May 1, 2002 RESOURCE COMMITTEE

The Committee met at 9:00 a.m. in the House of Assembly.

CHAIR (Walsh): Order, please!

This morning the Committee will be dealing with the Mines and Energy

Estimates. Before doing that, I would like to review and deal with the minutes

of our previous meeting, the minutes of the Department of Labrador &

Aboriginal Affairs. The Committee members were present. Other guests included

Randy Collins, MHA, and John Ottenheimer, MHA. From the department was the

minister and deputy minister, Ron Sparkes. On a motion from Mr. Sweeney,

seconded by Mr. Andersen, the minutes of the April 23 meeting were adopted as

circulated. The Committee reviewed and approved, without amendment, the

estimates of expenditure of the Department of Labrador & Aboriginal Affairs.

On a motion, the Committee adjourned at approximately 10:15 a.m. to begin again

today at 9:00 a.m.

Are there any errors or omissions?

On motion, minutes adopted as circulated.

CHAIR: Before we begin our proceedings this morning I would like to

welcome all members, including Mr. Ottenheimer who is here as a guest of the

Committee as well this morning, I guess in your capacity as critic. We also have

the minister and his officials.

For the record, because all of our seating arrangements are different - Kevin

is responsible for Hansard this morning and will probably recognize most of our

voices. It might take a moment or two for him to remember who is sitting where.

I would ask, in the interim, for each of our guests, who are accompanying the

minister, to identify themselves. I would ask each of the individuals also to

note that you are not live to tape unless you see the red light in front of you

being activated. It might take a moment to do that, so watch for that before you

answer your question. Again, for the sake of Hansard, if you would identify

yourselves.

I guess we will begin with an opening comment from the minister. Probably

even before we do that, we will do our introductions and then we will ask for a

motion to move 1.1.01. and we will begin the proceedings.

Minister, would you like to begin with an opening statement and the

introduction of your officials or allow them to introduce themselves for the

mike test downstairs? We can begin.

MR. MATTHEWS: Thank you, Mr. Chair, and good morning everybody.

I am glad to be here to go through our estimates and defend our estimates for

another year. Before I say anything further I am going to ask my officials to

introduce themselves so that they can be identified and check their mikes in the

meantime. I will start with my deputy.

MR. MAYNARD: Brian Maynard, Deputy Minister.

MR. SAUNDERS: Bruce Saunders, Assistant Deputy Minister, Energy.

MR. CROCKER: Ralph Crocker, Executive Assistant to the minister.

MR. RYDER: Wayne Ryder, Director.

MR. LESTER: Charlie Lester, Director of Policy and Strategic Planning.

MR. MERCER: Darrell Mercer, Director of Communications.

MR. MATTHEWS: Thank you very much.

CHAIR: Minster, before you start, the Committee members could do likewise

and then we will come back to the minister. Starting with you, Tom.

MR. T. OSBORNE: Tom Osborne, MHA, St. John's South.

MR. HUNTER: Ray Hunter, MHA, Windsor-Springdale District.

MR. OTTENHEIMER: John Ottenheimer, MHA, St. John's East.

MR. TAYLOR: Trevor Taylor, MHA, The Straits &White Bay North.

MR. SWEENEY: George Sweeney, MHA, Carbonear- Harbour Grace.

MR. BUTLER: Roland Butler, MHA, Port de Grave District.

MS M. HODDER: Mary Hodder, MHA, Burin-Placentia West.

CHAIR: Jim Walsh, Chair.

Mr. Minister.

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

Again, it is a pleasure to here this morning to defend the department's

estimates for another budget year. This is the second time I have had the

opportunity or the pleasure of defending the estimates for the Department of

Mines and Energy. As I said to some of my colleagues on the other side of the

House, this is a good morning for me to do this because if I get out of here

early I have to go to caucus. So, I cannot lose this morning if I have to spend

three hours here because I am here anyhow for three hours within fifty feet of

this Chamber. Having said that, I am happy to spend as much time as we need to

talk about the department in general.

In terms of the budget size for my department, it is a relatively small

budget. As I have said on two or three occasions to my colleagues when I went

over in that department (inaudible) this department first, having coming from

some other larger department budget-wise. My first take, when they presented me

with the budget for the department, was that it was just the minister's

office. It seemed to be that small. They said: No, no, that is your whole

department. I said: Oh, I see. Well, we will have to deal with it.

The size of the budget, in terms of the money that we expend from the

Treasury, is in no way reflective of the importance, the level of activity, and

the contribution of that activity which is made to the economy of the Province

in terms of relativeness. We have probably one of the highest profile

departments in government and I would suggest maybe one of the most interesting

and important departments of government in the sense that it has been structured

to deal with the resource development areas within the Province. As we are all

aware, the natural resources of the Province, in terms of the energy sector, the

mines sector, and particularly the oil and gas sector, have been the predominant

economic drivers in the Province over the last number of years and are predicted

and projected to rightly be the - probably outside of the fishery - most

significant economic drivers in the economy in the foreseeable future. So, for

that reason we are happy to be here and talk about the projects.

I have a wonderful set of briefing notes and even a lovely speech written

here by my communications people. I am tempted to read it because it is so good

but having thought about it, it would take away from the time that the committee

members, I think, should have to probably ask questions.

In a general overview, we manage the resources of the Province. We are both

the promoter and the regulator of most of the natural resources - outside of the

fisheries - in the Province.

In terms of the offshore oil and gas sector, we have the C-NOPB, which is, in

the day-to-day sense, the manager and regulator of activities offshore. With

respect to everything else that we do, including onshore oil and gas activities,

the department is the regulator as opposed to the C-NOPB. We have full

jurisdiction and full responsibility for everything, including land sales,

promotion, and regulation. We have a dual role. We have to manage well. We have

to promote the industry but on the other hand we have to ensure that the

industry operates, in a regulatory sense, in a responsible manner.

In the area of the Mines branch, obviously we have the same responsibility

for both promotion and regulation, and for trying to sustain and grow that whole

sector in the context of wanting to grow our economy and provide opportunity for

the people of the Province.

The other area where we have significant responsibility is in the area of

electricity generation. That is discharged mainly through the Crown corporation

known as Newfoundland and Labrador Hydro. We have ultimate responsibility for

that corporation. They answer, through the Minister of Mines and Energy, back to

government, who is the sole, single and only shareholder in that organization.

We also, of course, have responsibility for agencies such as the Bull Arm Site

Corporation, which is the corporation that both manages and promotes and

endeavours to attract activity to the Bull Arm site.

These are some of the predominant areas where we have a lot of activity going

on everyday. In terms of the level of activity, economic wise that is brought to

the Province, there are about 6,800 annual person-years of work generated in the

offshore sector and the mining sector combined. In terms of the value to the

economy, it is in the billions of dollars in terms of representing our GDP.

I do not think I will spend any time outlining the scope and extent of the

activities of the Hibernia or even the Terra Nova projects which are now in

developmental stages and which are operating offshore, other than to say that

they are operating at or above the levels that they had anticipated. They are

operating, in terms of production, at close to the level of authorized

production limits that they have. Hibernia is authorized to produce up to

180,000 barrels of oil a day. They are averaging about 160,000. They are, on

average, close to where they want to be.

In terms of the Terra Nova project, that is scheduled to produce about

100,000 barrels of oil a day when they get fully ramped up. The White Rose

Project will be about 92,000 barrels a day. So there will be about 350,000 to

360,000 barrels of oil a day, once the White Rose Project gets on stream in O5,

coming from our offshore. That represents upwards of 30 per cent-plus maybe of

the total light crude oil production in all of Canada. The numbers are

significant. The revenues and the royalties are ramping up as per the royalty

and taxation arrangements that we have in place. Each project, interestingly, is

separate in terms of the royalty regime. Hibernia was a negotiated regime. Terra

Nova was negotiated, but a different type of regime; significantly more

lucrative and beneficial to the Province. White Rose, the third project, will be

operating under a third royalty regime, which is the generic royalty regime;

which is the one, in the future, all of the projects will be coming in under. I

think it is a sign of the development of our offshore oil industry, that we have

now moved to a point where a generic piece of legislation will govern White Rose

and all future offshore activities.

Our big challenge, of course, is to continue to attract exploration

activities because outside of exploration and new finds, there is no possibility

of new fields coming into production. We have heard some discussion lately about

the downturn in exploration but it is not really significant in terms of - the

downturn is not as significant as one might readily think at the outset. We have

commitments, actually, for somewhere between three and six wells over the next

year to year-and-a-half being drilled in the exploration side of it by various

companies. At least two or three of these are going to be in the deep water area

for the first time out in the Flemish Pass. Considering that each of these wells

cost about $30 million to $50 million to drill, that is upwards of $200 million

to $300 million in drilling activity, exploration activity that we see in front

of us in the short term. There is about $570 million worth of commitments to

exploration work on our books that has to be executed over the next five years

by virtue of land sales that have been held in the past. While we did not have

an offshore land sale this year, it certainly does not indicate that there is

not a lot of eminent activity. As a matter of fact, to the contrary there is.

The boundaries resolution, of course, was a big important event for all of us

during the past year. I do not need to say more about that, other than we are

pleased with the outcome. It is going to be boding well for us, as we move into

the future, in terms of exploration attractiveness to our area that we now have

management certainty over.

I will speak later in the week, maybe, to the value of us joining the Energy

Council, as I have spoken to a couple of times. Suffice it to say, that is an

organization that we, as a Province, have joined. We are only the third

international affiliate. The organization represent about 80 per cent of all of

the gas and oil producing states in America, and that also includes Venezuela,

Alberta and ourselves. They are coming to town again this week to plan for the

major Northeast US Conference that they are bringing to St. John's late August

of this year. These types of activities are only an indication of many other

activities that we engage in, as a Province, on behalf of the people, to try and

promote and advance the development of oil and gas activities in the Province.

We do have some new initiatives in terms of hydro electricity generation

through Hydro. Granite Lake is now under construction. That has a potential of

about 40 additional new megawatt hours of power becoming available once it is

completed. We are also working with both paper mills, Grand Falls and Corner

Brook, Abitibi and Kruger, in cogeneration projects. Between them they have a

potential of, in the case of Kruger, about 15 megawatts of power available to

the grid, and in the case of Abitibi, up to 32.5 new megawatts of power as a

result of the cogeneration project that they are now moving forward with.

The Lower Churchill, of course, continues to be a challenge. It has been a

challenge for successive governments, as I have said for thirty years, to find

the right way to develop that resource, that asset. We are still dealing with

that. I am sure there may be some questions with respect to where we are.

I will not make any comment with respect to Voisey's Bay and the

negotiations there because, obviously, there is as high a level of knowledge,

with respect to where we are in terms of the negotiations and the want to get

that project up and running, amongst the members as there is amongst us sitting

over here, in terms of where we are with that project. We have said very

publicly where we are with that negotiation.

I mentioned yesterday in the media that we are seeing a bit of a mini gold

rush in Central Newfoundland, in an area called the Botwood Basin. There have

been about 12,000 claims staked out there in the last little while, 8,000 of

them since March, as a result of Altius and Barrick getting together. That is an

area that runs between - I had my officials get me a map this morning, just to

be sure where it was, because the Botwood Basin did not mean much to me. I did

not know whether it was the harbour in Botwood or whether it was a bigger

territory, thinking it was the latter. It is an area that really runs from Grand

Falls to Gander, runs south in that area and north towards Notre Dame Bay. It is

an area of high prospectivity for minerals generally. There has been an enormous

amount of activity and claims staking out there since March month. Considering

that each claim stake is about 25 hectares with 12,000 claims having been staked

or made, that is a lot of territory under observation and under prospectors'

eyes for assessment, to see what they really have or what they think is out

there.

