part of the solution to that challenge.

MR. OSBORNE: Okay.

In the pre-feasibility study it does indicate, and I will quote,

"High transportation costs for moving pulpwood to markets in Corner Brook, along

with a soft market for paper has made the resource less attractive to the pulp

and paper industry." So, that was known in the pre-feasibility study.

There was a docking facility in the Northern Peninsula, if

memory serves me correctly, that the federal government had decommissioned and

removed that I understand the Province could have bought for a dollar. Am I

correct in saying that?

MR. EVANS: Do you know the location? I am not aware of it

myself.

MR. OSBORNE: I am not sure. I will do some further research

on that, but I understood there was a facility that the federal government had

decommissioned. So, you are not aware of that?

MR. EVANS: Well, I know there was a study done on different

ports around the Province. I am sure it is in that report, but I cannot recall

it myself. I do not know if Gary can speak to it, or Eric.

WITNESS: It is in Roddickton.

MR. OSBORNE: It is in Roddickton?

MR. YOUNG: Yes, I can address that question. I think the

port you are alluding to was actually in Canada Bay itself, right in the Town of

Roddickton, and it was normally set up for the fishery industry. You are right;

it was condemned by Transport Canada.

As for if it could have been sold to Newfoundland, I am not

aware of that; but I do know why they condemned it. It was because of the

moorings and the pairings that were there, and it required substantial

investment in order to bring it up to speed. The other problem with that is that

it is not deep enough there. You would have to do significant dredging of that

port in order to bring in these large vessels.

There were a couple of issues of using that area there. Jim is

right. When an analysis was done a number of years ago around the whole Northern

Peninsula area about shipping ore, actually, out of Roddickton marble that was

up there at the time that is who commissioned the study of the ports.

The best location they identified was immediately in front of

the old hydro station that is there, adjacent to Canada Bay Lumber basically. I

do not know if you are familiar with the geography there. The port in town

itself was not identified as a suitable port, mainly because of the depth and

the work that was needed on it. In terms of water depth and location, the prime

location for any large vessels would have been off the Canada Bay, hydro area;

right there in Canada Bay itself. They identified a couple of other spots, too.

That was the reason why the port was condemned by Transport Canada at the time.

CHAIR: We should go to Mr. Collins now.

MR. S. COLLINS: In the interest of time and for the fear of

being repetitive, I do not have any further questions. I want to thank you for

the answers you have given, not only today but in the previous meeting as well.

Again, if some other folks here have additional questions, I will certainly

CHAIR: Mr. Cross my have questions.

MR. CROSS: No, I am fine.

CHAIR: Mr. Murphy.

MR. MURPHY: Thank you, Mr. Chair.

I have just a couple of more questions. A basic question about

the insurance policy that is carried on this I know that the present policy is

up on March 31. The present coverage right now, who is paying that bill? Is it

the taxpayer?

MR. EVANS: I will initiate the answer and my colleagues will

finalize it. Yes, the Department of Natural Resources right now is paying the

insurance premium on that, on the facility.

MR. MURPHY: I am just wondering when it comes to the

insurance

MR. FORWARD: (Inaudible).

MR. MURPHY: Sorry, go ahead.

MR. FORWARD: Just to add to what Mr. Evans just said.

Actually, it is being really borne by the company. We extended their FIDF loan

to cover off the insurance, so the money that we provided for the insurance is

in the form of a loan. It is just tacked on to their $7 million loan.

MR. MURPHY: Who is going to be paying that after March 31?

Is it still going to be the company or is it going to be the government again?

MR. EVANS: I guess we will have to address that when the

time approaches, which is within the next month-and-a-half, but we will take the

right steps to ensure that the Government of Newfoundland and Labrador's

investment is insured and protected.

MR. MURPHY: Okay.

The last couple of questions I have has to do with doing due

diligence. I guess it will come back to Mr. Bowers because he did touch on it

earlier. You mentioned about putting the mechanisms in there about due diligence

and the reporting mechanisms. Has anything been put in place right now; and if

those mechanisms are there, could you briefly describe them and give us an idea

of what is there so that we can be looking out for it next time?

