HANSARD

Printed and Published by Nova Scotia Hansard Reporting Services

ECONOMIC DEVELOPMENT COMMITTEE

Mr. Keith Colwell (Chairman)

Hon. Judy Streatch

Mr. Keith Bain

Mr. Chuck Porter

Mr. Howard Epstein

Ms. Vicki Conrad

Mr. Leonard Preyra

Ms. Diana Whalen

Mr. Harold Theriault

IN ATTENDANCE:

Mrs. Darlene Henry

Legislative Committee Clerk

WITNESS

Canada Research Chair in Oil and Natural Gas Policy - Dalhousie University

Dr. Jerome Davis

HALIFAX, TUESDAY, OCTOBER 23, 2007

STANDING COMMITTEE ON ECONOMIC DEVELOPMENT

1:00 P.M.

CHAIRMAN

Mr. Keith Colwell

MR. CHAIRMAN: Good afternoon, everyone. Everybody is a little bit slow getting here, so we'll start a little bit after 1:00 p.m. and we'll continue to a little bit after 3:00 p.m. to make up for the time. I would like to welcome everybody for coming today and our guests in particular. Before we begin, I would like to go around the table and start with introductions of the committee members.

[The committee members introduced themselves.]

MR. CHAIRMAN: The way I'm going to conduct the meeting today and every day from now on is, I'm going to run it the same as we do the Public Accounts Committee - each caucus will have one-third the time we have available for asking questions. You can divide it up any way you like; it will be up to each individual caucus. We will go with one long round first with a shorter one at the end. Again, each caucus will have one-third the remaining time left and that gives every caucus an opportunity, and if you have one member who wants to ask all of the questions that's fine or if you want to split it up - however you want to do it.

With that, I would ask Dr. Davis to introduce himself and again, welcome and we appreciate you coming today and taking your time to come to our committee. We anticipate your words of wisdom.

DR. JEROME DAVIS: Thank you very much. A few words about myself. Most of my experience with the offshore has been involved with the North Sea in Europe; I'm a relative newcomer to Atlantic Canada. I have a lot to learn and have kept quiet about what has been going on in Atlantic Canada for about four years, the general idea being that until you know what you're going to talk about it's best to keep quiet about things. Basically you should look at me as kind of a country boy from Denmark who is getting acquainted with your fair province, the way in which you handle and deal in this province, and also acquainted with your offshore.

I have worked in the hydrocarbons field for approximately 35 years in various capacities. I have been employed as a consultant, I have my own consulting firm. I don't do much consulting work largely, because I find some of the academic things that I'm doing more interesting.

I was requested when I came here if I had any remarks to distribute the remarks beforehand or send them to the secretary beforehand so that she could distribute them to you. The comments that I have here, I'll refer to these notes. I won't read them because I find that most people who read the notes that they have, it gets excruciatingly boring to read notes in front of other people, so what I'll do is I'll try to extempo and try to explain what's here and we'll take it from there.

I will begin with my story that I have here. When I was 22 years of age I was young, I was ambitious, I was ready for the world. I sat down one day and said, what do I want to be? We all go through this experience at one time or another and I looked at myself and said, Jerry, what would you like to be? I said, let's work it the other way, what don't you want to be - that makes it easier. I sat there and the first two things that occurred to me was one, I did not want to have anything to do with oil and gas. My father was an oil executive and living with him was, putting it mildly, difficult because he was an oil and gas executive and they are particularly broody.

The second thing I did not want to become was a university professor, because as far as I was concerned all university professors were old fuddy-duddies who didn't know what they were talking about and wasted everybody's time. What I never, ever thought would happen is I would find myself in Nova Scotia addressing you people - it's quite a transition. Life is filled with unexpected surprises and pleasures; let's hope that this tends to be one of the latter.

Before I commence my remarks, I have made some errors - the errors will become available to you. What happened was I wrote these remarks up this morning. My policy always is to write things up at the last possible moment and very often when you write things up at the last possible moment, certain things creep into your transcript which are erroneous and I will correct them as we hit them.

Since I am a professor, I'm going to be a bit boring. I'll try not to be and in order not to be, what I've done is I've decided to take three of the major projects having to do with our offshore connected and discuss them in terms of my major theme. I find that if we talk about concrete things people understand you a lot better and then you can make your more abstract points, if you will, but the abstract point is really what I want to make here.