In

summary then, we are a very active, a very busy and a very important

department to the people of the Province, to the life of our economy. While our

budget of $25 million-plus is not enormous in terms of size, it is money, I

think, that is well spent in a resource department that is being looked to, in a

large measure, to drive the economy of the Province for many years to come.

I do not think I need to take any more time to say any more than that, other

than to say the officials I have with me are well informed and capable of

answering any detailed or technical questions that you might want to put

forward. I will attempt to answer any questions that you wish to raise with

respect to any area of the department and/or any aspect of the budget.

Thank you very much, Mr. Chair, and it is back to you.

CHAIR: Thank you, Mr. Minister.

Subhead 1.1.01.

We will begin. Trevor.

MR. TAYLOR: Thank you, Mr. Chairman. Thank, Mr. Minister.

For the minister who was only going to have a brief opening remark, I figure

he must have been inspired by the Member for Ferryland over the last number of

days.

MR. MATTHEWS: The last number of years, with him.

MR. TAYLOR: Mr. Chairman, I am going to defer my questions for now, hold

off, and let our critic carry the ball for the opening couple of hours anyway.

CHAIR: Are there any other Committee members who want to begin first?

Mr. Ottenheimer.

MR. OTTENHEIMER: Thank you, Mr. Chairman.

I just have a few comments, I guess, of a general nature. My guess is the

Committee members may want to deal with, in addition to any general comments,

perhaps a few less specific questions as it relates to the Estimates.

I am assuming, Mr. Chairman, that it is a relatively small department in

terms of not only the amount but, of course, the actual number of pages. There

are only a few. I am assuming I have freedom to go all over the department and

not just restrict myself to the beginning. Is that correct?

CHAIR: The Chair is more than willing to grant a degree of latitude,

understanding that we are here to deal with the Estimates.

MR. OTTENHEIMER: I will cover just the topics that are in the Estimates.

CHAIR: I understand that.

MR. OTTENHEIMER: I mean, it is not just restricted to1.1.01.

CHAIR: No. As in the past, we welcome you as a guest of the Committee.

Being the critic for this particular department, the Chair and the Committee are

quite comfortable with the fact that I anticipate you will ramble somewhat

through the three or four pages of information that are there and probably ask

some questions that are not relevant to an exact, specific item. The Chair has

no problem with that, but we are here to deal with the Estimates. I just want to

remind all Committee members of that and, of course, you as our guest as well.

MR. OTTENHEIMER: Thank you, Mr. Chair.

I thank the minister and his officials for being here this morning.

As critic for this particular department, I just have a few questions, as I

have indicated, perhaps more of a general nature. Maybe if I could begin with

the

section 1.2.02., Major Projects Benefits Office. It is found on page 142 of

the Estimates book.

I am just wondering, Minister , maybe if you could just share with us exactly

- we know, and I am sure the people of the Province have an idea almost

automatically what the major projects are that are being discussed and

negotiated and contemplated when we talk about a Major Projects Benefits Office,

but I wonder if you could perhaps shed some light on all projects and in terms

of exactly what the role of this office is, if you could share that with us,

including all projects that are being contemplated at this time?

MR. MATTHEWS: Sure. The major projects are the ones that, as I have

mentioned earlier, (inaudible) public sense, as anybody, the Voisey's Bay

project is the most significant major project that falls under the department at

the moment. I say that, knowing full well that the development of the Lower

Churchill is also a very, very significant project but that project is, in part,

being led and driven under the direction of my department, myself and my deputy,

also with a team of individuals who are resident in Hydro. So, for purely

departmental purposes, the Voisey's Bay project is the big project that we are

and have been working on most of the year.

Now, that takes nothing away, again, from the offshore projects that we have

been working. We have spent an enormous amount of time last year on the White

Rose project, attempting to bring that to a point of sanction. As I have said,

when the project was sanctioned a month or two ago at the hotel, it was a very,

not difficult period of negotiation, but it was a very tough period of

negotiation because on the benefits side, while it was the smallest, is the

smallest of the three projects offshore-wise, by far it is one where we felt we

wanted to advance the level of provincial benefit significantly. I can tell you

that where we ended up versus where we started, and what was being offered to us

by the proponents out of the gate verses what we were able to achieve and have

in a commitment letter from the project proponents, that was included in the

CNOPB's sanction report, involved a lot of work, not only by my department,

not only by my officials and myself, but, in fairness, in large measure through

the Department of Industry and Rural Development; because they have

responsibility for benefit issues, along with us, on offshore and natural

resource projects, but they have a broader mandate for industrial benefits more

generally.

The Voisey's project is the big one we have been working on. It is the one

that we have spent a lot of time and money on this year in terms of the

negotiations, and it is still in front of us as a piece of work unfinished, that

we hope some conclusion can be brought to successfully - but we have no

guarantee of that - in the next number of weeks. I say the next number of weeks

deliberately, because, having been back to the negotiating table now for about

ten months, the people of the Province would be unfairly dealt with, I believe,

if we protracted the negotiations beyond what is reasonable, given the fact that

Inco have now indicated publicly, and, to us, they have worked through a number

of the issues they needed to resolve as an organization, that are not in the

first instance directly connected to the commercial negotiations I am speaking

of, their absolute necessity of having to work out IBA agreements with the

Aboriginals and work through their issues with respect to federal participation

and support for the project. These, as I say, are not our issues in the first

instance. We are not sitting at the table or in the offices that are doing those

negotiations, but we have a keen interest, of course, in how they are moving

forward and what they will eventually mean to the project in terms of the

agreements that they have entered into.

Subject to those things coming to absolute conclusion and the company telling

us that they are ready to move one way or the other, seeing if we can work out

the few remaining issues, we will know where this project is very soon.

MR. OTTENHEIMER: I realize that you said in your introductory comments

that you were limited, obviously, in what you can say with respect to that, and

I appreciate that, but in view of the comment that you just made, is it fair to

say that the Province is simply now waiting - like, the Province's role,

largely, is concluded and is now simply waiting - for the company and other

third parties to complete their negotiations and then the Province will then

reappear and enter into whatever the final concluding agreement is? Is that a

fair comment?

MR. MATTHEWS: It is more or less accurate. There has not been a

disengagement of discussions between ourselves and Inco. We have continued to

work with the company in terms of discussing the file generally.

How we proceeded in terms of process -I think it is only fair to share it

with you - is that we went back to the negotiating table and we identified a

whole basket of issues that had to be resolved. I don't know the number - it

could be twenty, thirty, forty - but they are major, major subheads, if you

like, issues to deal with royalties and taxation, issues of benefits, issues of

business opportunity, issues of environmental management, issues to do with

royalty and tax regimes. There is a whole myriad of issues that had to be

resolved. We have taken them, more or less, one at a time, and we have concluded

successfully on probably 90 per cent of the bunch of issues that had to be

resolved, and none of them were insignificant. But there remains outstanding, a

final discussion to be had with respect to the issue of whether to allow some

export for a short period of time, which we have indicated we are prepared to

entertain, for two very valid reasons from our perspective. We have taken a lot

of independent advice on this project. We have taken a lot of independent advice

that we pay good money for, of course, from industry analysts, both financial

and on the metal and industry side of it, and a couple of things are very clear

to us, and very normal.

Projects like this are normally self-financed, and for that reason the

company has got to find a way of generating some cash somewhere to move forward

with the $1.1 billion upfront first - the five to eight year capital investment

in this project.

Secondly, and concurrently with this, even if that were not the situation, we

have to allow time for the testing up of the new technology. That, by all

accounts, is the right direction to go in terms of proving a way to extract the

nickel, et cetera, from the laterite, or from the sulphite deposits that are in

Labrador.

For those two reasons, we have indicated, (inaudible) preparing us to talk

about export for a short period of time. Whatever that period of time will

eventually be has yet to be determined. So that issue is outstanding. We have

some tightening up to do, some conclusion to bring to the project development

timelines because, obviously, if we were to sign a deal tomorrow we would want

to see the project start with activity in Labrador and activity in Argentia, et

cetera, moving towards a demonstration plant, then towards testing up, and then

towards the commercial plant, and in the instance of Labrador, the mine mill.

The other reason, of course, why we have to talk about and entertain a period

of export is this: First of all, we have to have the concentrate coming out of

Labrador in order to be able to test it at the demonstration plant in Argentia.

The only way you can get the ore out of the ground is to start a mine, a mill,

and a concentrator. Once you start that, you start production of concentrate

material. Concentrate material cannot be held for any amount of time before it

is processed. For a lot of technical reasons it loses its value. It is subject

to extreme heat and pressure that causes it to be flammable, explosive and all

these sorts of things. My technical people can tell you why that is but, simply

put, once mining starts, the stuff that comes out of the ground, the concentrate

that is produced, has to be further processed. So, you cannot stockpile it for a

period of time.

So, these are the reasons why, in a very pragmatic and practical sense, we

are prepared to entertain, with the understanding, with the absolute assurance

that we have a full guarantee that we will see, over the life of the project,

all of that equivalent nickel come back to the Province for final full

processing. That is the concept that we are following.

So, in terms of the issues, most of them are resolved. In terms of the

importance of the two or three that are outstanding, they are very significant.

In terms of moving to conclude on these one way or the other, there has been no

value really in bringing the negotiations to a full conclusion because it is all

academic, if the agreements with the Aboriginals and the Environmental

Management Agreement are not concluded successfully. If you don't have that,

it doesn't matter how good a commercial arrangement we make with the company.

Nothing can happen until all of these agreements come together. There are really

five agreements that have to be concurrently brought together, and that doesn't

include the federal piece which is, of course, an issue between the federal

government and the company.

Our position on that is simply this, that we would expect the federal

government to treat Inco, as a corporation that wants to come here to do

business, no different than they would treat any other company that wants to

come here to do business, whether it is in the mining, the mineral, the offshore

or any other sector. We are saying, if there is federal money available, by all

means we want to see it come to the Province. We are not going to pick the

winners and losers that we might think should be supported by the federal

government. We say, give best efforts and maximum assistance to Inco, in this

instance, and to anybody else, in any other instance, who comes forward looking

for federal dollars that are available generally across the country.

MR. OTTENHEIMER: Thank you, Mr. Minister.

Last week, during the Estimates on Labrador and Aboriginal Affairs, we had a

good discussion on the land claims issue, and, of course, these discussions

hinged on the whole Voisey's Bay project, keeping in mind, of course, the

necessity from the company's point of view that this issue be resolved.

I am just wondering what role the department plays, if any. Is there some

overlap with the major projects benefits office, as it relates to these

discussions with both the LIA and the Innu Nation? To what extent does the

department have a role to play? You mentioned earlier, largely you sit back and

let other parties deal with that, but surely, there has to be some relationship

between those discussions and the department. I am just wondering the extent to

which that relationship exists.

MR. MATTHEWS: The answer, John, is that we are extensively involved in

those discussions whilst acknowledging that other departments have lead roles to

play on the Aboriginal's file.

What I will do is ask my deputy to explain the extent to which we are

involved in those discussions as a department with other departments of

government. If you could just explain that level of interaction that we have in

the process; it would be helpful I think.

MR. MAYNARD: The minister is exactly right. We have a couple of staff

members in the major project benefits office who are working extensively with

Labrador and Aboriginal Affairs on LIA and Innu Nation negotiations, both on the

land claims piece, and there is an environmental management agreement -

MR. OTTENHEIMER: Sorry, I can't hear you, Brian.