MR. BOWERS: The extent to which we have addressed that is

that we have had our in-house planning and discussion going forward and looking

at any potential new initiatives that come up, and there are several now that

might emerge. We have only discussed right now the framework and how we would do

that. One element of that relates to a committee that I am trying to establish,

a steering committee around fibre supply and the future management of

initiatives and projects related to fibre supply.

I can say we have had the discussion phase and we are looking at

how we would set it up in terms of a proper accountability framework, but we

have not taken any overt moves or made any changes in our human resources right

now to build the structures around it at this point.

MR. MURPHY: Okay.

MR. EVANS: One thing I should add there, Mr. Murphy, is, as

CEO, I take responsibility for this from both the agrifoods and the forestry

components. One thing we did initiate within the last month, I guess, because we

do have audits on both sides and there are some common elements or findings in

the audits from a procedural point of view, monitoring perspective. We have all

directors working now. It was initiated about three weeks ago, I guess, and

trying to combine and implement strategies and procedures right across the board

in how we manage not only financial programs but other aspects of our programs

as well.

We are going to have a committee struck as well in addition to

Wade's committee.

MR. MURPHY: Okay. (Inaudible) looking at that.

Mr. Chair, I have nothing else and in the interest of time, I do

not know if anybody else has anything, but I think most of it was pretty much

covered in the last session.

CHAIR: I have a few questions. I will go back to a Committee

member first. Are there any members with questions?

MR. OSBORNE: I do.

CHAIR: Mr. Osborne.

MR. OSBORNE: Again, in the pre-feasibility study it says

that residential usage of wood pellets is expected to significant growth once

pellets are readily available. Did we see significant growth in the use of wood

pellets for residential purposes in this Province?

MR. BOWERS: I can answer, and I think my colleagues have a

little more insight into this. I would not characterize it as significant

growth. We have three industry companies now using pellets in the Province, but

the question of converting domestically is rather complex, because the challenge

there is to convince people to invest in stoves and facilities to utilize

pellets, yet we do not have a supply. So it is a bit of a chicken and an egg

situation. I think if we had the supply we would get more uptakes domestically,

probably both industrially and domestically. We have not seen a significant

uptake at this point.

Gary, you might want to comment.

MR. FORWARD: One thing I would add is that prior to the

FIDF, we estimate the number of wood pellet stoves in the Province were around

300. It is probably up around 1,200 now. There is probably a market for 3,000 to

4,000 tons of wood pellets in the Province.

Also, there have been some industrial conversions with some of

the greenhouses in the Province. Right now we have three greenhouses that have

switched from oil to wood pellets, and they are receiving their wood pellets

from local producers. I would estimate the industrial demand would be around

1,000 tons. It is modest, but it is growing slowly.

MR. OSBORNE: I know in the pre-feasibility study there were

great expectations for growth both residentially and commercially in the

Province. We did not see that.

I guess we all have roots and relatives in rural Newfoundland.

Even when government announced the incentives for wood pellet stoves, I really

found it difficult to believe my relatives would give up the ability to cut wood

for free, bring it to the back of their home and saw it up into fire logs in

exchange for buying a wood pellet stove where they would have to buy wood

pellets. I just thought that was really an unrealistic expectation, to expect

that many Newfoundlanders and Labradorians would give up the traditional habit

of burning wood for wood pellets.

How would you explain the unrealistic expectation as outlined in

the pre-feasibility study?

MR. BOWERS: I do not disagree with you on the principle that

as a people our culture is very much about that attachment to the land, to the

forest in particular. There will need to be a cultural shift there in the way

that people think if we were going to make that transition.

At the same time, one of the arguments for expecting some of

that change is pure economics. If people can save a dollar then they may also

change some of those habits. They might still go into the woods and do some of

that, because that is part of who we are, but there is also the reality that

fuel is expensive. Energy costs are increasing, and if people see a means to

save dollars.

The pellet industry is not too unlike the traditional industry

in the sense that you are still burning a wood product. I do not know if the

cultural shift is that great, but I would agree that it will take some

adjustment. It will take a transition if we have that expectation.