The point I want to get at is a point which is common to all regulations and all regulatory regimes. The question comes, and the question is very simple, how do you regulate offshore activities given the following criteria? Criteria No. 1 - your regulations are supposed to be consistent, they're supposed to apply to everybody. Criteria No. 2 - your regulations are supposed to be fair. Fair to the individual? Fair to everybody? I want to point out when we talk about fair and the fairness criteria, it's very wide criteria. What is fair in Alberta may be regarded as unfair in Nova Scotia. What is fair with certain elements in, shall we say, Alberta that wants, shall we say, a royalty increase is regarded as unfair by the oil companies and other particular interests in Calgary.

So we're dealing with rather slippery concepts here and what I'm going to say is that the Nova Scotia regulatory regime has the same problems that every other regulatory regime has. Neither is this statement supposed to be in any way a criticism of the people who do the regulation. I have met the people who do the regulation - they impressed me with their competence and their willingness to work hard and examine questions from all points of view. So this is not a criticism of the current regulatory regime, it's just going to pinpoint some problems and these problems in many ways have been created and it's not the people who create them, but it's the framework within which you are working that creates the problems. I would like to dwell on this, because I think this is relatively important when we talk about the future of the Nova Scotia offshore.

In other words, what I say here is that I regard the Nova Scotia offshore is, shall we say, at a cusp - it can go various directions from now. Tomorrow, we're going to find out from EnCana whether Deep Panuke is a go-ahead. This is going to have a major, positive impact on the offshore. If they decide not to go ahead, it's going to have a negative impact; this is clear.

The Bass Brothers - many of you have probably never heard of the Bass Brothers. Bass Brothers is an outfit from Houston and are what the Canadians would regard as a junior oil company. They are very interested in drilling on the edges of the Nova Scotian Shelf. They have a drilling plan that is extremely expensive. The drilling rig that they're looking for, I think there are about maybe 25, maybe 40 copies of this drilling rig worldwide drilling everywhere from the Arctic to West Africa and virtually everywhere. It's a very highly sophisticated well they want to drill. What they're looking for on the Nova Scotian Shelf is a resource, they say, roughly 2 billion barrels of oil and maybe 1 trillion cubic feet. That's the size of what they think they are drilling for.

Now the problem there is that while they've been waiting and looking for a drilling ship - a drilling vessel, to be more exact - their exploration period is running out. They haven't had a chance to drill. How do you take care of a company such as Bass Brothers, which wants desperately to drill in the Nova Scotian area and, at the same time, have a consistent, regulatory regime that says after five years or after six years - depending on how you interpret the regulations - you know the exploratory licence disappears and the person is without anything?

A third one is the Maple LNG Project - I apologize for calling it the "Maple Leaf" project. There is a Maple Leaf Ball being given, I believe it's in Boston on November 7^th, to promote the Maple LNG Project. The Maple LNG Project is another major project that we're counting on here in Nova Scotia. I was rather curious about the Maple project because they were relying on Russian natural gas.

One of the problems with most LNG projects is that you have to have the various elements in the LNG chain all lined up for you. Now, there are exceptions and I'll tell you the exceptions later on, if you're interested. You have to have the gas - it has to come from somewhere - you have to have a liquefaction plant to liquify the gas, you have to have the vessels to transport the gas, and then you have to have a reception terminal.

[1:15 p.m.]

Now, what we're talking about here is we're talking about a terminal, the far end of the thing. What we're talking about here is Russian gas, and unfortunately Russian gas has a reputation for being somewhat unreliable. So what I did was I called my buddy in London, who is an expert on Russian gas, and he came back with various questions. He said, first, where is the natural gas? Well, Itera has a lot of natural gas, but where is the natural gas dedicated for this project? The next question was, where is the liquefaction plant? I couldn't answer that, he couldn't either, obviously, and finally, what do they know about LNG?

Now, this doesn't mean they don't have a project and the project won't go ahead, but we're getting back into the question of fairness, of consistency and another concept which I'm going to use, which I call opportunism. I don't like "opportunism" but it's probably the best way of expressing it. What is opportunism? It's just like fairness. What is opportunistic behaviour on one part by one party, is just good business on the part of another party. So what we have to do is you have to try to regulate these things so that basically you have consistency, fairness and a minimum of opportunism.