MR. MAYNARD: I am sorry.

We are working extensively on the various chapters of the land claims with

the Innu Nation and the LIA. As well, there is an Environmental Management

Agreement that will come into play which will provide for permitting practices

and things like that. So we have extensive involvement in that.

As well, we coordinate the roles of all government departments with respect

to the Voisey's Bay project, whether it is education, training or industrial

employment benefits and things like that.

MR. MATTHEWS: Thank you, deputy.

One of the five agreements that I mentioned is what we call an overlap

agreement. That is really an agreement that has to be worked out between the two

Aboriginal Nations, exclusive of everybody else, so to speak, inasmuch as land

claims issues are not finally resolved with the Innu or the Inuit. That has to

do with what happens to the land, if you like, in the Voisey's Bay mine

footprint. After the mine is completely depleted it has to be remedied. So that

is an agreement that, while it may not seen very significant to us, and it has

nothing to do with getting the project up and running, it has to be done between

them because until land claims are finished both groups have claims in the

Voisey's Bay footprint area.

MR. OTTENHEIMER: As I understand it, as well, these two agreements, as it

relates to project development, those side agreements - I believe it is called

Chapter 7 with the LIA and any agreement with the Innu Nation. As I understand

it, these are separate agreements - vis--vis the overall land claims

discussions - and that a major project can proceed as long as these two

collateral agreements are finalized, and all parties can still await the overall

land claims issues for agreement and resolution at a later date. Is that

correct?

MR. MATTHEWS: Yes, I will have the deputy explain what the interim

agreements are with respect to the carve out of the ability to move the project

forward even though they are in disputed land claims areas.

MR. MAYNARD: You are absolutely right. The LIA piece is farther advanced,

and the

Chapter 8 on the LIA agreement deals solely with the Voisey's Bay

project. Because the Land Claims Agreement will not be finalized, we will do

that as an interim measures agreement.

With respect to the Innu, obviously, we are not even to an agreement in

principle stage on the overall land claims, but, again, it will be a stand alone

chapter dealing solely with the Voisey's Bay project.

MR. OTTENHEIMER: Then, obviously, it is these stand alone chapters that

must be concluded, from the company's point of view, before any major project

can proceed?

MR. MAYNARD: Exactly, because the Aboriginals acknowledge, while they

have an Aboriginal claim to the land, that they are allowing the project to

proceed. They are basically giving their consent.

MR. MATTHEWS: The land claims issues are really between us and the

nations, the Aboriginal Nations. The Impact Benefits Agreements are between the

company and the Aboriginal Nations.

MR. OTTENHEIMER: But must still be concluded?

MR. MATTHEWS: Yes, they must be included. Absolutely, or else nothing can

happen. Obviously, we saw what happened, even on the exploration side a number

of years ago, when the courts said that you cannot go any further in your

exploration work. Some of the things they deemed to be exploration, the courts

deemed to be advanced exploration or development. You cannot move ahead until

these things are resolved; really, there is no possibility.

MR. OTTENHEIMER: I would like to just shift for a moment, if I may, still

dealing with major projects - and you alluded to it in your introductory

comments, minister - and that is dealing with the ongoing discussions,

presumably, regarding Lower Churchill development.

I am just wondering if maybe you, or your officials, could give us some

indication of where we are. I realize you gave, I believe, a major project

update about four, five or six weeks ago in the House, I believe in mid-March

when the House reopened. Here we are some six weeks later. I am thinking

specifically of any ongoing discussions and negotiations with the Province of

Quebec or with the New England States, for example. Can you, perhaps, bring us

up-to-date of where we are with those discussions? Because really, what has

happened with Voisey's Bay being relatively imminent, the other issue tends

not to get a lot of attention publicly. I am just wondering where we are, from

the department's point of view.

MR. MATTHEWS: The Lower Churchill has been a thirty year challenge for

all of us to try and find a way to develop it. The reality of the Lower

Churchill is that we have not been able, to date - no government since the 1960s

has been able to attract an industrial user that is willing to come and pay the

right price for the power that would be available from the Lower Churchill to

drive new industry in the Province. What price is the right price? Well, that is

a question that has to be answered through any discussion or negotiation, but

obviously, at-cost would be certainly the minimum maybe that we would, or that

the people of the Province might want us to accept as being the price that we

would make power available for. Then, that would have to be judged as being

right or wrong in the context of what the value of the economic activity to the

Province would be if you were to make cost-based power available to new

industry. To this point we have not been able to find a user who is prepared to

come in and set up smelting for any purpose, which is really where high volumes

of power are needed, and tie that to the development of the Lower Churchill.

We entered into discussions last year with Alcoa, who is the major world

player in aluminum and alumni production. They came to us and expressed an

interest in finding new sites to site new smelters in terms of their long-range

worldwide strategic plans. We are still in discussion with them with respect to

trying to determine whether or not there are, in fact, realistic economic

parameters within which we can get down to more serious negotiations.

There are a whole array of issues that have to be dealt with at the

preliminary stage before you know whether, in fact, fundamentally there is any

basis of moving forward to serious negotiations. These issues range from knowing

what the economic and physical impacts would be on the Province if you made

power available to them under any bunch of scenarios, starting with the scenario

of cost-based power, move from that to cost-based plus royalties for the

economic rent of the water, move from that to smelter-based royalties, working

it right through.

The comparison, of course, is always what is more valuable to the Province.

Is it to take the benefits from developing that resource in jobs and new

business opportunities or to take the benefits in terms of generating the power

and exporting it, selling it to somebody else, which means selling it through

Quebec, selling it west because bringing it east is not on at the moment. We do

not have any need for it today in the Province or any projected need for that

much more new power considering that the Lower Churchill can produce more power,

maximum, than we use in the Province of Newfoundland and Labrador in any given

year in total. We use about 1,900 megawatts in the Province on an annual basis;

that is our requirement. The Lower Churchill could throw off up to 2,000

megawatts. So we do not need to bring it here today, regretfully, but we do not.

There is no prospect of bringing it this way, exporting it somewhere. We have

kicked the tires on that concept for many years. We have been in the New England

market; we have been in the American market. We have talked to the PG&E

Energy groups, the Dukes, the Enrons, the Merits, the big energy wholesalers

down there, and those that have not gone bankrupt during the period of

discussion, and changes to the industry down there, the electricity industry

generally, nevertheless see no opportunity for being able to get the power to

them, because we have to get the power to the Quebec border and we have to get

it to the U.S. border. When you get it to the U.S. border, then you have to deal

with a whole bunch of other transmission issues and players if you have

customers in the States that you are trying to sell it to.

We have not been able to crack that challenge. Where we are with Alcoa is

trying to determine if whether or not they are - and they are trying to

determine, of course, for their purposes, if whether or not they are - really

seriously able to be a player in the development of the Lower Churchill and a

customer for the consumption of some or all of that power on a basis that would

be acceptable to them. Bear in mind that these large companies are not looking

for power available for the short term. They are talking seventy-five-plus years

of availability at stable and committed-to prices and committed-to power

arrangements.

When you talk about developing something that is going to take ten years to

develop, and then you are talking with somebody who wants seventy-five years of

certainty on price and availability, you are looking a long way down the road.

None of us want to do a deal that has any semblance or resemblance or any

outcome that replicates what we have done on other power projects like the Upper

Churchill. So getting it right, if getting it done at all, is the big challenge.

MR. OTTENHEIMER: In seeking a partner, what is the level of discussion or

negotiation within your department? For example, would you have officials or

staff members who are, on a daily basis, dedicated to this project in an effort

to continue these discussions and negotiations with third parties? What is the

level of activity within the department as it relates to the development of this

very important project?

MR. MATTHEWS: Very significant and very active and ongoing. We have a

dedicated team of officials at Hydro who are leading the discussion on the Alcoa

prospect on behalf of government. They operate and take direction from my

department, from me, through my deputy minister. So, my deputy, in conjunction

with the team of officials at Hydro under our direction, are the ones who are

very actively pursuing this. We have people working on it every day. They are

fully dedicated and engaged to working through the discussion with Alcoa as we

speak, and that will continue until we come to some resolution as to which

direction we should or should not, can or cannot, go with that particular

discussion.

With respect to Quebec - you asked me that question - I suppose the simplest

way I could describe our discussion with Quebec is that, at some level, at the

political level, at the Hydro-Quebec versus Hydro Newfoundland and Labrador

level, there have been open doors of communication for the last - I was going to

say the last thirty years and I suppose that wouldn't be entirely wrong. There

has always been the Quebec option there. Our challenge is to get the project

right, and with respect to Quebec, that option still exists.

There will always exist, I think it is fair to say, the option of selling

power west through Quebec from any development in Labrador. The issue with

selling it west of Quebec is, if we sell it just to get money into the Treasury

and we don't get any industrial benefits out of it, then how do you structure

something long-term to make that type of a deal, the right deal, as opposed to

comparing it to, people would say - although that can be debated - a wrong deal

as was done on the Upper Churchill; wrong, I say, only in retrospect, because

when it was done it was the greatest thing since sliced bread, but there turned

out to be, over thirty or forty years, a lot of different views on it.

So, selling it west of Quebec is always an option, provided we can get the

right deal. Using it in the Province for industrial development is always the

preferred option, if we can get the right deal. So far, for thirty years, we

haven't been able to work out either arrangement to our satisfaction, to any

government satisfaction, and that is the challenge that we still have in front

of us. I hope sooner, rather than later, we can bring some resolution to that

development; but, hey, it has to be done right and we are not there yet.

MR. OTTENHEIMER: You mentioned Quebec, not only perhaps selling to Quebec

but selling through Quebec; it seems to me it has always been a problem in terms

of rentals and (inaudible) rights, and those sorts of difficulties that this

Province faces. Has the Province attempted, in the past, to engage the federal

government in these negotiations - again, keeping in mind any relationship or

any arrangement with Quebec - to assist this Province and perhaps raising an

argument in favour of lessening the demands that will be placed on this Province

in view of the fact that we have another provincial partner, to some extent,

being somewhat obstructionist because of their insistence that certain rights be

maintained and upheld from their point of view? I mean that whole discussion, it

seems to me, is something that has to be explored. Maybe it has been, and maybe

I am wondering to what extent the federal government has entered into this

because of those conditions that are placed on this Province.

MR. MATTHEWS: With respect to attracting Ottawa's interest to put money

into transmission solutions, obviously they have said: no, we are not interested

and we have no money to give you to build transmission infrastructure, or we

have no money to put into developing the project. That will be private sector

driven. So we have not had any luck with Ottawa to get them to help us with an

in-feed to the Province, if it was the right thing to do at all.

With respect to moving power through Quebec, we have the ability to get our

power through Quebec. There is a process that enables us to get our power

through Quebec by going through the regulatory process. The FERC rules demand

that Quebec make access available to us in terms of their transmission system.

The challenge is, the issue is, finding a customer who will sign on for fifty or

sixty years to buy your power down in the States, if you like, and getting a

commitment from them that would allow us to make a commitment to Quebec to

provide the infrastructure transmission-wise that they would need to be able to

make that transmission.

In other words, how it would work is, we don't go into Quebec and build our

own transmission lines, but they would carry our power on their grid. Now, if we

have a bunch of power to sell, they've got to build a bunch of lines to carry

that power. So, we have the ability to export our power. Under the FERC rules we

can go, and there is an obligation - if Quebec wants to participate in the U.S.

market they have to have open access for moving and wielding our power for us,

in simple form. The challenge is to get a customer who will pay a committed

price over a long term for power coming up here, so it would enable Quebec to

make a commitment to us to build a transmission to carry that power. It is very

complicated, but yet it not real complicated.