MR. FORWARD: Just to add, maybe a couple of years ago we put

out a wood pellet appliances survey. What we found is that most of the uptake

was from people who were replacing fossil fuels. It was mostly urban centres,

where people still enjoyed the wood heat but did not want to go out in the

forest and spend the time at it. There are two opinions there as to a lot of

people still want to burn wood and go out in the forest and cut their wood, but

there are a lot of people who want to get away from that because it is a lot of

work.

MR. OSBORNE: I am going to go back to a question I asked

previously, just to ask that again, because I am not sure if I am clear on what

the response was.

That is, there are other wood pellet operations in this country

that sell into the European Union and they managed to survive all of the

challenges you said the operation faced, whether it was the currency challenge

or transportation cost challenge, or fossil fuel, the cost of heating fuel. Why

is it that we could not compete and survive that when other companies in Canada

did?

MR. EVANS: I will start again and maybe Wade can finalize

it.

I know in some cases across the country, especially out in

Western Canada where the mountain pine beetle infestation went through much of

British Columbia and Alberta, a lot of the wood there was fairly cheap. I think

the government gave some incentives to harvest it, and harvest it quickly, to

capture the volumes.

Every location has its challenges, and they had their shipping

challenges. Wade said we had an advantage here. In our case here, I remain

optimistic. I will get back to your question now in a second. We have a good

facility there. We keep working with the proponent and feel that we are going to

have something there in the very near future.

Some of the challenges were the shipping component. Some of the

costs did change. Maybe in other parts of the country there were other

advantages that helped offset some of the common issues that were in the

industry. The marketing we feel is there and it is still there. It is growing.

The shipping was a challenge. Labour costs we were competitive with other

components as well.

I don't know, Wade, if you want to continue with that.

MR. BOWERS: To reiterate Jim's point, I think given the

situation we are facing at the moment and the conditions we face, economic

conditions, I think we can compete. I think we are in a position at the moment

to compete. We have a few modifications, a few alterations to make. We need to

work out a couple of details and I think we can be competitive. I think that is

how close it is. I think most things are in our favour at the moment, still.

MR. OSBORNE: With the investment of public dollars in this,

though, shouldn't these details have been ironed out long before now?

MR. BOWERS: I think I would disagree on that from the point

of view that if you look at the investments made, they are relatively modest

investments in a major industry. There are huge costs involved in these

ventures, the pulp and paper sector, the pellet sector.

I think it is a matter of fine tuning, more than anything, what

we have right now. If we can look at a slight alternative to the way we market

the product. We have a few issues around ports. We are close to making this

viable. I am very optimistic that we can compete on pellets from Newfoundland

very optimistic. Every indicator points to the fact that we can and we should.

MR. OSBORNE: What do you expect those timelines to be? The

investment in this pellet plant was years ago and it is still sitting idle.

Taxpayers are still paying to ensure the operation and so on, which is sitting

idle. I appreciate your optimism and I hope you are right, but when do you

anticipate this hope to become a reality?

MR. BOWERS: Well, I cannot put a date on it, obviously. It

is something that will have to be decided by the government and by the minister,

but we are in constant discussion and we are in close contact with the

proponents virtually on a daily basis. All I can say is that I am looking to the

near future that is the best answer I can give you. In the near future, we

will resolve some of these issues.

CHAIR: Do any other members have questions?

Mr. Murphy.

MR. MURPHY: I have a question for Mr. Bowers. Are you saying

to us that there should be more taxpayers' money gone into that, with that

optimism?

MR. BOWERS: No, I am not saying there should be more

taxpayers' money. I think the private sector is always the best way to go here,

and that is what I am voting for.

Our role is to create an environment. As a government and as

officials, we try to create an environment to allow that to prosper. What I am

saying is that we need to put some more energies in, keep supporting the

company, and create the environment where the private sector can prosper. That

would be my view.

MR. MURPHY: Okay.

That is it, Sir.

CHAIR: I have a few questions.

Are you still working with the operator to make the plant work?

MR. BOWERS: Yes, we are still working very closely with the

company, Mr. Chair.

CHAIR: What is the nature of what you are doing? Is it

marketing, is it transportation, generally?

MR. BOWERS: Well, we are working on a lot of the issues that

came out of the original FIDP in terms of modernization, getting the mill more

innovative. We are working at a lot of factors to enhance the probability of

getting the mill back on line. It extends throughout the full value chain from

the harvesting sector looking at wood availability, fibre cost, permits, and

infrastructure. We are looking at all aspects we can look at to try to optimize

the conditions for the Northern Peninsula.

