Industry Committee on July 20th, 2010

[The Chair, Conservative, Michael Chong]

Welcome to the 26^th meeting of the Standing Committee on Industry, Science and Technology. Pursuant to Standing Order 108, we are here today to study the impending closure of Shell Canada's Montreal refinery.

We have three witnesses on our first panel: Mr. Oblath and Monsieur Houle are from Shell, and Mr. Rocheleau is from the Shell Workers Union.

We'll begin with opening statements from each of the two parties, beginning with Shell.

[Christian Houle, Chief Executive Officer, Montreal East Refinery, Shell]

Committee members, good morning. My name is Christian Houle. I am the general manager for Shell’s refinery in Montreal East.

Sitting next to me is Mr. Oblath, the vice-president responsible for Shell’s merger, acquisition and divestment activities, including those involving Shell’s Montreal East refinery. He is a senior member of Shell who is here to provide information and answer your questions regarding the significant efforts made to sell the refinery, and provide a perspective on global refining.

I will provide information and attempt to answer questions regarding our plans for converting the refinery to a terminal, including the supply of gasoline, diesel and aviation fuel to meet the demand of our customers in Quebec, Atlantic Canada and parts of Ontario.

For the past 77 years, Shell has operated its refinery in Montreal East; that is 77 years of Shell and its employees contributing to the economy and community of Montreal East. Taxpayers, governments, employees, customers, suppliers and Shell have all benefited.

First, please know that this outcome is not our first choice. As my colleague Mr. Oblath will demonstrate, for almost a full year we tried hard to sell the refinery. We realize that its conversion to a terminal will have a significant impact on many people—our employees and their families, as well as those who live and work near the refinery who benefit from our operations. We recognize how difficult this is for all and sincerely regret having to take this step. This was not an easy decision, but unfortunately it was the only viable decision in the difficult economic climate in the refinery sector.

On the matter of supply, we do not agree with the assumption that the conversion of the Montreal East refinery to a terminal will result in interruptions of fuel supplies for our customers. Shell has experience converting refineries to terminals. Within Canada, for instance, Shell converted its Shellburn and St-Boniface refineries into terminals. We learned a good deal through those conversion processes and continue to have a strong presence in those areas as a major fuel provider. We will continue to reliably supply our customers with quality products.

We announced our decision in January. We have since then cooperated with requests from the provincial and federal governments, which asked us to delay dismantling the refinery until June 1 to cooperate with a special committee and consider potential bids.

I should note that by agreeing to the special committee process, we also delayed normal business processes including moving forward with regulatory permits required for the conversion.

Normal permit requests for demolition, construction and operation of terminal equipment are needed. A delay in permitting can cause supply disruptions. Also, Shell needs to start shutting down the refinery in the near future to ensure safety and asset integrity.

I now turn the floor over to my colleague, Mr. Oblath.

[Richard Oblath, Vice-President, Downstream Portfolio, Shell]

Good morning, committee members.

At Shell we are deeply conscious that our decision impacts our employees, their families, and others. In regard to our employees, we will treat them fairly, and we appreciate the professionalism they have shown throughout this difficult time.

I hope our attendance here today will provide you with a better understanding that Shell has made substantial efforts to sell the Montreal East refinery in a difficult economic environment and that its conversion to a terminal is necessary to supply our customers.

There have been numerous news articles and public statements regarding our announcement of this conversion. Many of them have been speculative and inaccurate. There are three key issues related to the attempt to sell the refinery: it was marketed to a large number of potential purchasers; a significant capital investment is required to continue to operate the refinery in a competitive and safe manner; and despite a year of effort from a large number of parties who were contacted, many of whom analyzed the opportunity in great detail, no offers were made to us.

We're not the first to end our refining operations in Montreal East. Despite significant challenges, we have continued longer than others.

The business climate has changed substantially, particularly in the past decade as global competition has increased. Several refineries in North America have been closed and a few converted in recent times. New refineries in other parts of the world are coming on stream with advantages that smaller, older refineries such as ours in Montreal do not have. Thus margins are lower as unit costs for a smaller refinery become higher.