The reality is this: While we have a very big resource in Labrador, the Lower

Churchill and the Muskrat Falls, the reality is that it is so far from the

market, it is so far removed from the North American market, generally, that it

is not really cheap, cheap power. It is reasonably priced power, but it is not

give-away, dirt-cheap power. So, we don't have something that we can produce

real, real cheap and make a lot of money on. It is a business challenge, as much

as anything. It is not a technical challenge to get the power to market; it is a

business case challenge that always, I think, has been the one we can't get

over.

Deputy, I don't know if you can add to that. I have tried to describe it in

simple form, the real challenge, the real issue.

MR. MAYNARD: No, there is no regulatory issue, there is no technical

issue, it is simply, as the minister says, the source of power is some 2,000

miles from major markets. If we were anywhere closer, it would have been

developed, if not thirty years ago, twenty-nine years ago.

As I say, the way the energy markets are in the U.S., obviously, anyone can

see that it is looking with one eye half open, looking at the fluctuation in the

value of energy generally. To get people to commit to long-term power purchase

arrangements is just not on at the moment. Two years ago, the discussion was

that we should be selling our power into the U.S. because it was worth ten times

what power was worth, generally, the year before. But then the next year we see

it is back to where it was a bunch of years ago as well. Natural gas went up

from $2 to $10 per 1,000 cubic feet because they had a problem with California.

Now it is right back to where it was three or four years ago, $2.

To structure a power purchase arrangement on the basis of predictable value

and cost of power long term is the big problem. If we could get somebody in the

States to say: Yes, we are going to sign on and pay you x number of dollars for

your power and we are going to put in an escalation clause that will carry us

fifty years down the road - because it is ten years to get the project on

stream. It doesn't matter when you start it; it is up to eight to ten years to

get it on stream by the time you get through the environmental piece, the

engineering work and the construction project. Add to that forty or fifty years

of a power purchase agreement and it is pretty difficult to find someone who can

make that type of commitment, a credit worthy customer who can make that

commitment, because five years ago you would have said Enron, Duke, PG&E

Energy and all of these big players from the States would have been your

customers, but I don't think they are the people we would be chasing today

because they are all in

chapter eleven.

That is the problem. We have a great asset but it is stranded and it is

remote in terms of its proximity to where the energy has to be sold if we are

going to get the project done. I think that is the bottom line.

MR. OTTENHEIMER: Mr. Chairman, I have a few more questions, if it is okay

to continue.

CHAIR: Yes.

MR. OTTENHEIMER: I appreciate the comments by the minister, but again I

am going to move to a completely different area, if I may. I guess we are

dealing specifically with mineral lands or mineral development, and it is very

much a localized issue.

A little while ago, I had an opportunity to discuss concerns by the residents

of King's Point, dealing with the Hammerdown and the Nugget Pond issue as it

relates to King's Point and the Baie Verte Peninsula. I know there have been

ongoing discussions and representations made by residents of King's Point and

the difficulty that they have, I guess, perhaps with both the department and the

company, and the feeling, of course, that they feel somewhat shut out in terms

of certain benefits and advantages that they ought to receive as a town and as a

community. I am just wondering, is there any update that the department can give

us in terms of where we are with that particular issue?

MR. MATTHEWS: Yes, it is an issue that I am very familiar with because it

has been before us and the issue has to do with the King's Point town, if you

like, trying to extract, rightfully, the highest level of benefits from jobs,

and that sort of thing, from the project, and extract from the company as high a

level of municipal taxation as they can.

We have been working with the company and working with the town and the

member, I must say. The Member for Baie Verte has been in to see me and he has

been co-operative and helpful to us in working through that issue, because it is

a regional issue. It has to do with, you know, minerals moving from one area of

the Province to another area for further processing. Everyone understands why

that has to happen on small projects. So, that is really not the big issue,

although I suppose it is always a local irritant to see that happen.

The issue of taxation for the town, revenues to the town for services they

provide and beyond, we have been working through that issue with the town and

with the member for the area, Mr. Shelley, and I think at this point it has or

is coming to some resolution. Brian, deputy, maybe you can update me further

than what I have just said because, as far as I am concerned, we are getting

there.

MR. MAYNARD: What we have been trying to do is facilitate the discussions

between the mining company and the town council. I think, to be perfectly honest

with you, the expectations of the town are a little high. This is, at best - if

we can extend this mine life to four years we will be doing well. Some of the

numbers that have been thrown around in the media about the value of the

resource are significantly higher than the actual value of the resource. So, it

is one where, I guess, we are trying to call on reason on both sides to work

together to find a solution.

MR. OTTENHEIMER: Is the department playing, I guess, a mediation role in

an effort to resolve it?

MR. MAYNARD: More of a mediation, facilitative role. Yes.

MR. MATTHEWS: As I say, I think we have been helpful to the issues out

there. The member, Paul Shelley, has been helpful to the issue because he has

been, in my judgement anyhow, working reasonably within the context of the

issues and the realities that exist for taxation revenue from the town and for

employment opportunities and that sort of thing. We are satisfied that, within

reason, everybody, at the end of the day, will be half sensible about it and end

up with a good, you know - when you talk about mines, it is so interesting

because there is a perception and an assumption as to what the value of a

resource is, and based on that assumption, all kinds of propositions are put

forward.

I always get a kick out of, when I listen to - and I say this honestly - one

certain Open Line caller who talks about Voisey's Bay. He starts off talking

about: Because we know that there is 500 billion tons up there... That is the

premise on which he starts his discussion every now and then. The fact of the

matter is, there is no one in the world who acknowledges that today the proven

and inferred reserves up there are 141 million tons, but if you start off on the

premise of: because there is 500 billion tons... He is absolute right. Then you

can do a whole lot of other things in terms of modeling if you start from that

premise, but the premise is about five times wrong. The perception of what

sometimes is available in a resource and the value of it is used to predicate,

from which you start to make certain extrapolation, and the resource in King's

Point area, if we can get four more year's out of it, that is probably maxing

it out. Now if they can find more, which the companies always want to do of

course, better again. But you know the history of mining, the day that you open

a mine is the day that a mine is moving towards closure. The day that you start

extracting, you are one day closer to closing that mine than you were the day

before you started it.

MR. OTTENHEIMER: But the life of mine, I guess, does not necessarily

restrict what the immediate benefits may be to a particular town or municipality

in terms of a day-to-day basis.

MR. MATTHEWS: Yes.

MR. OTTENHEIMER: I think it is fair to say that is what that particular

town, with the company, hope to resolve some resolution, regardless if the life

of the mine is not a lengthy one. It is still the day-to-day and the immediate

concerns that have been expressed by -

MR. MATTHEWS: The town has a right and the town must be properly

compensated for services, first of all, that they provide, even though it is not

within the town's boundaries, that they are providing fire services or any

other type of services. Obviously, they have to be compensated properly for the

services they provide. That is a given, and we accept that. So does the company,

I would think.

Beyond that, what the reasonable rate of taxation or level of municipal tax

return is, is a matter sometimes of negotiation because these are a stand alone

type of situation. Towns like to extract as much as they can. We do not fault

them for that, but somewhere in the middle there has to be a reasonable outcome

for the town in terms of taxation revenues and in terms of job opportunities and

business opportunities.

I think on balance, King's Point and that area are doing pretty good. They

hate to see the product being trucked down to wherever it is - Baie Verte

somewhere or Nugget Pond. I hate to see it trucked down there for further

processing, but they obviously understand that is the only option to see the

mine go forward, even in its current form.

MR. OTTENHEIMER: Mr. Minister, a couple of questions under Policy and

Strategic Planning, or maybe under the electricity development area. It relates

to the paper that was released a few weeks ago on energy projects. I remember

the invitation, of course, and the public engagement, to some extent, that was

being requested by the department.

A number of days ago, I believe the IBEW held a news conference simply

looking for more consultation and more opportunity for the public to become

engaged in the response to this proposal which, of course, is very important and

significant for this Province in terms of future industrial development and, I

guess, even for domestic use purposes. From what I can understand, at this

point, the government has not changed its line of thinking in terms of how the

public is to be engaged. I think there are a certain number of days there can be

written submissions to Mr. Reid and that sort of thing.

On an issue as important as this is, is it not possible, minister, for there

to be some forum or public consultation whereby individuals may want to present

oral presentations and give their opinions, and perhaps in a variety of

locations in the Province, as it relates to what is being proposed, in terms of

the significance of it?

MR. MATTHEWS: Yes, that issue has been topical lately, to be as succinct

as we can about it. The paper that is out there is really a paper that deals

with structure, in terms of how the industry should be structured or

restructured or adjusted in terms of who generates, who has responsibility for

the grid, who has responsibility for distribution, and how can it be done more

efficiently and effectively. It is not a process, or it is not a White Paper

that deals with power rates. It is not a paper that deals with, you know, sort

of domestic day-to-day type issues. It is more of a, I wouldn't call it a

technical paper, but it is certainly, in terms of a structure, tending and leans

in that direction.

Really, where we are now is probably stage two, maybe, of a three-stage

process, if I could define it that way. We went through the exercise of getting

the White Paper put together. Now we have it out there for comment by all the

stakeholders who want to comment and anybody in the general public who has a

level of interest to the extent that they want to speak to structures, to make

representation. It is not, in our judgement, a White Paper that lends itself to

much of a public, at the consumers' level, type of interaction or debate.

Notwithstanding that, we have made every extraordinary effort to tell the

public, if you view on the issues, structure wise, that is in this White Paper,

please come forward and make them known to us.

Where we go from here is the issue. We will take this information, government

will, and it could be - I cannot prejudge what we will do with it or won't do

with it, or what the responses that we get will indicate we should do or how we

should move, but assuming we get to a point where government is making policy

changes, it is at that point the next stage where we would probably be wanting

to have more direct public input into policy decision issues. So, this is sort

of a second stage of maybe a three-stage process, and at what point we get to

significant policy issues, like changes, making the changes that might be

brought forward, then obviously, I think, there would have to be more

consideration given to a more public type of process. On the issue now that the

IBEW has raised and the Leader of the NDP Party and the Federation of Labour

saying that we think it should be a more open process, apart from that type of

representation, I can tell you honestly - and we are monitoring this very

closely - we are having next to no concern being expressed by consumers or

consumer groups other than those that you have heard as to the process that we

currently have.

We think the current process is the right one for this part of the review. We

think it is adequate to get the input that is necessary for this part of the

review, and at what point we move to significant government policy changes in

the future, at that point I think it would be more of a consideration for public

hearings, if you like, that type of thing.

I am trying to explain what the rationale is. It is not a question of trying

to avoid public input or public consultation. We can put a road show on any day

and travel around the Province for two or three months, and ask people to come

and make representation, but the people who would come and make representation,

probably in 99 per cent of the cases, are the people who are going to make

representation through this current process, the significant stakeholders.

People will become very engaged if you are talking about power rates, or who

is going to make the distribution in their area, moving from one to the other,

that type of thing, but in terms of how hydro should be restructured in terms of

generation, transmission and distribution, that is more of a technical,

structural issue that we are dealing with now as opposed to more of a consumer

oriented type issue.

That is our judgement and that is why we are in this process. I don't know

if Brian can add anything to that.