In each of these cases, the companies are hard-pressed by economic and political constraints and they feel as though they're justified in taking the widest possible interpretation of existing regulations and pressing for relaxation of other regulations which they find either unfair or make their project, shall we say, less attractive economically.

We're going to get into opportunism now because if you take a look at each of these projects, there is room for opportunism, however you define it. This room for opportunism is where I think basically this is the stuff that one should be looking at in the future.

Let's take a look at Deep Panuke. I, myself, have severe reservations. I hope I'm wrong - believe me, I hope I'm wrong - but I don't think EnCana is going to approve the Deep Panuke Project. This, of course, was going to be my big thing I was going to say - I noticed I was basically pre-empted by The ChronicleHerald yesterday, which rather disturbed me - but I base my case on several points. First of all, natural gas prices have not followed oil prices. Oil prices are roughly just under $90 a barrel, if I remember correctly; natural gas prices are under $7 per 1,000 cubic feet Henry Hub as of yesterday. Now if there was parity between the two, natural gas prices should be $14 per 1,000 cubic feet. In other words, natural gas prices in energy equivalent are half the prices of oil. This reduces, shall we say, the corporate incentive to drill after natural gas or to produce natural gas from a project.

The second thing I'd like to point out is that the Canadian loonie, of which I've become very fond since I've come here - I think it's great that you call your currency the loonie, but I'm sure you hear that from a lot of people from outside Canada, and I'm one of them - is basically at its peak. One of the major points that we fight for here in Nova Scotia is you fight for a large, concrete, onshore effect of offshore platforms or offshore development. In other words, the number of work hours, labour that is put into these things is a major negotiating issue. Well, one of the problems here is that as the Canadian loonie goes up, the cost of the desired onshore effects, which we have been negotiating about, also goes up. This also creates a certain degree of hesitancy on the part of the corporation.

There are some other aspects, but one of the interesting things when we get into opportunism is that we in this country have a provision in the Atlantic Accord which is unique in the world - and this isn't me talking, this is some very well-paid investment bankers who say this - you have something known as a significant discovery licence, which essentially means that if I find something that I think is economically viable, I can apply for a licence and I get to hold this asset for as long as I possibly want to.

Now there are conditions under which an SDL can be revoked and perhaps we can talk about that, but I think it's rather curious that on July 11^th, if I remember correctly, EnCana applied for and got significant discovery licences for the two structures which comprise the Deep Panuke Project. The question is, did they need to do that? The answer is, no - they were going ahead. Now the question then comes up, if they intend to go ahead, why take out your significant discovery licence? There are many different reasons for this - as I say, I have more questions than I have answers, but I think the signs are not terribly good.

The point I want to make about this is that if you take a look at the history of significant discovery licences, it has nothing to do with firms being able to hold onto their offshore assets until the Second Coming. Basically the reason why you have an SDL is

because when you were forming the Atlantic Accord, you were concerned about onshore effects of offshore activities. The idea of a significant discovery licence was to give Nova Scotian industry a breathing space so that after you made a find, you could wait for a while with the find while Nova Scotian industry prepared itself to bid for the resulting offshore projects.

Now, this is a case where you have a good intent, you're trying to apply things consistently, but the question comes up, are firms behaving opportunistically when they decide to sit on a discovery rather than develop it? I'll entertain questions on this point later on if people have them, because this discussion . . .

MR. CHAIRMAN: Dr. Davis, if I could sort of get you to wrap up your comments or make them a little bit briefer, because we have a lot of . . .

DR. DAVIS: I understand, I respect your wishes. I am an academic - I get terribly wordy.

MS. DIANA WHALEN: Mr. Chairman, if I could, I would like to encourage Dr. Davis to continue and I'd like to hear all of his comments because it's an area that I'm frankly not as familiar with, so it's really good for me to hear it - if the others are willing to share their time.

MR. CHAIRMAN: Does the committee agree with that? Okay, you've got the floor.

DR. DAVIS: It really doesn't make much difference, I can be very quick.

MR. CHAIRMAN: This is very unusual, by the way. (Laughter)

DR. DAVIS: Okay, well, I'm glad to hear that.

Bass Brothers' exploration licence is running out. We would like them to drill, but how do you give them special permission so they don't have to give up their licence without, shall we say, opening up the door for all the other companies to do the same thing?