CHAIR: Now, some of the materials that you provided us with,

after being here last time, included a business plan or feasibility studies

based on different amounts of output. Do you recall the different production

amounts, different costs?

MR. BOWERS: I do not recall all the numbers at the moment. I

do not know if one of my colleagues can help us. Is there a specific question on

that?

MR. FORWARD: I believe in the report that you are referring

to there was some scales of production that would work more so than other

scales. Is that what you are referring to?

CHAIR: Yes, exactly.

MR. FORWARD: What was the question?

CHAIR: What amounts were analyzed or were forecast? What

amounts of annual production?

MR. YOUNG: The amount of production we are limited to the

forest resources on the Northern Peninsula. So, it is a tough question, when,

what is the proper size of plant that you can build on the Northern Peninsula.

You can go small and just target the residential market; you can go large, which

would be using all of the forest resources on the Northern Peninsula and

funnelling it towards a pellet plant. Or, can you strike a balance in between?

That is kind of what we looked at when we looked at the feasibility study. We

looked at a plant that could run around 75,000 to 80,000 tons. It was initially

talked around 50,000 tons, so

CHAIR: You say you looked at a plant that ran around 75,000

or 80,000 metric tons?

MR. YOUNG: Well, that would be the size of the plant that is

designed up there now. It was designed for 50,000 tons; however, it has the

capacity to do about 75,000 tons.

CHAIR: What I mean is the numbers that you sent to us with

the forecasts said certain amounts nowhere near 50,000 metric tons. Do you

recall how much the numbers were?

MR. YOUNG: No, I do not. I am sorry; I cannot recall that

report. That was the very first report around the idea of a pellet plant on the

Northern Peninsula. I cannot recall, to be honest with you, the volumes that

they had indicated in that. A lot of pellet plants are much large than what has

been designed. It is a very small plant; it is around 50,000 to 75,000 tons.

That is small, in terms of pellets. They range anywhere from 250,000 to a

million.

CHAIR: No, I am talking about the document that you sent to

us. I know the numbers. Are you saying that nobody among you read it, or are you

saying you cannot remember?

MR. EVANS: Are you referring to the Enfor report, Mr. Chair?

CHAIR: Yes.

MR. EVANS: Okay. We will have to refer to that there now.

CHAIR: Yes.

MR. EVANS: Okay.

CHAIR: Did it not start with 2,500 metric tons as a starter?

MR. EVANS: I will have to refer to the report; I cannot

recall the numbers off the top of my head.

MR. FORWARD: I believe I can recall the report, but I think

that was the consultant just put forward some scenarios that could potentially

work. I do not think he came out and recommended a certain size. A plant of

2,500 tons would be a very small plant, and it really would not be able to

support any industry on the Northern Peninsula. It would just be a pellet plant;

there would be nobody harvesting. You would run the pellet plant from the

sawmill residue alone, so it would not support much employment on the peninsula.

CHAIR: I believe there were three different ones. Was that

one 10,000?

MR. EVANS: Yes, 2,500 was the first one; 11,250 the second;

and 18,750 the third.

CHAIR: Okay.

MR. EVANS: The production, I think, in the plant on the

Northern Peninsula has a capacity of 50,000 to 75,000 tons.

CHAIR: Was there any other forecasting made on any amounts

other than the three amounts that you just indicated?

MR. EVANS: From a cost production perspective?

CHAIR: Yes.

The unit cost of production presumably, it is important to

know how much it cost per unit to be able to know how much to sell it for.

MR. EVANS: This was done in their business plan in

conjunction with their consultants and the Canadian wood pellet industry. It is

not in this report. This report here just gives three examples of three

different size pellet facilities.

CHAIR: When I ran those numbers through the calculator, my

calculator, it looked like the unit cost increased as the volume increased, and

I would have thought that the unit cost would have decreased as the number of

units went up.

Isn't it true that going from 2,500 to 11,000 the unit cost

actually got higher?

MR. EVANS: Yes, it is.