Shell continuously reviews our refineries to understand the future investments needed to sustain safe, continuous operations. In the case of the Montreal East refinery, this analysis determined that some $600 million of capital would be needed in the near term, notwithstanding the $400 million in capital expenditures we have spent in the last six years.

Thus in July 2009 we publicly announced our intention to seek a buyer for the site, and more than 25 different parties were contacted or contacted us. From this group, 17 made serious inquiries regarding the site and its operations; six of these parties progressed to due diligence, where they were given very detailed information on the site and its operations. Unfortunately, no one, after this detailed analysis, concluded that the refinery warranted their investment, and this process did not result in one single offer.

As a result, in January 2010 we regretfully announced our decision to convert the refinery to a terminal. We wanted to give our employees proper notice of this decision and ensure we could maintain a supply of petroleum products to our customers.

The government asked us, and we agreed, to delay our conversion plans and work cooperatively with a special committee it had created to seek out potential buyers. The special committee is reported to have made more than 100 contacts. As a result of this effort, five of these parties conducted a more detailed evaluation of the site and had open access to discussions with the Shell personnel responsible for this transaction. Out of all of these, only Delek US, a credible refinery operator, came forward with a viable expression of interest. However, after constructive and good faith negotiations, Delek unfortunately withdrew from the process.

Several factors likely influenced decisions of these many interested parties over the past year, one of which was that any potential buyer had to be able to finance three things: a fair purchase price; the cost of approximately $400 million to $500 million of working capital; and another $600 million of capital investments that would be needed in the near term to sustain the site, keeping it operating in a safe and secure manner.

We understand that the special committee offered advantageous financing, acquisitions of shares in the prospective bidder, and direct cash grants that may or may not have had to be repaid. However, despite all of the extensive efforts made by the special committee, the Quebec government, and our employees, as well as the proposed incentives and investments, not one out of the over 100 prospective purchasers saw an acceptable future for this site as a refinery, and none presented us with an offer.

I would like now to hand the floor back to my colleague, Monsieur Houle.

[Christian Houle]

Thank you.

These are never easy decisions, and I hope you can see how thorough we have been during this process.

We are very proud of our 77 years of operating the Montreal East refinery and have always strived to safely provide top-quality petroleum products to our customers. Unfortunately, we could not justify the significant costs required to safely operate the facility as a refinery in the future, and potential buyers likely had similar concerns and so were unwilling to make the investment needed.

As explained, we recognize how difficult this is for the employees of the refinery and their families. Substantial efforts have been made, and a thorough process was undertaken to market the refinery to potential purchasers during the past year. The refinery requires a significant capital investment in order to continue operating in a competitive and safe manner. Despite the fact that more than 100 potential purchasers were contacted, and efforts were undertaken for a year, no offers were made.

I hope this information has helped put our decision in a clearer and more informed context for you today.

Thank you.

[The Chair, Conservative, Michael Chong]

Mr. Houle, thank you for your presentation.

Mr. Rocheleau, you have the floor.

[Jean-Claude Rocheleau, President, Shell Workers Union]

Ladies and gentlemen, I want to begin by thanking the members of the committee for studying the issue of the closure of the Montreal East Shell refinery.

For more than 12 years, I have been the president of the workers' union for this refinery, CEP local 121, which is affiliated with the FTQ. I have worked in the refining sector for 33 years. I am here because I believe that the Montreal East refinery can and should continue to operate, and that it can do so in a profitable manner while serving the Quebec market as it has done for 77 years.

As soon as Shell announced its plans to close the refinery a year ago, indicating that it preferred to sell the refinery, the union supported selling the refinery and protecting jobs.

I want to go over the reasons why the refinery should continue to operate.

First of all, it is profitable and has made money every year for the past 18 years, except in 2009, which was a bad year for the entire industry.

Second, it supplies a stable market with specific products that other refineries do not produce in large enough quantities, such as aviation fuel.