MR. OTTENHEIMER: It just seems to me, if there is a request for a more

open consultative process, the easiest thing to do is have it for one or two

days.

MR. MATTHEWS: Yes.

MR. OTTENHEIMER: Whether you have one on the East Coast or one on the

West Coast, it need not be a lengthy process, but it is done then.

MR. MATTHEWS: Quite honestly, if we were getting an indication, if we

were getting any sense that this should be a more public process, then we would

do it.

MR. OTTENHEIMER: So, it hasn't been ruled out.

MR. MATTHEWS: I think this is the union that represents Hydro workers in

any event, so they would obviously be expected to speak, probably, publicly and

a few others at the same time. Outside of that, we have had virtually no concern

or displeasure being expressed about the process. As I say, we are watching it,

we are monitoring it, and I am glad they raised the issue because it only gives

another opportunity for people who might have a different view about the process

to come forward and speak, and if there were that type of additional indication,

we may have to consider it; but, at this point that is not on, I can tell you.

MR. OTTENHEIMER: Minister, I am interested in what your response may be

to what is taking place in Ontario today, effective May 1, in terms of the

distribution. We have a Province in this country that has embarked on a new

regime, in terms of the distribution of energy. I am interested in your views.

MR. MATTHEWS: My views would be this: That they are getting into the

breaking up of the Hydro One, I guess, is it they call it? They are getting into

the breaking up or the breaking down of the restructuring of their electricity

generation and distribution system. They are moving into areas that others have

attempted to do, with some great difficulty in the past, and I speak of the

Americans, the experience that they have gone through, particularly in

California and those areas.

There are those who would say: At the end of the day, break it down, let the

marketplace decide who should be producing, who should be distributing, and what

the cost of that should be to the consumers and the industrial users.

I suppose the concept is that, in a pure free market system, with all the

checks and balances that it has inherent in it, competition will provide cheaper

and more reliable power. I cannot believe that it will provide more reliable

power to the people in Ontario. I think it is very much an open question as to

whether or not at the end of the piece it will provide a more efficient and a

cheaper power-based pricing system. It is very interesting to watch.

The difference with Ontario or with California or with us is that our

jurisdiction is so, so small in terms of what we generate, what we have to

distribute, and our geography is so large, in terms of the area that we have to

service, that the same drivers that would cause them in Ontario, or in other

places, to move to do what they are doing in breaking the system up, in our

judgement, is not at play in our circumstance. That was pointed out, I think,

pretty clearly in the paper that is currently before the public - this one you

just referred to: the electricity power review. If we were to try and break up

the generation part of the business in Newfoundland and get a bunch of different

players encouraged to get into generating power and then get a bunch of players

into being the wholesaler, and then a bunch of players into retailing it, we do

not have the market that would lend itself to us thinking that has any value for

us. That is clearly stated in the White Paper that it out there.

In a bigger jurisdiction, in a bigger area, there are some real drivers that

make sense to move in this direction, but I can tell you, it is not clean and it

is not simple and it is very much an outstanding question as to what the outcome

will be in terms of benefit to the consumers in Ontario. It is a great deal for

Bay Street because they get to sell a bunch of instruments on which they charge

a commission and make a lot of money but beyond that, the value to the people of

the province in Ontario, in my judgement, is very much an outstanding question.

We will see where it goes.

Now I do not know whether my officials agree with me on that one or not

because we haven't debated the Ontario one. It is not one that they briefed me

on at all.

MR. OTTENHEIMER: The reason I asked the question is because I believe it

is today that it comes into effect. It is today, isn't it? Yes, May 1.

MR. MATTHEWS: Yes, that is right. Do you have a view on this, deputy? I

would like to know it.

MR. MAYNARD: Just an interesting side note. We engaged external

consultants when we commenced the review and these were -

MR. MATTHEWS: Our own review.

MR. MAYNARD: Our own review.

- mainland consultants and they came down with the view that competition and

deregulation is good; monopolies are bad, Crown corporations are bad. They spent

some time going through our system, talking to the people reviewing the

situation and came away and said: Competition and deregulation does not make a

helluva lot of sense in your jurisdiction; for the reasons that the minister

pointed out. You have a very well run electricity system. You do not have a

situation where you have been in an over-bill situation. It is very efficiently

and effectively run; surprisingly so. Here we go. So it was a bit interesting.

MR. OTTENHEIMER: So it is not necessarily the philosophy, but more the

jurisdictional reality that we are confronted with.

MR. MAYNARD: Yes.

MR. MATTHEWS: Exactly. The philosophy is great if you are private sector

oriented. Of course, there are all kinds of philosophies. We are not sure these

days, in our political circumstance, which philosophy prevails on which side of

the House any more in terms of a political context, but in our own situation

there are some possibilities for improvements. They stand out in our energy

policy review because you have a circumstance with us - not that we are

suggesting it should change tomorrow - where hydro produces, they are the

generator of about 85 per cent of the electricity that we use in the Province,

but they only distribute about 15 per cent of it.

We have another organization called Fortis Light and Power which generate

about 15 per cent from various sources, but they distribute 85 per cent of it.

Obviously, you would quickly conclude that maybe there is some rationalization

there that could take place which would benefit the consumers. Now we are not

suggesting that this should happen, but it is one of the options raised in the

White Paper that is before us. Another option is to maintain the status quo

exactly as it is. Another option deals with breaking up some of the activities

of hydro. I do not want to get into what is in the paper, but there are options

available for us going through this review that probably make things a little

better and a little more efficient, and cut down some of our costs. But, as the

deputy said, it is not big time given our - how did you put it - geographical

realities and those sorts of things.

MR. OTTENHEIMER: Just a couple of more questions, Mr. Chairman, as it

relates to the offshore.

In your introductory comments, Mr. Minister, you referred to the C-NOPB and

its decision not to offer land sale and get into that activity this year. I

found that somewhat surprising, and perhaps disappointing, from the point of

view that we have had those decisions earlier this year as it relates to Chevron

and its withdrawal of any further activity. Secondly, I guess, Exxon Mobil's

decision to try and seek the transfer of its ongoing leases. So in view of those

decisions that were made, why is it that C-NOPB - if for no other reason, just

from a promotional or from a marketing point of view - for the first time in

eight or nine years, that it did not seek to find further activity as it relates

to the offshore, particularly in view of those somewhat very public decisions

that were made earlier in the year with respect to both Chevron and Exxon Mobil?

MR. MATTHEWS: It is a good question, first of all. The short answer, I

guess, is that before the C-NOPB goes to land sales, they always determine by

way of an expression of industry interest as to what would be in a land sales

auction for a given year. So we go through that process of trying to figure out

whether it is worth doing at a certain point. The reality is that in years where

we have had low uptake in terms of land sales, in some instances we have

deferred or not had sales in the next year. In 1992 and 1994 were years when we

did not have land sale auctions. That was in part based on the reality that in

the previous years to those two years, there was a low level of interest, and

the level of interest in making commitments by the industry to expenditures -

because we do not sell, as you know; we ask for expenditure commitments - where

that is low, then you get lower uptake and lower participation. This year, the

C-NOPB decided, and we concurred with them, that, because of (

a) the $500-plus

million worth of commitments that are outstanding on the books that have to be

executed over the next five years - that was one reason why - because there were

big sales in previous years, there is less of an interest now. Secondly, a lot

of the area in the Jeanne d'Arc basin has already been explored. Thirdly, the

expression of the interest now seems to be towards deep water plays out in the

Flemish Pass. So there is a changing.

The other thing that has happened in the industry is that there has been a

lot of consolidation, as you would know, globally, in the oil business, the gas

business. A big merger, Exxon Mobil as an example. There have been big mergers

and the companies are rationalizing their holdings, and there is a bit of a

shaking down within the industry at the corporate level.

So all of these reasons are the real reasons why there is less of an interest

in the last year or two in big land sale uptakes. That is the reality of the

industry. It is cyclical. Sometimes there is high interest; sometimes there is

low. On the East Coast there has been a lot of attention paid lately to gas as

opposed to oil. We are mostly oil prone as opposed to gas prone in our offshore.

Then, of course, we did anticipate - we knew - that there would be a resolution

to the boundary issue this year. We did not know what the outcome would be, but

we were hopeful and we were expecting that it would be a positive outcome for

us. We knew that from that, if it happened that way, that there would have to be

some work done with the old federal permit holders to convert them to

exploration licences. While the holders of the federal permits may be now in

arrangements or in corporate mergers with other companies, they do carry that

with them, so we knew that we would have to work through that piece in

anticipation of the boundary decision with some of the players that would

otherwise be bidding offshore. These are some of the reasons why the companies

were not expressing a lot of interest in bidding this year on land sales, so we

decided not to go forward.

Now, we could have gone forward for optical and promotional type reasons. We

could have gone forward and spent a lot of time and energy and money and had a

land sale and then had a probably low uptake like we had last year. I do not

deny that last year the sales were not high. I think it was $13 million, was it,

we got committed, $14 million we got committed, in work expenditures. That is

really not - it was disappointing. It was not big.

In the big picture, it is not an issue, it is not a disappointment; because,

if you look back since 1985-1990 you will see that land sales interest has

peaked and has ebbed and waned, you know. It has gone up and gone down on a

cyclical basis. The industry tell us that - and Brian, my deputy, and some of my

officials, last week or the week before last, spent a week in Calgary doing the

rounds with the oil companies, meeting with CAPP, discussing this whole issue,

just to, for our greater certainty in understanding what is going on, and that

is that message that has come back. I would have been there with them except

that the House was open and I had to be here. That is part of it. If there is

anything I have left out, Deputy, you can certainly add to that for their

information.

MR. OTTENHEIMER: I appreciate that answer. Could I just have one

follow-up, though?

MR. MATTHEWS: Sure.

MR. OTTENHEIMER: If there was no expression of interest, or no invitation

of an expression on interest as it relates to the Jeanne d'Arc basin, and if

activity now seems to be more focused on deep waters, couldn't we have at

least entertained some activity or invitation for the Flemish Pass, for example?

Are we in a position to do that?

MR. MAYNARD: A lot of the lands in the last several land sales have gone

into the Flemish Pass area; and the exploration cycle being what it is, these

companies then go out and shoot seismic over the area. In the last several

years, we have seen record amounts of seismic acquired. That takes time to

process.

The basic message we got out in Calgary when we were there for the week was

that: Look, we have a significant land position in Newfoundland and Labrador's

offshore area. We need to process our data. Our prospects in the next several

years are in the other basins and they move out in a gradual progression. They

are going into the South Whale Basin and Flemish Pass Basin and these, they

feel, are very perspective. The minister has said earlier, we are expecting to

see three to six wells drilled in the next year-and-a-half, with a further three

to six in the next year-and-a-half after that. That will be the primary driver

of exploration activity from here on in, that and the area that was under

motorium in the Laurentian Sub-Basin.

They were a little bit surprised that we would question it, and they said:

Look, this is a normal part of the cycle on exploration, that we need time to

interpret our data and to acquire further data. We asked the question if there

was anything that we could do and they said, basically: Pray with us, that we

hit a successful well.

MR. OTTENHEIMER: But, I cannot understand why the Province would not at

least invite participation. Again, the message that is being sent, it seems to

me, is that we are not interested at this time, and maybe for some of the

reasons that you have just explained, but at least if there is an invitation to

engage in activity, the company is then free to participate or not. Without the

invitation, it doesn't get off first base.

MR. MAYNARD: The way the land sale process works is that companies are

first asked to nominate parcels that they would like to see put up on a land

sale. Many of the companies declined to nominate any new parcels, recognizing

that they had a substantial number of parcels already that they were working.