They are indicating it went from 152 to 187; the third one of

18,750 went down again to 155.92. I would have to get into the details of the

analysis to see why, but usually when the economies have scaled you would think

that the number of tons, as they increase, would be a cheaper cost of production

because the overhead costs would be factored into a higher volume.

MR. FORWARD: Can I just add something here?

The reason why is because once you move beyond a certain

production level, you have to go into the forest to harvest your wood, so his

raw material costs would go up as you approach 11,000 tons. At 2,500 it gets it

solely from sawmill residue, so that raw material would be already paid for. It

would be about $25 a cubic metre.

Whereas, as you move up into like 11,000 tons

or 20,000 tons, your raw material costs goes up to about $50 a metre.

I think it is directly related to the raw material costs.

CHAIR: Isn't it true that it only showed part of a year

operation? The 2,500 would only operate for quite a bit less, maybe twenty-eight

weeks or something like that.

MR. FORWARD: Yes, 2,500 tons would not be like a full

operation. It would be two or three months, probably.

CHAIR: Were these forecasts relied on by your department in

any way?

MR. EVANS: Yes, I think we did a combination of things. We

used this report to refer back to it. Also, the Canadian Wood Pellet Association

provided information, in addition to the consultants that the proponent hired as

well. It is a combination of at least three different experts, I will call them.

CHAIR: Was this produced before the monies were advanced or

after?

MR. EVANS: This was before, I would think. I will just

confirm the date there, but it was May of 2008, which was before.

CHAIR: This was before the monies were advanced?

MR. EVANS: Yes.

CHAIR: Other than this, did you have anything else to rely

on at that date?

MR. EVANS: There were two reports; these reports, in

addition to our own in-house expertise, the Canadian Wood Pellet Association,

and the consultants that were hired.

CHAIR: Okay.

If you were to produce 50,000 metric tons per year, how long

would the wood supply last on the Northern Peninsula?

MR. EVANS: The wood supply at 50,000 metric tons per year is

sustainable into the future. Our wood supply analysis is recalculated every five

years. It is on a sustainable basis. The harvest levels are sustainable into the

future as long as there are no major catastrophes. Historically, the

catastrophes such as fire or insects are built in. It is sustainable. It is

updated every five years.

CHAIR: In the area seventeen and eighteen combined, there is

enough to produce 50,000 metric tons year after year after year?

MR. EVANS: Yes, that is right.

CHAIR: Does that include lumber?

MR. EVANS: Yes, that is right. Yes.

MR. YOUNG: Just to add on to Jim's commentary. When this all

was developed the whole concept of the pellet plant was secondary. The concept

on the Northern Peninsula is to support the sawmilling industry. That is where

the economy should be focused on. We all became kind of caught up on the pellet

plant as we went along, but the sawmilling industry is the backbone here in

Newfoundland, especially on the Northern Peninsula. We have grown the forest up

there for our sawmill sector.

When we talked about this pellet plant, or when we received a

proposal from Company A and looked at it, it was around: What is the production

in a forest of a sawmilling industry? It was around 10 million feet of lumber, I

believe, Gary. If we had a sawmill in the Roddickton area that could saw 10

million feet of lumber, okay, that is what we are aiming for.

What are the residue by-products that are going to be produced

from that? It is going to be X volume. Well, what size pellet plant can be

supported? You would need a pellet plant in the order of 50,000 tons to support

a 10 million-foot sawmill, if you can follow the line of thought here. You have

sawmill residue that will be derived, and you would have all this pulpwood that

would be cut.

With Kruger down and not receiving any pulpwood from the

Northern Peninsula and maintaining our AAC in that area, maintaining the level

of harvest, which is what we wanted to do, you would need to scale a plant of

around 50,000 tons. That would absorb all the pulpwood, all the sawmill residue

that would be coming from it. It would also support Company A's sawmill of 10

million feet, as well as all the other independent sawmills up there. Let's not

forget, there are more sawmills on the Northern Peninsula. Their combined

production, Gary, is around 1.5 million, 2 million feet. I guess around that,

combined.