Third, it is directly responsible for 800 jobs and indirectly responsible for 3,500 jobs.

Fourth, it generates $240 million in economic benefits a year.

Fifth, the refinery has undergone upgrades and modernization over the years in order to meet Shell company standards, which are among the most stringent in the industry.

Sixth, closing the refinery could lead to the closure of its Suncor neighbour, which would mean that Quebec would lose two-thirds of its refining capacity.

Seventh, the disappearance of the Montreal East refinery would mean the end of the petrochemical industrial cluster.

Eighth, if the Shell refinery closes, Quebec will lose 25% of its refining capacity. What is worse, the entire aviation, civil and military fuel supply currently provided by the Montreal East refinery is at stake, not to mention the dependence with respect to importing.

That does not include the fact that any scenario put forward by the company based on the on time, on spec arrival by ship of refined products from abroad is the stuff of science fiction. The last three ships that arrived in Montreal were further proof of that. When ships do not arrive on time, it results in shortages at the pump, such as the one experienced by Quebeckers in June.

We are here because despite the fact that Shell received bids that satisfied the conditions set out in its February 16 document, no agreements were reached, contrary to the commitment to sell the refinery that Shell made to the workers, the community and the government.

Furthermore, even though the document put out by Shell on February 16 outlined the conditions under which it would sell the refinery, the company was not all that committed to selling. That is why the committee received confirmation from Shell on four different occasions, from Mr. Williams, Mr. Oblath, Mr. Rathweg and Mr. Marion, that it was prepared to sell if the conditions outlined in its February 16 document were fulfilled.

That confirmation changed the nature of the contract between Shell and the committee, such that if a buyer was prepared to do business with Shell under its terms, Shell had to sell its refinery to the buyer in question. That is the nature of the commitment undertaken by Shell that parliamentarians must consider today.

When Shell began the process to sell the refinery, it did not open the virtual data room, which brought together the refinery's financial documents and conditions of sale, until October 2009, and Shell closed it two months later in late December 2009. It was a fleeting period that should have opened the door to a serious process.

Despite rumours that certain companies were interested in buying the refinery, on January 7, 2010, Shell publicly announced its plans to convert the refinery to a terminal.

The union could not stand by in the face of such a senseless decision, both from an economic standpoint with respect to the 800 families directly affected and from the standpoint of the country's energy security. Our arguments are well-founded, and we have received considerable support from sincere non-partisan parties, initially from fellow union members but also from the Montreal East community. And I would just like to point out that Montreal East Mayor Robert Coutu is here today and has been steadfast in his support since the very beginning.

A coalition of more than 80 companies and socio-economic leaders was formed, and support has come rolling in from every political party, at the municipal, provincial and federal levels. Montreal's city council moved a unanimous motion, and governments sent letters to Shell in an attempt to delay the closure. And Shell delayed the closure for three months, until June 1. As early as February, we helped form a survival committee, chaired by Michael Fortier. It brought together union, municipal, provincial and federal representatives. As a member of that committee, I noticed that every time we took a step forward, Shell would raise the bar higher; I felt as though I had been invited to a silly dinner game.

Throughout the committee process, Shell engaged in doublespeak. On one hand, Steve Rathweg and Christian Houle told us that Shell preferred to sell the refinery rather than convert it to a terminal. On the other hand, however, local management at the refinery did everything in its power to dash the legitimate hopes of workers that the refinery would be sold. Just about every day for the past six months, supervisors and managers told workers the same thing: your RE/MAX agents committee will not find a buyer, it is impossible. If Shell could not find one, there were none. Then, when the committee managed to find five buyers, despite the extremely tight deadline, companies that Shell deemed serious and credible, companies it allowed into the data room, the line that management fed employees was that it would not go any further, that when the potential buyers saw the figures, they would not make an offer.