Where they were in the cycle was that they wanted to work those packages and

those parcels first.

We have $570 million in exploration commitments made and on the books. The

companies want to work some of that before they go to the next stages.

MR. OTTENHEIMER: Were there some nominations, though?

MR. MAYNARD: Very little.

MR. MATTHEWS: The reality is that we did go through the process to get

the expression of interest to us - as C-NOPB did - to see whether or not there

was any real interest in going forward with a land sale, and when you do not get

the industry nominating parcels, obviously, they are telling you that they are

not very interested this year in bidding. If they did bid they would probably

bid very low work commitments which would be insignificant in terms of what they

need to spend on these major parcels of land.

Of this $570 million, if this is not spent in the next five years we will get

- what? - 25 per cent of that, which comes right back to the Treasury as a

penalty for not performing. With the three to six wells that we see happening

this year, we think that the switch, in a sense, from the shallow water to the

deep water play is in fact going through this cycle now. We do not see it as a

bad thing, that land sales did not happen this year. Obviously, we would like to

see mega sales every year, but the reality is that.

MR. OTTENHEIMER: On the issue of penalty, was Chevron penalized for its

withdrawal on the Hebron Ben-Nevis Project?

MR. MAYNARD: No, because that was under a Significant Discovery License.

They hold the Chevron-Hebron - they have made their work expenditure commitments

under that. That is an existing discovery. The work expenditure commitments are

under the exploration licenses.

MR. OTTENHEIMER: So, there was no penalty?

MR. MAYNARD: No penalty provision in that.

Chevron will tell you that they continue, themselves, to work that field and

try to identify technological solutions, or technical solutions, to improve the

economics on that field. We met with Chevron -

MR. OTTENHEIMER: I have heard it said in the industry that it is a matter

of time.

MR. MAYNARD: Chevron says: Very much so. Chevron and their partners say

it is very much so. It is a matter of time.

I met with Norsk Hydro just this week and they pointed out a field that they

had in the North Sea that fifteen years ago had 3 billion barrels of oil in

place and they carried a recoverable reserve of zero barrels. Fifteen years

later they are carrying a recoverable reserve of 1.2 billion. The field has

produced some 600 million. That is just the effect of technology and time. They

express all the confidence in the world that the field will be developed. It is

a timing issue.

MR. MATTHEWS: They won't come out publicly saying it, as blatantly or

clearly as that, particularly Chevron-Exxon who really were the lead on the

Chevron people and the Ben Nevis Hebron one. We have met, as the deputy said,

with the Norsk Hydro people, we have met with all of the other partners in that

play who are in that Ben Nevis-Hebron, and the clear message that we get is that

it is not a question of if, it is a question of when.

If I were adventurous enough to put my

interpretation on the comments that

have come back, I would interpret their comments as being highly, highly

interested and probably at their own level in their own shops, so to speak, are

today, as we speak, still continuing to pursue those projects, doing things

within their own areas, within their own organizations, to try and advance the

technology to make sure that this Ben Nevis-Hebron one moves forward. Seven

hundred million barrels of oil is not going to sit there very long, even though

it is in a fractured field and it is heavier oil and it is more technically

challenging.

MR. OTTENHEIMER: I don't disagree. In fact, I have spoken with

officials at NOIA and they share the same opinion, that it is very much a matter

of time.

On the other issue, regarding the transfer of leases by Exxon Mobil, can you

shed some light on this, any information that you can share with us with respect

to: Has Exxon Mobil been successful in the transfer of its offshore leases?

MR. MATTHEWS: Well, they haven't been successful to date, but they are

working through that issue now with C-NOPB, so that the conversion from the

federal permits to the exploration licenses can take place.

The deputy, John, can probably inform you as to what the process is, but they

are in that process now of engaging with C-NOPB.

CHAIR: Not to interrupt the flow of dialogue, and we will can go right

back to it, the Chair would like to recognize and welcome Mr. Williams, the

Leader of Her Majesty's Loyal Opposition, who has just joined us as well. For

the record, I just wanted to show that Mr. Williams is in attendance this

morning.

John, we can go back to you after the lull of the conversation, if you wish.

MR. OTTENHEIMER: I only have one more question, and then I am finished.

CHAIR: Okay.

MR. OTTENHEIMER: Thank you.

It is the on-land activity on the Port au Port Peninsula, the Garden Hill

project. You know, we hear publicly, of course, that that has had better days in

the past, and there has been some difficulty, we know, from a financing point of

view. The company has been very open, I think, in discussing its difficulties in

recent months.

Can you perhaps give us some indication as to where we are with that

particular project, and what the department envisages as the long-term prospects

for Garden Hill?

MR. MATTHEWS: The situation with respect to onshore oil and gas

development is quite different than the offshore. The offshore activities, the

exploration side of it, the development side of it, the regulatory enforcement

side of it, all of that is done by C-NOPB on our behalf and on behalf of the

federal government, because we jointly make up, along with industry, the C-NOPB

organization.

Onshore we have full responsibility for the regulation, the enforcement of

regulation, as well as for the promotion of our onshore resources. So, it is

quite different in onshore versus offshore, because we are not only the promoter

but we are also the regulator,

whereas with the offshore we are the promoter,

but substantially C-NOPB is the regulator. So we have a different circumstance

and we are walking more of a fine line or a tightrope as to what we should or

should not appropriately be saying with respect to the potential on the one

hand, and on the other hand trying to ensure that, on a regulatory basis, the

companies are held to account to do things properly.

All I can say about the West Coast here is what I said publicly, that we are

hopeful that the current proponents, or any new proponent that they bring or

that comes otherwise through land sales, are successful out there.

Obviously, you hear different comments with respect to the prospectivity of

the area. You hear different numbers, maybe, from time to time, with respect to

the potential reserves or the proven reserves that are out there. We make no

comment on any of these observations or information releases that are put

forward by the proponents, in this case CIBC, simply because they are the ones

that need to be held accountable for any information that they disseminate with

respect to what they are doing, how it is going, how it is not going, what their

prospects are from their perspective. From our perspective, we have information

within government that can be made available to the public to the extent that it

is not confidential on the basis that it has to be protected.

The West Coast oil play is a challenge, it has been for many years. It has

not matured to the point where we, today, have a significant development

happening. We do have one organization out there operating under an advanced

exploration licence which, in effect, gives them the ability to do some limited

commercial production. I think that is the circumstance that they are actually

and factually in. The licence under which they currently operate - because we

have done everything we could, everything that is reasonable, everything that is

appropriate, we have done everything as a department and as a government that we

can to move and assist them to move that project forward. We have not bent the

rules, but we have given maximum latitude to everything we can do to advance

their interest in moving the project forward.

Now, that is not making any comment on how successful they will or will not

be. That is not making any comment on any of the challenges that they have on a

business case basis. We are simply saying that we have put them in a

circumstance, with this advanced exploration licence, that they, in effect, can

do some commercial production if they can bring themselves to that point, and if

they have reserves there that lend themselves to being produced commercially.

The extent to which they will have ultimate success is obviously still an

outstanding question in everybody's mind, because at what point it happens I

am sure they will the first, and appropriately so, anxious party to make that

announcement.

MR. OTTENHEIMER: Thank you, Mr. Chairman.

I will allow my colleagues to ask some questions.

Thank you, minister, and your officials.

CHAIR: Thank you, Mr. Ottenheimer.

I want to also thank my colleagues from the House, who serve on the

committee, for allowing the critic for the Opposition to have free-wheeling

discussion back and forth with the minister. In doing so, by not sharing the

time five minutes each, allowing him to deal with many of the issues that were

important to him and issues that he wanted to discuss. I want to thank all

committee members for allowing our guest to the committee to have that

free-wheeling discussion this morning to answer those various questions. I thank

all members for that, and John, thank you for attending.

Trevor, we will go to you as vice-chair. You may begin if you wish or defer

to one of your colleagues.

MR. TAYLOR: I will ask a couple of questions before I pass it on to my

colleagues.

Mr. Minister, petroleum price regulation, the person responsible for that,

where in the budget estimates would we find that?

MR. MATTHEWS: Where would you find it?

MR. TAYLOR: Yes.

MR. MATTHEWS: In this year's government estimates you would find those

votes carried in the Department of Government Services and Lands. The regulatory

regime has been put in place. We were involved, as a department, in that issue

until we put the petroleum directorate in place.

MR. TAYLOR: Okay.

MR. MATTHEWS: Then full responsibility for that activity was moved to the

Department of Government Services and Lands. They would be carrying the vote for

that. A little bit of it may be found - and I am not sure - in Works, Services

and Transportation to the extent that there may be rent for office space, that

sort of thing being paid; but these are the two departments, and predominantly

GSL.

MR. TAYLOR: I notice in the total departmental budget - as I see it,

there is approximately from 2001/02 Budget to the 2002/03 Estimates there is a

difference of approximately $2.1 million and a difference actually of about $8.1

million from the revised. Why such a large difference this year from last year,

both from the Revised to the Budgeted, and from the budgeted to budgeted?

MR. MATTHEWS: You are talking about the total budget?

MR. TAYLOR: Yes.

MR. MATTHEWS: Our total budget is about $25 million-plus. One of the big

items in there is the - it really inflates our real budget significantly - Hope

Brook Mine reclamation project. That is going to be - who knows? - maybe a $14

million to $16 million project. This year, upwards to $10 million of that will

be spent. In fact, we have just, or we are about to enter into a major contract

of about $8.6 million to move a major piece of that work forward. It should have

been done in previous years but we are only getting to it now. A big piece of

our budget is the Hope Brook Mine reclamation project, which, as I say, sort of

skews the real size of our departmental budget. That is reason for the

difference.

WITNESS: (Inaudible) delayed the schedule.

MR. MATTHEWS: Yes, we had a delay.

WITNESS: We had originally scheduled to have more work done last year,

but it took longer to get the contracting activity underway.

MR. MATTHEWS: There is also, I think, in our budget this year - while

generally budgets are decreased, there is an increase in our budget this year

reflective of our statutory commitment to the funding of C-NOPB, which is

essentially funded jointly between ourselves and the federal government. They

recover some money from industry. That relates directly to the increased

offshore activity with the Nova Scotia project coming on stream. Now, the issue

is imminent with respect to White Rose.

MR. TAYLOR: I assume - it is not wise to assume many things, is it? But,

on page 144, 2.1.03.06., Purchased Services -

MR. MATTHEWS: Just a second now, page 144?

MR. TAYLOR: Yes, page 144, item 06., Purchased Services.

The budget from last year was $7.59 revised to $2 million, and the budget

this year is $10 million, approximately. Would that be inline with what you said

about the Hope Brook?

MR. MATTHEWS: Yes, that is the Hope Brook reclamation site activity that

is anticipated this year, the $10,024,700. Last year we budgeted $7.5 million.

We only expended about $2 million, but we are getting into the major contract

awards as we speak. There will be a lot more money spent on that project this

year.

MR. TAYLOR: On page 145, I noticed in the total - I will not go into the

specific items, I suppose, but the total for the Policy and Strategic Planning

section, there is a difference of $520,000 approximately from the Revised of

2001/02 to the 2002/03 Estimates. Obviously, I can see where it shows up on the

item by item, how it totals up to roughly $520,000. But, why would that actually

happen, the $520,000 difference in that section? How will it affect the

department's abilities in that area?