For around 12 million feet of lumber, you would need a plant of

about 50,000 tons. That is what the proposal came into. The documentation you

are referring to, the pre-feasibility study and that, 2,500 tons of pellets

would not support an industry on the Northern Peninsula, nor would 11,000. It

would be a very smaller industry and we would not realize the full potential of

the forest up there. We have been growing that forest for forty years with a

sawmill industry in mind. It is a different management prescription for the

Northern Peninsula than it is for other parts of Newfoundland. It was a sawmill

industry, not a pulpwood forest.

To support the full industry on the Northern Peninsula, yes,

that report, the pre-feasibility study was there that demonstrated what would

need to go into building a pellet plant and the various scales, but the level of

production that has been identified in there is far too small. It would not

support the industry. You could do it, but you would not be able to run a 10

million-foot sawmill. You would have to run a 3 million or 4 million-foot

sawmill, and that is not our objective. We want that mill to be running at least

10 million or 12 million.

CHAIR: Did you say it takes forty years to grow a saw log on

the Northern Peninsula?

MR. YOUNG: No, we have been managing the forests on the

Northern Peninsula for forty years. Softwood forests for balsam fir on the

Northern Peninsula is about seventy years, so the rotation age for balsam fir on

the Northern Peninsula is seventy to eighty years. As you get into managed

stands, you could reduce that down to probably fifty or sixty years for saw

logs. Pulpwood you could reduce it down even further, forty-five year rotations,

but for a saw log industry on the Northern Peninsula you are talking close to a

seventy-year rotation. That is what our management plan is.

When we do our forest management analysis, every five years we

redo the numbers. Land base goes into it, all the growth and yield information

goes into it, and the rotation age goes into it. That pretty well, through

management, derives what annual allowable cut we can do.

From our calculations from the Northern Peninsula, we can

sustain an industry in District 17 and 18 of around 12 million feet of lumber

and of about a 50,000-ton pellet plant; or, you can bring that wood back down to

Corner Brook, if they would take it. You would maintain the sawmilling industry,

and you could use it in pulping.

Unfortunately, the species is not what Corner Brook Pulp and

Paper is looking for, and the transportation costs from the back of Roddickton

down to the mill, 400 kilometres away, is quite expensive. So for those reasons

Corner Brook Pulp and Paper have harvested wood that is closer to them, as well

as the species they need to make paper, which is mostly spruce content is what

they are looking for.

CHAIR: How many sawmills do you say are now operating on the

Northern Peninsula?

MR. YOUNG: Right now, there are no sawmills operating on the

Northern Peninsula. It is winter. They normally have a seasonal operation on the

Northern Peninsula. Come spring, you will see a number of the intermediate-size

mills starting up. I guess, Gary, there are probably four or five smaller mills

as well.

I guess by the springtime you will see five or six mills back up

and running. Unfortunately, the largest mill, which is Company A hopefully, he

will be up and running this spring as well. That is our objective, to get him up

and running. He is the largest mill up there.

CHAIR: How many board feet of lumber were produced on the

Northern Peninsula last year?

MR. FORWARD: I would estimate, without having the numbers in

front of me, maybe a million board feet.

CHAIR: How much?

MR. FORWARD: One million.

CHAIR: About 1 million.

MR. FORWARD: One million board feet.

CHAIR: How much the year before?

MR. FORWARD: Maybe the year before, close on 4 million.

CHAIR: Okay.

Where is the market for that?

MR. FORWARD: The market would be a local market. I would

think mainly on the West Coast, the Northern Peninsula.

CHAIR: Is that primarily coming from Roddickton?

MR. FORWARD: Yes.

MR. YOUNG: Just to touch on the markets on the West Coast.

There are two large mills. Company A on the Northern Peninsula, as well as

Burton Cove Logging in the Hampton area, that supplies material to Western

Newfoundland.

There are two markets. There are green and there are dry

markets. The dry market is doing quite well. We have seen significant gains in

the green market in the past couple of years, thanks to two new pressure

treating plants that are here in Newfoundland now. One is situated in Deer Lake

CHAIR: I do not want you to wander off and talk about Burton

Cove Logging. It has nothing to do with this operation.

MR. YOUNG: I know, but you asked about the market. You said:

Does the Northern Peninsula fulfill all of the market on the West Coast? No,

they do not.

CHAIR: No, I said: Where is the market for that lumber, the

1 million board feet?

