Industry Committee on July 20th, 2010

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

And we can keep it going as a going concern, no question.

[Jim Boles]

But it will be shut.

[The Chair, Conservative, Michael Chong]

Okay. Thank you very much, Mr. Rota. Thank you, Mr. Boles.

Monsieur Petit.

[Daniel Petit, Conservative, Charlesbourg—Haute-Saint-Charles, QC]

Thank you, Mr. Chairman.

Good morning Mr. Fortier, Mr. Boles and Mr. Delage.

Mr. Fortier, I would like to address this question to you to be sure I have proper understanding. You seem to have successfully fulfilled the mandate you were given, because you were able to find potential buyers—we don't know who all of them were, but you did find potential buyers. The witness sitting next to you represents the company that went the furthest in this whole process.

However, since we began our discussions with the other witnesses—in other words, the officials from Shell, including Shell managers at the Montreal refinery—we have been discussing a very special context in which refineries in Canada have operated since about 1970. More than 35 refineries—large refineries—have shut down. We're not talking about small refineries. We are told that Shell had reached the stage where it felt it had to consider shutting down the refinery in order to convert it to a terminal. We talked about conversion to a terminal, a project which is currently at a standstill as a result of a court ruling.

When you received your mandate and began discussions with potential buyers, did you talk about the special context in which North American refineries have been operating—namely that more of them are being shut down than are being started up? In Quebec in particular, there is a much greater focus on hydroelectricity than on oil. Have you explained the particular context in Quebec to future buyers? Was all of this explained to Delek US Holdings? Were they given a demonstration of this so that they would really know what they were getting into?

[Michael M. Fortier]

As part of the process we put in place, Mr. Petit, we obviously approached companies operating in the energy sector, most of which were already in the refining business. The vast majority of these companies have a very good understanding of their industry, their operations, their profession and especially the North American market, because it is very different from the European market.

The overcapacity in North American refineries is well known. At the same time, there is one surprising fact. I am no expert on the oil industry, but over the last four or five months, because of my involvement in this, I have learned a few things. The fact is, Mr. Petit, that there are attractive acquisition opportunities out there all across North America and refinery transfers are occurring. There was a transfer in Delaware that was finalized on June 1. This is a refinery that had shut down and was purchased by a group of American investors.

So, there are transactions occurring. The buyers are adults and they've been vaccinated. They have a very clear understanding of the industry's circumstances in the short term, and especially over the long term.

[Daniel Petit, Conservative, Charlesbourg—Haute-Saint-Charles, QC]

I see.

Mr. Fortier, I would like to discuss something else with you. You presented potential buyers to Shell. Naturally, Shell is talking about the refinery, but we learned subsequently—even today—that there was also an issue of customer loyalty, in terms of retail station customers or customers who are loyal to Shell because it provides them with the oil or gas they require on a daily basis.

In the transaction that Delek US Holdings was attempting to finalize or which it may have decided to reopen, what was going to happen to employees? You know, it's like buying a hockey team. Do we take all the players or do we drop some of them? What discussions took place with respect to the employees? Were the 500 employees expected to move over to Delek US Holdings or was the plan that half would stay with Shell, some would be laid off and others would be pushed into retirement? What plan was decided on? When you buy a refinery, you do not necessarily buy all the employees.

[Michael M. Fortier]

I would like to ask Mr. Boles to answer that, because he was involved in the discussions with Shell.

[Jim Boles]

I take it I just got thrown under the bus.

[Voices]

Oh, oh!

[Jim Boles]

You need the employees to operate the business, right? You need the people. You need the union people and you need the administrative people.

We didn't get to the point, in 30 days, of being able to...we never met a single employee of the refinery, never. There wasn't time. We were trying to do due diligence in the virtual data room, to try to get an understanding of the business. To the extent that there need to be cost cuts, and some of that would be people, you typically see that in a refinery situation. That typically would occur with regard to administrative people, but there was not any real analysis done. We just didn't have time. We had too many business issues we were trying to understand.

[The Chair, Conservative, Michael Chong]

Merci, Mr. Petit. Thank you, Mr. Boles.

Mr. Bouchard.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Thank you, Mr. Chairman.

Welcome, gentlemen.

My first question is for Mr. Boles.

You offered $150 million to buy the Shell refinery and you had discussions with certain company officials on a number of occasions. What specific terms or conditions proved to be a stumbling block in the process? Was it a question of cost? Were there other factors? They may have been quite clear with you on certain things or perhaps you had your own interpretation of the facts.