What we've done is, we have basically given Bass Brothers an opportunity to drill. We have redefined the terms under which one can explore in the Canadian offshore but unless we are very careful, this could also wind up in an invitation for companies to take their time in exploring for resources. I can explain this point as well.

Maple LNG - I have nothing against Maple LNG, they're a good outfit. They have a Dutch company called 4Gas that's behind them. The Russian company is Itera, which is a Shell company that was hived off Gazprom back in the good old days when the Gazprom executives wanted to have their own gas fields they could exploit. The point is that we don't

have an LNG chain here like they have down in Canaport. There they have Repsol - they have everything in place. We do not have something in place. We are out there looking for things.

We have a public interest in this, I would argue. I mean, if you go around Halifax today, you'll see us burying natural gas pipelines all over Halifax. This is the assumption that there will be gas coming - if not from the offshore, it will be coming from an LNG project up in Bear Head. These are only the examples of what I'm talking about with regard to fairness, opportunism and consistency. I want to emphasize that these are problems that everybody encounters, and basically it's part of the nature of regulation that you encounter these kinds of problems.

Then what I have here - my point, once again - you can see it in my manuscript, this leads to another five overlapping points. I list four which I would like to discuss further with people if you people are interested in it. If you're not interested in it and want to talk about something else, I'll talk about anything to the best of my ability. I want you to know that my knowledge is limited. I am not a chartered accountant or a CFA, so there are a lot of things there that I can comment on, but I cannot come up with any more than a relatively qualified judgment that you probably can get with the press outside.

First, offshore exploration. How do we get consistency, efficiency, fairness and how do we get rid of opportunism? I would like to say a little more about the offshore development. Most of you people think about offshore development as a company that sits there and says, okay, we go ahead, but you're all members of caucuses. Can you guess what it takes in a caucus to get agreement on any one point, particularly if it involves literally millions and millions of dollars? What we're talking about here for all of these companies is consortia of different companies with different preferences, with different programs and everything else. The fact that somebody doesn't develop a field does not necessarily mean that it's uneconomic, it can have any number of reasons. One of the problems of regulations is getting around these blockages in the development decision, I can talk about that as well.

Information. This is an area which we're making great progress on in our offshore regulations. Information basically is critical if you're going to get an increased rate of exploration in your offshore, and I'm glad to say the CNSOPB is well on its way to developing a digital database which will enable this kind of thing.

Finally, the final point is what I call the future. It covers everything, and of course that's what most of us are interested in, in any case. Thank you very much and I'm sorry if I ran overtime.

MR. CHAIRMAN: That's quite all right, it's very interesting. We'll start with the NDP caucus and I'll start you with 20 minutes. You run to 1:56 p.m.

MR. LEONARD PREYRA: Thank you very much for that presentation. You have a lot of material in there and maybe I can start by asking a few general questions about things that you passed over at the end.

You talked about the future of the Nova Scotia offshore in passing, but you didn't say much more about that. What do you make of current projections? I've been looking over the background in this field and we always seem to be on the cusp. The Premier in his column in The ChronicleHerald about two weeks ago said, we are on the cusp of greatness in this area. If I can quote him, he said, "Deep Panuke has already put new life and optimism into our offshore supply community and our local economy. We have already seen it pay-off with contracts . . . this project will bring great economic benefits for our province. It will provide jobs, opportunity and support for our social programs." You seem to be saying we're always on the cusp and I saw your presentation today as much more pessimistic. Is that a fair reading of it?

DR. DAVIS: We're talking about different things. We're talking about short term and long term. If you're talking about offshore and offshore exploration, what is really necessary is that you have what I like to call a market in assets. By that, I mean what you want to do is you want to have as many people as possible come look at your offshore and drill there for something, you don't want people blocking up the system. The reason for this is very simple: drilling for oil and gas today is a very scientific enterprise. We have all kinds of gadgets to sniff out the oil, but it still basically relies on good old brainwork.

You have a very complex offshore sector here and there are many places where oil and gas may be, but if you don't have a concept of where it might be, you are not going to find anything. So the reason why you want free access - as free access as you possibly can have - is those many companies with those many different concepts can come in and try their concepts. So if we talk about the future, you can be very pessimistic; you can say there are no companies with different concepts that are going to come here and drill. You could also be very optimistic and say there are only 100 some-odd wells, of which maybe 60 or 80 are real exploration wells; the others are production wells and other sorts of drilling. The Nova Scotia area isn't really explored yet; the concepts really haven't been all tried.