MR. YOUNG: It would be on the West Coast, yes.

CHAIR: What is the value of a million board feet of lumber?

MR. FORWARD: I guess it would depend on the price at the

time, but 1 million board feet today would be it is $450 per thousand board

feet, so $450,000.

CHAIR: The total value is around $450,000 a year worth of

lumber that was produced on the Great Northern Peninsula last year.

MR. FORWARD: Yes, I guess.

CHAIR: Does that include Wiltondale?

MR. FORWARD: I would think so.

CHAIR: Okay.

WITNESS: (Inaudible).

CHAIR: Four point five million last year?

WITNESS: (Inaudible).

CHAIR: Okay. Four-and-a-half million?

WITNESS: Yes.

CHAIR: Okay.

I think one of you said that there are pellets going now from

British Columbia to Europe through the Panama Canal which is five times the

distance. So, how far is it trucked?

MR. BOWERS: You mean how far is it trucked in BC?

CHAIR: You threw out a number and I am trying to do a

comparison. If they can ship it five times as far as we can, what is our

problem?

MR. BOWERS: Well, again, as I said earlier, I think we can

compete with that. The problem is we have a few alterations to do in how we sell

it, do we sell it in bulk, do we sell it in bags, or do we have a port. If we

can alter some of those factors, I think we can compete with them. It is

obviously a much smaller scale, but we could still enter the marketplace and

compete.

CHAIR: Shipping by water is the lowest cost means of

transportation, correct?

MR. BOWERS: Yes, that is right.

CHAIR: Not by road?

MR. BOWERS: That is right.

CHAIR: Road is more expensive.

MR. BOWERS: Yes.

CHAIR: More expensive than railing.

The BC pellets, are they from trees that were killed by the pine

beetle?

MR. BOWERS: Some of those are. In fact, their transportation

distances are, at times, relatively long as well by road, to get it to the port

facility in places like Vancouver.

CHAIR: In British Columbia because they are under so much

pressure due to the pine beetle, isn't it really a salvage operation?

MR. BOWERS: It is, to some extent, I would agree. The

mountain pine beetle has produced millions of board feet really available.

CHAIR: BC has to take out those forests because of forest

fire hazard because most of the trees are dead, are they not?

MR. BOWERS: Yes, following the beetle attack, that is right,

a lot of these trees are dead and it becomes a fuel build up, a fire issue.

CHAIR: That is not really a valid comparison with what we

are doing here, is it?

MR. BOWERS: It is valid in some sense. I mean, it is not the

only type of tree that is being harvested.

Gary, you were out there, maybe you can elaborate on it.

MR. FORWARD: I would say about 70 per cent of the pellet

production in British Columbia comes from sawmill residues.

CHAIR: Canfor and Ainsworth and people like that?

MR. FORWARD: Yes, they have a huge sawmill industry, so all

the feedstock would come from surrounding mills, like a 100 kilometre radius

from the pellet plant. They do supply some of the raw material from the forest,

but they try to stay close to the mill to keep the transportation costs down.

CHAIR: What is the total consumption in our Province today

of wood pellets? What is the annual consumption?

MR. FORWARD: If I would just do an estimate based on my

knowledge, I would think it is between 4,000 and 5,000 tons, which would also

include the industrial users that I referenced earlier.

CHAIR: From what I understand, that is actually higher than

it used to be?

MR. FORWARD: I would think five years ago that was maybe at

1,000.

CHAIR: When this project was conceived, clearly, it could

not have been for a domestic market; it had to have been for a foreign market.

MR. FORWARD: I think originally it was conceived that it

would be a combination of a domestic market and some export market. I think that

was the original plan.

CHAIR: The pellets that are being consumed in our Province

today, where are they produced?

MR. FORWARD: Some are produced locally, the other pellets

are coming from Atlantic Canada, and the furthest would be coming from Quebec.

CHAIR: From time to time we have heard a reference to large

vessels required to ship these pellets. How large are the vessels that we are

talking about?

MR. FORWARD: Generally, these vessels would be between

30,000 to 50,000 tons.

CHAIR: That would take less than a full year's production.