When two companies and practically a third made offers before the June 1 deadline, management told employees to stop operating one of the refinery's most profitable units, lubricating oils, and to stop protecting boiler 13, which had been shut down on May 18. Seventy-two hours after the offers had been made, management sent employees an email indicating that the two offers had been rejected. At that point, the ministers demanded an explanation from Shell regarding the lack of negotiations.

First, reassurance was given that Shell still wanted to sell, and steps were taken to submit a better offer that satisfied the conditions. And despite that, management continued to send out the same message within the refinery—Shell would never sell and the refinery was worth more than $1 billion to it, which was 5 to 7 times the amount it had told the committee. Certain supervisors and managers were so fervent in getting that message out that the union filed a harassment complaint.

Even though the sale process has ended, the doublespeak has not stopped. The local management has changed its tune and is now saying that the terminal will not be profitable, that the land and facilities are not configured for that purpose and that Shell estimates that the terminal will rank in the fourth quartile in terms of results.

It is our opinion that Shell did not really want to sell the refinery, contrary to what its commitments may suggest. Shell gave the Fortier committee a light pat on the back but never believed that the committee would succeed where it had not. What is worse, Shell probably thought that it would make the refinery so unappealing to buyers that no company would want it. When it was faced with a serious buyer, Shell ended up turning down an offer at the higher end of the range it had itself set. And that was no doubt to hide the fact that it had gone to great lengths to stop the progress of the Fortier committee.

Thanks to this parliamentary committee, we can now get to the bottom of the situation.

We still believe that the refinery can and should continue to operate, that our information shows there is still an offer on the table that meets Shell's conditions and that Shell will speed up the process of dismantling equipment. For those reasons, we have obtained an interlocutory, interim injunction from the Superior Court to stop Shell from rendering the refinery equipment unusable. That injunction is valid until September 10.

During that procedure, Shell submitted its terminal conversion plans, in which it indicated that it would remain open to any offer to purchase its Montreal East refining facility throughout the terminal conversion process. Therefore, according to the document Shell submitted to the department, Shell will be prepared to sell the refinery until the terminal conversion process has been completed.

Members of the committee, it may not be too late.

Thank you.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Rocheleau.

We now have one hour and five minutes for the committee members' questions and comments, until 10:30 a.m.

We will start with Mr. Coderre.

Mr. McTeague...?

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Just to be clear, it shows the time going to 12:30 with both witnesses. Am I incorrect in that assumption?

[The Chair, Conservative, Michael Chong]

Yes, you are. We are going to 10:30, and at 11 o'clock the second panel will commence.

Now we'll begin with questions and comments.

Mr. Coderre.

[Denis Coderre, Liberal, Bourassa, QC]

Thank you, Mr. Chair.

Mr. Oblath, you came from Houston. I am glad to see you here, but you basically repeated word for word the letter written by Lorraine Mitchelmore, the president of Shell Canada. Shell could have saved itself some money, in terms of conveying its message, or saved on travel expenses. You are not required to repeat the same thing.

Mr. Houle, you started off on a bit of a bad foot by saying that safety is at risk because of this committee, as you do not have the time to complete the permit request necessary to dismantle equipment. I would point out that there is an injunction against the dismantling because you do not have the permits needed to go ahead.

Now, to the heart of the matter. Let us get down to business, whether you want to sell the refinery or not.

The reason we had to ask you to appear before the committee is that we have the feeling that someone is trying to pull the wool over our eyes. We have the feeling that someone is lying to us. We have the feeling that a lot of people worked very hard to make a sale happen, to save 800 direct jobs and 3,500 indirect ones. But today we will talk about saving the energy security of not only Quebec, but also Canada as a whole.

First of all, I would like to thank my colleague Dan McTeague because he got the ball rolling at the time with a motion. It was withdrawn to ensure a proper negotiation process.

Second, I want to thank all of my colleagues because there is no partisanship today: everyone agrees that we need to ask the real questions to figure out how to protect an industry and our nation's energy security. So this affects not only Quebec, but the entire country.

We want to know two things today: whether you want to sell and whether there is a buyer. It is not complicated.