[Jim Boles]

Well, it's time and circumstance. I'm not trying to pick peas with you, but we didn't make an offer; we expressed an interest at a certain price level--since the lawyers would have a problem with the word “offer”. We're prepared to move it to that level, but it's not there now.

You must understand, this turnaround is a major, major, major issue. We were faced with closing regardless of what we did. The term sheet we exchanged with Shell provided that on June 26 we would sign an agreement by July 26; that's 30 days. We've got to move two sets of lawyers and all that stuff and understand the business issue, and it's 30 days. We've worked around the clock on deals and we could do it again; we know how to do it. So in spirit we'll agree; we'll sign an agreement in 30 days.

The other condition was that we close within the next 60 days following that 30. That's a very, very short timeframe to get all the approvals, to get the financing, to do all the things that are necessary. We said we would agree to that and go forward on that basis. How much furnace money we have to put up, recognizing the risk we take on those timeframes--we needed to talk about that. But in terms of the spirit of getting this deal done, we'll do that.

It did not matter if we had met both of those timeframes. That refinery was going to be closed because you could not do the turnaround. Prior to that, we explored with Shell: we'll put up the front money, you get it started; you get it started, we'll pay you back. That was a problem. I'm not questioning that internally it didn't have a right to be a problem; it just was. We explored the ways of trying to hurry up and do it.

Even if we had resolved that, it's not likely, in my humble opinion--well, in my opinion--

[Voices]

Oh, oh!

[Jim Boles]

--that that would have been done. You didn't have time to do the turnaround.

So you had a closed facility. We're not going to pay the purchase price for a closed facility, and we never got to the stage of saying, okay guys, let's agree that we've got a closed facility... Shell had an alternative use here. It wasn't like they had to sell to us, right? They've got an alternative purpose for it, unlike many sellers who just want to sell the asset and the business. So we didn't get to the point of exploring, hey look, let's furlough some employees, let's pay some part pay; you organize the temporary arrangements for the customers and we'll stand by and continue to spend money and time and management effort to get this deal done.

Willing parties can find ways to do that, right? But it was an enormous hurdle for them, because Shell's a big company and they've got plans in place. We respect those plans, and they're moving forward with what they corporately needed to do for themselves, their stakeholders, and, as they continue to tell me, the pain that all this “do we have a deal or don't we have a deal” was causing their employees.

So that's the problem. The turnaround is the biggest problem. There are many other issues, many that need to be resolved, but that's just a day's work, right? We just do it. On this one, time ran out. You couldn't get any equipment, you couldn't get the engineering done, you couldn't get any of that, and if Delek's choice was to buy a closed refinery or go operate a popsicle stand, we were not going to buy a closed refinery. We weren't going to pay the purchase price for a closed refinery.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Mr. Boles, to a question put to you earlier, you answered that the discussions were over and that you do not expect to reopen negotiations with Shell.

So, as I understand it, the ball is now in Shell's court. What has to happen in order for the Shell people to pick up the phone and ask you to sit down with them for further discussions?

[Jim Boles]

To commence discussions, we just have to have somebody who gives us a call and says they're ready to convene a group to talk about it. We're available to discuss the situation again.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

How would you describe your relations with Shell throughout these discussions? Did you have the feeling that they were sometimes making additional demands? Were the initial terms clear? Was it always like that? You referred to that earlier but I'd like you to say more about it.

[Jim Boles]

I think they conducted themselves on a commercially reasonable basis. There were times when they asked for things, and if I were a seller I might ask for the same things. When I didn't hesitate to say no, their positions were more modified as a result of negotiations and the to and fro of all that.

It was very respectful, as you would expect. I didn't see anything in there that was under the table as to the relationship of the negotiations with Delek.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Boles.

Merci, Monsieur Bouchard.

Mr. Braid.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Thank you very much, Mr. Chair.

Thank you to our witnesses for being here today.

Perhaps I could start with questions for Delek US.

Mr. Boles, does Delek US currently operate in Canada?

[Jim Boles]

No.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Could you explain, Mr. Boles, why you were interested in this potential deal?

[Jim Boles]

I'm going to assume that you don't want me to repeat what I've already said about our interests, and I won't. We want to buy refineries. It's a stated corporate objective. This is a refinery that was presented to us as being for sale.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

All right.

This could perhaps be classified as a hypothetical question, but take a stab anyway, if you can. What were your long-term plans for this refinery had you been successful in acquiring it?