MR. MATTHEWS: There are two issues. The boundary dispute issue was funded

and managed under this vote. The bigger piece of it, in terms of Grants and

Subsidies, is page 145, 3.1.01. Grants and Subsidies, budgeted this year

$85,700, but the Revised for last year $489,300 reflects the work that had to be

done to set up the petroleum directorate. In addition to that, some expenditures

with respect to climate change issues, our new membership fee into the energy

council, and our annual membership into the Canadian Energy Research Institute.

The biggest, single issue that caused the upward expenditures last year actually

was the activity of setting up the petroleum directorate and the activity of

bringing the boundary hearings to conclusion.

MR. TAYLOR: I suppose it would be your department that might be

responsible, or maybe it is Environment, but I will ask the question anyway

since you are responsible for energy production, generation. This might seem a

little bit off now, but the possible ratification of Kyoto. Has your department

done any work on the ramifications, positive or negative, of the ratification of

Kyoto on our Province and our energy production and what have you?

MR. MATTHEWS: We are fully engaged on the issue of analysis with respect

to the impacts of Kyoto or the potential of a Kyoto agreement, particularly the

energy sector. From a Mines and Energy perspective we have an interest in

showing we understand how it would impact the development of our oil and gas

industry and what the impacts are in terms of, in a positive sense, the

development of our hydro. Hydro is deemed to be clean energy and, hopefully,

should attract some Kyoto credits which would make it attractive to develop

hydro. On the other hand, there are negative impacts on oil and gas because they

are not clean energy sources, or as clean, but they are not as dirty as coal and

that sort of thing.

We are fully engaged, both Mines and Energy and Environment, both ministers.

Both departments are engaged in the joint energy and environment council

meetings that occur regularly around the Kyoto thing. There is a significant

series of minister's meetings scheduled for the third week of May in

Charlottetown, I believe, to deal further with hearing an update from the

federal government with respect to the work that they have been developing to

come to some definitive conclusions as to what the real impacts of signing off

on Kyoto would be if we were to do it this year, as the federal government seems

to have a want to do. Although they are backing off a little bit from that it

seems publicly.

The information that I have from my counterpart, who is now Minister Dhaliwal

- I also hear directly from Minister Anderson on the issue - is that they now

seem to be a little more committed to ensuring that we get the right economic

analysis in terms of the economic impacts on the economy if we move without

taking into account the American decision, not obviously to sign onto Kyoto but

to go their own path and do their own thing. There is a big - I prefer to say

lobby, I guess - area of concern being expressed particularly by Alberta, B.C.

and Ontario with respect to the impacts on industry.

On the other hand you have a province like Quebec, very much in sync with the

federal government in terms of wanting to have it signed off because they see

the potential for, in their economy, the growth of new hydro generation coming

on stream. They see that as clean energy. They see the likelihood of picking up

Kyoto credits that would make those projects more attractive to do. There is a

big, outstanding question as to who gets what credits when they become

available. Some suggest that the Americans are suggesting that the credits

should belong to the consumers, not the producers of the clean energy. The

American position currently is more along the lines of large hydro projects not

qualifying for credits because they do environmental damage. So, they are really

not that great, but small hydro projects would be attractive to them in terms of

allowing credits. We would call them NUGS, small developments.

It is a really interesting file. There is a really interesting bunch of

dynamics that play with respect to the industry and their view on the impacts of

Kyoto verses the environmentalists and the environmental agenda, generally, as

to why it should move forward more quickly. One crowd are saying that you will

hurt the economy if you do this. The other crowd are saying: But, all the new

technology that is going to have to be developed to implement Kyoto will mean

new economic activity. It is a very, very interesting discussion; a very, very

interesting set of dynamics always at play when the ministers get together on

this particular issue. Very, very polarized, I would say, in terms of the

discussion and the perspectives.

MR. TAYLOR: Thank you, minister.

I note in - I think it was - your opening remarks or comments on independent

advice that your department has obtained from time to time on Voisey's Bay

and, I guess, any number of different projects, possible projects or potential

projects. I note you - obviously, that does not come free. In looking through

the estimates of all the departments I find a fair amount of funds allocated for

Professional Services and Purchased Services. I wonder - I am sure I can find it

there - how much of your budget would be spent on seeking outside independent

advice on major projects like Voisey's Bay? How would that advice be sought?

Would it be done through public tendering or whatever?

MR. MATTHEWS: The percentage of our budget would vary greatly from year

to year. As an example, last year and this year, there would be more of a demand

for independent advice on a financial basis, on a legal basis, and on an

industry analysis basis with respect to the Voisey's project and big projects

like that. So, the amount varies considerably from year to year, depending on

the projects.

How we go about getting that; I can tell you from my perspective, we try to

find the best advisers we can get. We normally go with the advisers that

governments have been using historically for many, many years. I speak of the

people like Merrill-Lynch, as an example. Government has been using them through

the Department of Finance - and I know that from being there - for the last

twenty years, as advisers. This goes back to successive governments. So, you

will find if you look through - at least the departments of government that I am

most familiar with, the ones I have been in. You will find that there has been,

for the most part, a long standing and historical relationship with respect to

advisers and advice that we take. That is because, I guess, for many, many years

government, successive governments of all stripes, have always sought to get the

best advice from the best people, and we stick with those. We do not jump around

a lot in terms of finding new advisers.

On the Voisey's Bay file, as an example, we used people that we have used

for many, many years. To the extent that we need additional advice, additional

analysis, they sometimes recommend to us who the best people are. In any event,

the best people to give the best advice is generally known to, not only

government, but it is also known to industry. So, it has to be very transparent

in terms of who we engage and who we pay for our advice. It would serve us no

purpose, it would serve the projects no purpose, and it would serve the Province

no good or the industry, if we were using advice on any other basis or buying

advice on any other basis other than buying it from the best possible people

that are out there to give advice in that specific area. In the case of energy,

it would be certain types. In the case of the mine side, it would be other

types. We buy from the best and we do it on the most objective basis -

particularly in these areas - that is available because we want to have the best

level of knowledge to work from moving through the projects. If we did not do

that it would be so transparent to everybody, that we were not using the best

advice and getting the best value for our bucks that we would not be able to

defend against it. For that reason we stick with the best because they have

served us well historically.

MR. TAYLOR: I will move to a specific item now on page 143. It is sort of

related, I guess, to our previous exchange. Subhead 2.1.01.06., Purchased

Services. What kind of services would be purchased under that sub? On page 143,

minister.

MR. MATTHEWS: Subhead 2.1.01., Purchased Services?

MR. TAYLOR: Yes, Purchased Services.

MR. MATTHEWS: Subhead 06. you are talking about there?

MR. TAYLOR: Yes, sir.

MR. MATTHEWS: That particular line item has to do with the costs

associated with the program delivery, such as our vehicle and equipment rentals

and maintenance. It is also the fund from which we pay for sample analysis, fin

section preparation, micro probe services, as well as costs directly associated

with the publication of maps and reports emanating from the field programs. On

top of that, we pay for storage space that is related to our geological surveys

that go on year over year. It is really a vote that captures all of these areas

of expenditure under the general heading of Geological Surveys.

MR. TAYLOR: On rentals or services such as - I assume the department

would use helicopters from time to time, maybe even boats, or what have you.

Excuse my ignorance, I am relatively new at this. How would government go about

seeking that type of - for example, if you wanted to rent a truck, does

government have a standing rate the same as if I walked up to the counter at

Budget today or is it done by tender or whatever?

MR. MATTHEWS: It is basically all tendered. You mentioned helicopter

services, that sort of thing is done on a standing offer through Works,

Services. Works, Services and Transportation manage a lot of that stuff on

behalf of many departments of government under the standing offers. With respect

to major purchases for other types of things that are covered there, they are

basically all tendered. That's in a general sense. That is not quite the case

if you or I walk up to a counter in Deer Lake to get a car tomorrow, we pick up

whatever we can get. That is a different circumstance, but the major issues are

all tendered. Deputy, I think it is fair to say?

MR. MAYNARD: Yes.

MR. MATTHEWS: We are completely subject to the - for better, for worse -

Public Tender Act. We have to live with that, and we subscribe to it. There is

no reason to deviate from it unless it is in the context of what the act would

permit as an exemption, which would be, for our purposes, only emergency

circumstances because other than that, we have the ability to tender in advance

and live with the act.

MR. TAYLOR: Thank you, minister.

Mr. Chairman, that is all I have right now anyway, but before I pass it over

to - I noticed in previous committee meetings, we sort of hogged the meeting. If

any of the other members would like an opportunity before I pass it over to my

colleagues -

CHAIR: Thank you, Trevor.

We have traditionally tried to allow the time available, at least committees

that I have chaired, to give the Opposition ample opportunity to virtually ask

any question they want for the record. I suppose, being government members, the

advantage we have is that a stroll over and sitting with the minister during the

Legislature gives us an opportunity to deal with some of these issues. Plus, as

would be in your own caucus, a lot of these issues are dealt with directly

during our own caucus meetings. So a lot of the background information that you

are seeking this morning, we would probably be more than just a little privy to.

We would probably already have had our briefings on them, especially during the

budget process.

The current Premier has taken a very open attitude towards budgets. A lot of

the budgets, in actual fact, unless the minute details - the majority of the

issues, I would be safe to say, minister, have been dealt with in caucus prior

to the final publication. Now, we all know the budget document is a document we

all see, but in most cases, for many of the departments, we have been through

them. They have asked some of the same questions that we are hearing during

these sessions, and have received the answers.

Bearing that in mind, any member who wishes to identify themselves, the Chair

will certainly recognize them and give them an opportunity to ask questions.

But, from the government member's perspective, most of the questions have been

answered for us already and because of that, they end up here in these

estimates.

Thank you for drawing it to the Chair's attention. My colleagues know that

if they wish to ask something it is just a matter - they can grab my attention

and then we will go back to that five minute, five minute thing. For me, as

Chair, this seems to work and I think it works for the committee as well. We

will defer to one of your colleagues unless - no, we will defer to one of your

colleagues.

MR. T. OSBORNE: Thank you.

Minister, in questions from the critic earlier, you mentioned that the

concentrate, the ore that comes out of Voisey's Bay, it is not wise to let it

sit there for a number of reasons. You say it may devalue over time because of

exposure to heat. It may be explosive, whatever the case maybe. Would it be

feasible to just take enough ore out of that find to test at the facility in

Argentia until we know that facility works?

MR. MATTHEWS: Well, in order to extract any ore out - first of all, ore

will never leave the Province unprocessed. There will never be ore leave the

Province. The minimum that will ever leave the Province is a concentrate which

is an initial processing of ore that is mined, and in order to get it to that

stage, of course, you have to have the mine, mill and concentrator development

take place. In order to accomplish that, there has to be, I think, the $400

million to $500 million capital expenditure to create that infrastructure and

get that up and running.

So, the short answer is no, you cannot go up and put a shovel in the ground,

so to speak, and take out enough concentrate just to run a pilot test plant. I

mean, the incremental cost of doing that, the real cost of doing that would be

impractical in terms of the development of the site and that sort of thing.

So, the real answer is that once they start the mine, mill and concentrator

development, they have to proceed to completion of that phase. That is a three

to four year project to get that done. During that period they will have

expended $400 billion or $500 billion, in addition to what they will be

expending to build a demonstration plant at the Argentia site. So, there is in

total, probably $500 million, $600 million expenditure right up front before any

concentrate goes anywhere. You are correct, and my officials, I think, would

explain to you why you cannot stockpile this stuff or why you cannot sit on a

deed if you wanted to do that, but the fact of the matter is you can't. The

practicality of extracting just enough to do the Voisey's testing up is really

not on in the context of the cost of doing the mine, mill and concentrator

development to get that minimum amount of product out.