So, first off, we just want to know....

Mr. Oblath, you were there for the last negotiation with Delek US, if the news is not speculative. Is that correct? You were there at the end in discussions with Delek US, to see if they were a buyer?

[Richard Oblath]

That's correct.

[Denis Coderre, Liberal, Bourassa, QC]

I'm a bit concerned, because at the beginning we were talking about asking for $150 million or $200 million to buy the refinery, and then we had a letter coming from nowhere last week, saying that you had to put in an extra $600 million. That's pretty scary. It means that our installation, that infrastructure, is in jeopardy right now, and you have to put in an extra $500 million of capital for the operation.

If we stick to the term sheet of February 16, is it correct to say that Shell Canada was ready to sell if we had an enterprise that was ready to put forward $150 million to $200 million?

[Richard Oblath]

I would ask, Mr. Chair, for a few minutes to explain.

The $150 million to $200 million was for the refinery itself. In order to run a refinery, you also need working capital, so any person would have to also acquire the working capital needed. That's in the order of $400 million to $500 million. There are continuous needs for refineries in terms of capital investment. We have invested $400 million in the last few years in the refinery, and the $600 million is our estimate of the needs to invest over the next few years, including the turnaround that we need to do very soon.

[Denis Coderre, Liberal, Bourassa, QC]

But if I may, Mr. Oblath, you're repeating again what the letter from Mrs. Mitchelmore was saying. The simple question is if I'm a company that's willing to buy Shell Canada, and you have the term sheet of February 16...

My question is not complicated. Under the terms of the conditions of purchase, was it just the $150 million and $200 million? If not, did you very clearly indicate in the documents that anyone interested also had to put in $600 million in capital?

It's as simple as that. Yes or no?

[Richard Oblath]

The term sheet was for the purchase of the refinery itself. Any party that has ever bought a refinery or looked at a refinery understands that there is a lot more cash needed in the near term for any refinery, especially working capital, and the term sheet did not hide that. Those are normal conditions of sale. There is nothing different. We were very eager. We're very sorry we couldn't find a buyer for the refinery. It's obviously our preference to sell the refinery; it has been for over a year.

[Denis Coderre, Liberal, Bourassa, QC]

So you're still willing to sell.

[Richard Oblath]

We are still willing to sell, but my colleague Monsieur Houle can explain to you that we're getting to a very critical point. We cannot run the refinery much longer before a turnaround. We need--

[Denis Coderre, Liberal, Bourassa, QC]

The question is this. If it's not dismantled, are you still willing to sell, according to the documents that your company tabled at the court? Yes or no?

[Richard Oblath]

If we have an offer, an expression of interest that is good enough to meet all of the needs of the refinery, the answer would be yes, but we are running very, very short of time.

[Denis Coderre, Liberal, Bourassa, QC]

I have one last question. Is it true, yes or no, that Shell said it wanted to get out of Quebec and the Maritimes and that when you were in talks with Delek US Holdings, you also wanted to sell your service stations because you no longer wanted to have any operations in Quebec or the Maritimes?

[Richard Oblath]

I cannot answer yes or no to that question. I can answer the question, Mr. Chair, but I can't answer yes or no. Can I answer the question?

If Delek US had put a large enough offer on the table and met the sales and purchase conditions there, we perhaps could have reached an agreement for the refinery only. They did not want to buy the refinery only. They asked whether we would be willing to sell the refinery plus the wholesale business plus the retail business, and we said if the offer was high enough, we would be willing to do that.

[Denis Coderre, Liberal, Bourassa, QC]

Did you offer that to them, or were they asking you for that?

[Richard Oblath]

They asked us.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Coderre and Mr. Oblath.

I will now give the floor over to Mr. Laframboise.

[Mario Laframboise, Bloc, Argenteuil—Papineau—Mirabel, QC]

Thank you, Mr. Chairman.

I am going to continue along the same lines. Initially, you were seeking to sell the refinery, and you were asking for $200 million, is that correct?