MR. FORWARD: That is correct. Also, in some cases, as was

referenced, a ship just left Nova Scotia with 25,000 tons. I think that is

correct.

CHAIR: I also heard you say we need to work out a couple of

details and we can compete. That is what I wrote down, anyway. What are those

details we need to work out?

MR. BOWERS: Again, I would go back to, I think, the port

facilities, and storage and shipping facilities as part of the equation. I would

also say the means by which we would package, whether it would be bulk or

whether it would be bag market, I think we need to work out. Those two factors

are among the two most important, I would argue.

CHAIR: Do I understand that we have markets ready and

waiting today?

MR. BOWERS: That is correct.

CHAIR: If we had shipping, a wharf and storage, then we

could compete?

MR. BOWERS: I would say that is largely the case. That is

right. I would agree with you.

CHAIR: Has the department done any projections on what it

would cost to put into place wharf and shipping?

MR. BOWERS: We have looked at numbers to either put in new

infrastructure or refurbish current facilities. We have a range of numbers that

it would take to establish those kinds of facilities.

CHAIR: What is the range?

MR. EVANS: The range would be between $5 million and $12

million. I think that was the estimate we used.

CHAIR: Where would the facility be constructed?

MR. EVANS: That was part of the analysis. That has not been

determined yet. There are several options.

CHAIR: If we are looking at this facility, which is let's

say $10 million or $12 million, and we require $5 million to $12 million to

really get up and running, then could that be put to other uses as well to

export, say, minerals or whatever? Would it be single use for pellets or could

it be used for something else to flatten the cost?

MR. EVANS: Yes, multiple uses would be the preferred option

if there are other products in the area for the reason you mentioned, to flatten

the cost and reduce the overhead.

CHAIR: Is it possible to ship pellets by a smaller vessel

from Roddickton to some central point in the rest of the Island, maybe Botwood

is a poor example but it has been a long-standing port, whereby we would then

accumulate everybody's pellets and send them wherever for less money?

MR. EVANS: That is actually one of the scenarios. That is a

common practice in pellet manufacturers. We mentioned a 30,000 or 40,000-ton

vessel. They pick up, for an example, 10,000 tons in three or four different

ports, depending on the cost and if it works in your whole operation.

CHAIR: Do they go by container or in the hold, or some other

place?

MR. FORWARD: They normally go in the hold. They go like bulk

in the hold.

CHAIR: By conveyor or by hopper, or something like that?

MR. FORWARD: They are either conveyed, or put in like a

shipload or with a crane.

MR. BOWERS: I would just like to add one comment. As Jim

said, one of the scenarios would be to go to a central point for pellets, like

you suggested.

There is sort of a word of caution there, though, and that is

when we looked at these numbers, every time you unload and load again, every

time you have to handle pellets it significantly increases the cost. The

desirable scenario would be to ship it from the production site itself.

CHAIR: That is why I was asking you how they are handled, if

they are in the hold or by container. Could they just be taken off by a crane,

added to another load that is already gone in by conveyor or something of that

nature? Would that be feasible, that they could go by smaller vessel by

container from Roddickton to be added to something in maybe Botwood, send

100,000 to Europe?

MR. BOWERS: I really do not know if it is feasible unless

I would have to see the numbers, the current costs now and the production costs.

It is practical. From a physical point of view you could do that. Whether it is

economically feasible, I would have to see the numbers. I would have to crunch

the numbers.

CHAIR: Okay.

I do not have any more questions. Maybe some of the Committee

members might have questions.

I should turn to our Auditor General and his staff. Did you have

any questions, anything that we should cover and did not cover?

MR. PADDON: No. I think between this hearing and the last

one it has been fairly comprehensive, so we have nothing that we would suggest.

CHAIR: Okay.

Seeing we have no more questions, I want to thank you for

coming.

Hopefully this investment can be resolved, because a lot of

people in my region are depending on this for employment, and in the Province

generally. There is a lot of money gone in, and people are going to keep burning

something, so let's hope there can be some sort of a resolution that will work

for everybody.

MR. K. PARSONS: I want to thank (inaudible) couple of

sessions to make the trip in to see us and we really appreciate it.

Thank you.

CHAIR: Thank you.

In that case, we stand adjourned.

Thank you.