MR. T. OSBORNE: Okay. Thank you.

That was the answer I anticipated, actually, that it would be too costly;

which leads me to my next question. Why is it we would not bring enough ore into

the Province from another site somewhere else in the world to test the pilot

project in Argentia until that is a proven technology?

MR. MATTHEWS: The short answer, as I understand it - and if my officials

can add to it I would ask them to do so - is that there are probably no two ore

bodies exactly alike in terms of the type of ore or laterite structures that

have to be tested up. In the Goro circumstance, that is a laterite deposit, and

literally I was there. You can go out anywhere on the side of the road or

anywhere in that area and take up handfuls of clay-like material which is what

contains the nickel. In Voisey's Bay, what you have is a solid granite,

sulfide rock. So, I mean, they are two different planets apart in terms of the

type of material that contains the nickel. That is why they have to test up each

against the individual ore bodies.

There has been two specific experiences of nickel producing companies trying

to bypass the piloting stage; both of them were in Australia. Both of them have

turned out to be unmitigated disasters with operations either in bankruptcy or

near bankruptcy because instead of getting at the 90 per cent to 95 per cent to

97 per cent of extraction rate, which they have to have in order to make the

economics work, they are down around 40 per cent, 50 per cent and 60 per cent

because they went pass the piloting stage. I am sure, Brian, you could share a

little bit about that in terms of the technical reasons why that happened, if

you are interested; but it is very important information in the context of why

you need to test up the hydromet against the sulfite deposits out of Labrador,

specifically. It goes right to the heart of the issue.

MR. MAYNARD: I will get back to your question. You could bring in an ore,

you would require - ore concentrate. It would have to be mocked up and try to

simulate the Voisey's Bay concentrate and test it through the hydromet but

practically speaking with the timelines that we were on, if activity commenced

tomorrow you would have concentrate coming out of Labrador roughly at the same

time that the hydromet research and development facility would be available to

take that. So practically speaking, it does not make much sense to do anything

other than test it on the actual concentrate in the first instance that will be

used.

MR. MATTHEWS: On the Murrin Murrin experience in Australia, for not going

through the piloting stage.

MR. MAYNARD: The hydromet technology basically can be proven at a bench

type scale process; it is a chemistry. It is a bunch of chemicals that leach out

the material and then you precipitate out the nickel. The difficulty comes in

the design and engineering phase when you scale up from a lab-top process to a

facility that is roughly the size of 100 to 150 football fields. You get into

design problems. You get into equipment failures and things like that.

The Australian experience was they went right from the lab test to a

commercial plant that was roughly that size and they got into equipment

failures. It is working, it is just not working economically because the repair

rates are so high. The process trains are only working for days and then they

are finding that the acid is burning through the material that they used in the

pressure vessels and things like this. So it is not a clean technical solution.

That is the primary reason Inco is proposing to go through the intermediate step

of testing this in a pilot phase to allow them to ramp it up to a full-scale

commercial plant.

MR. T. OSBORNE: If I understand part of your earlier answer, there are no

two ore bodies alike?

MR. MATTHEWS: Well, I wouldn't say there are no two ore bodies alike

but there are no two ore bodies identical. As the deputy says, you can simulate

or you can mock up or you can bring in synthetic type of material that would be

close to or similar to the sulfite material coming out of Labrador. As a matter

of fact, there may be some of that brought in to be run through the pilot plant

as a small part of what is going to be used to test up the technology, but the

best way to do it, the safest way to do it, the most sure way to do it is to use

the ore body that you are going to be processing for the next thirty years to a

$730 million commercial plant that is going to be built. Experience of others,

plus what Inco and other big organizations like that know, is to do it in the

phase process that gives the most certainty to the best outcome. That is the

concept they are laying out and that is the concept that we are envisioning

happening with respect to the development of the Voisey's site.

MR. T. OSBORNE: So, if I understand you correctly, we could bring ore in

from somewhere else but it would require some initial processing in order to

simulate it to the type of ore that is coming out of Voisey's Bay?

MR. MATTHEWS: You could simulate it, yes. You could do like the Murrin

Murrin crowd in Australia done. You could try to bypass the piloting project,

the piloting phase but the problems there are a disaster. That is everything I

have heard. You could do that but, I mean, the right way to do it is the way

that we are proposing, the way that they are proposing. Everybody who gives out

advice from the industry, plus independent advice, tells us absolutely, this is

the proper way to do it, the only way to do it to ensure a good project. So, I

guess that is where we are.

MR. MAYNARD: Again, with the current time lines, we wouldn't be

surprised to see, for the first couple of months, the test facility use a

synthetic concentrate and not the actual Voisey's Bay concentrate in order,

again, to (inaudible). But, this has to be scaled to the characteristics of the

concentrate that it is feeding. That is the value of having the research and

development facility in Argentia, as well as the pilot plant because as this

facility continues to operate - the intention is to operate it on non-Voisey's

Bay feed. So, what you will do is take the non-Voisey's Bay feed, run it

through the test facility in order to make sure your chemical calculations and

your engineering and design parameters are sufficient to process other type ore

bodies. You will run it through the test facility in order to know what

adjustments you have to make to the commercial plant once the Voisey's Bay

feed is no longer available.

MR. T. OSBORNE: So, why then would we, as a Province, risk having another

Churchill Falls deal, where in thirty years from now Inco may say it is not

feasible to bring ore in from Goro? Because Sudbury will be gone, undoubtably,

in thirty years. Brandon, obviously, will be gone. Why would we risk, as a

Province, letting our ovide concentrate leave the Province at this stage of the

game prior to knowing that the hydromet facility is absolutely going to work and

will absolutely be viable? Why don't we just bring ore in from another site,

such as Goro, to ensure that this is going to work without any ore leaving the

ground in Labrador? Once we prove that, then proceed with removing ore from the

ground and having it fully processed in this Province.

MR. MATTHEWS: Well, part of the reason why concentrate movement is

contemplated, as I said earlier, is to provide capital to do the $1.1 billion

capital expenditures that have to be done to get the mine, mill and concentrator

up and running, and to get the commercial plant operating. So, if you done

nothing in Labrador and you brought in something and tested it up in the

demonstration plant, if you have not started up in Labrador then you have to

wait another four years to get concentrate in any event. Now that is the period

of time, I know, that it will take to build a commercial plant, more or less.

The reality is that they have to have the ability to generate the capital needed

to do the upfront investment of mine, mill and concentrator and commercial

plant.

That is why I said very clearly at the outset, there are two concurrent and

very necessary reasons why concentrate export is under consideration. One is the

fact that they need it to do this, in any event, to generate some cash to do the

infrastructure. Secondly, of course, is to test up the technology to make sure

that it works. So there are two parallel, concurrent, and very defensible

reasons why it has to proceed in this fashion. I think, in all fairness, if this

proposition along this line was not sensible or not necessary or not

appropriate, by now there would have been enough critics out there in the

industry and enough critics in the business world to have said: no, this is

absolutely not necessary. This is not what is being said because this is in fact

what is necessary and these are the defensible and the real reasons for it. If

there was another way of doing it, then it would be under contemplation.

It is a question of, yes, you can take the position that come hell or high

water, for whatever reasons necessary on a technical basis or in generating cash

on a fiscal basis, no matter how valid those reasons are, we are not going to

let a spoonful leave the ground in Labrador until it comes to Argentia. If we

take that position, we can continue to hold that position and it would be a very

much outstanding question as to whether or not we would ever get the development

of Voisey's Bay moving forward. It is the same old argument, leave it in the

ground forever, let the water run to the sea forever, do nothing and wrap

ourselves in the flag and be heroes for doing nothing. We can do that, that is

not an issue. That is a road we can go down. It is a judgement call as to

whether we should be doing fundamentally the right thing to move the project

forward or whether we can do the wrap yourself in the flag thing. For some, the

politically acceptable thing of doing nothing - because on principal we have

always done a bad deal so now we don't think we can ever do a good deal. I

think the challenge in front of us is to do a good deal.

With respect to the fear of whether or not there is going to be concentrate

left in Thompson, Manitoba to bring back in thirty years; sure that is a valid

question, I accept that. We are not paying any interest really as to where the

concentrate is going to come back from in thirty to thirty-five years' time,

in the sense that there are so many sources of feed around the world that Inco,

as an organization, have control of, that they can bring it in from any number

of sources. They moved it now into Clydach, Wales, from Chile, I believe, and

from Australia. They keep running that processing plant because the - from

import of feed because there has been no mining done in Clydach, Wales for

thirty or forty years.

The last figures I saw in terms of worldwide reserves of nickel, lest we be

fearful that there is none going to be around, is that in 1998 a U.S. Geological

Survey indicated that there was, at that point, 121 years of nickel supply in

the world. So a specific miner site potentially running out of feed is really

not the basis from which we can either criticize or defend a proposition. The

fact of the matter is, if we have to have it stored in a warehouse and sit there

for forty years so that we can be guaranteed it going to be there, then that is

not on. I mean there has to be some decision made with respect to how you move

forward and the basis on which you are prepared to accept a type of guarantee

that gives you a sufficient level of comfort to be certain that we are going to

get the feed back. Wherever it comes back from will be fine with us.

I would like to be able to inflict upon my children and my grandchildren the

burden of having to watch feed come in here for forty or fifty years after

Voisey's is mined out. To watch feed come in for the first time to run a

commercial operation, that has never been our circumstance before. We have

always seen feed go out, concentrate go out and be processed elsewhere. I am

satisfied to risk the future generations having to watch feed come in to run the

plant after Voisey's is mined out after thirty years. Bearing in mind that

while there is thirty years life there now, I do not think anyone would doubt

that there would be more reserve found over thirty years to extend the life of

Voisey's itself, if in fact the project gets up and running. That is normally

what happens, they find more feed and they continue to extend the life of mines,

generally. They do run out at a given point, I accept that, even though Sudbury

has been going now since 1880, I believe. I will not assume that Sudbury is

going to be running out in thirty years because I do not know that. Nobody has

ever said that it will. That is not the issue of where they are going to get it

back from. Particularly, the issue is that it will be available, they will bring

it back and we will accept the legal commitment on that basis with penalties

that ensure - the language that ensures it is enforceable.

CHAIR: I am going to ask members now if they would like to zero in a

little more closely to the actual Estimates themselves, and I appreciate the

dialogue back and forth.

WITNESS: (Inaudible) when are we starting? I have questions to ask.

CHAIR: That is what I am saying. I would like for us to start zeroing in

on the Estimates. We have an hour-and-a-half.

The Chair gets a little complicated because we invite the critics to have as

much time as they want, they take an hour-and-a-half of the committee's time

to have the free-wheeling conversation that has taken place. The Chair finds

itself going back over some of the exact same questions that were asked and yet,

at the same time, not getting to the actual numbers. We have been two-and-a-half

hours now in general discussion and as Chair, I think it is time for us to start

moving in on the actual Estimates themselves. That is where I would like to go.

MR. T. OSBORNE: Mr. Chair, I am not sure that my questions are the same

as what the critic had asked but in the meantime, I only have a couple of more

questions and then we will get into the numbers.

CHAIR: Fine.

MR. T. OSBORNE: Again, I have to ask, Minister, if part of the philosophy

for allowing ovoid to leave the Province is to help finance the pilot project in

Argentia, why would we not bring feed in from an existing site to help finance

the pilot project in Argentia? And giving ample time to