[1:30 p.m.]

For example, I talked to an American independent recently who was interested in coming into the area and when I asked them why they were interested they said, we think we found something the big boys haven't found. That's what you want, you want to bring in that kind of person who will look for that kind of thing. Let's face it, if Bass Brothers finds 2 billion barrels and 1 trillion cubic feet, I can guarantee you Halifax Harbour will be filled with drilling rigs shortly thereafter, or at least a year to two afterwards; that is one problem. The other thing which you address - and I think that's interesting - is that when we think

about our offshore, we think largely about jobs and onshore effects, and I'm not sure that's the only thing that we really should be thinking about.

There are many different ways of developing an oil field. You can develop an oil field so that 20 per cent of the oil there is exploited, you can develop an oil field so that 30 per cent is developed; it's just a matter of investment and how you do it. I'm just taking a particular example - you have a whole series of other things. You have environmental regulations, you have the rate of exploitation, how quickly should a field be developed. You have another question: royalties and taxes. Royalties are not insignificant from the Sable Island right now, they're in the hundreds of millions in any case.

So you have all these other things that you could be looking at, but we always tend to look on the offshore effects. I think that's a bias that could get us into trouble like, for example, with the SDL. If we weren't so worried about the onshore effects we wouldn't have given out the SDLs and we wouldn't have the problem that we have with SDLs currently. Danny Williams, of course, as we all know, has had problems with SDLs. Remember he was saying, use it or lose it - not that I'm a fan of Danny Williams.

MR. PREYRA: I have a Danny Williams-type question. What do you make of the Nova Scotia Government and the Nova Scotia Department of Energy's capacity to negotiate with the oil companies and these exploration companies on oil and gas? In looking at EnCana's report last year, for example, they negotiated project royalty rates, employment and industrial commitments, and funding for research, education and training. EnCana says this establishes a royalty framework that clarifies the opportunity for owners to earn a fair return and for Nova Scotia to generate substantial economic activity and benefits. What do you make of the capacity of the Nova Scotia Government and its agencies to negotiate those deals on energy? Are we capable of doing it? Do we have the information? Are the outcomes, in your opinion, fair?

DR. DAVIS: My problem is, I don't know all about these negotiations - I really can't say. For one thing, you have to remember that it's not just Nova Scotia that's involved in these negotiations, you also have the CNSOPB that's involved, and they're involved in a lot of the more technical materials. Nova Scotia, if I remember correctly, is largely responsible for royalty. The actual control over resources is a much more complex thing than just looking at the Nova Scotia Government and saying they can't do anything.

It is my impression that the people who work in the Department of Energy have access to some really top flight consultants whom they work with and since they do talk to their consultants, I assume that basically they're making some pretty well-judged decisions in this entire thing. Of course, the problem is, you can always say that consultants can also mislead you, and this is true. But once again, what are the trade-offs? Do you want 800,000 jobs or are you willing to settle for 800,000 hours, shall we say, and a royalty rate of 5 per

cent, or do you want twice that number of jobs and a royalty rate of 2 per cent? You have trade-offs here, they're very complex and very hard to figure out.

MR. CHAIRMAN: Mr. Epstein.

MR. HOWARD EPSTEIN: I don't know that we actually got an answer to the question about whether you're optimistic or pessimistic. It sounded - if I may interpret what you've told us so far - that you sound as if you're pessimistic in the short term, and perhaps by implication you're suggesting you might be more optimistic in the longer term. The reason I interpreted your remarks that way is that when you went through all of the major projects that are talked about right now, you gave good reasons why you didn't think any of them were likely to go ahead for a while. Is that what you're telling us?

DR. DAVIS: That's what I mean. There are two ways that you can look at the current situation. You can look at the situation in despair, nothing is going to happen, and it seems to me that Nova Scotia kind of swings between elation and despair. When I came here in 2003, gosh, we were the next Norway. Now we've had a couple of years where things haven't really developed and there are all kinds of reasons why there's nothing happening here. It is expensive to drill here, there's no infrastructure really which supports offshore. All the companies that drill here have to relocate their manpower here, this is expensive. The overheads of having people in Nova Scotia is very high. You have consortia that basically where they can't agree on various things, you have all of these various things that are working against you.

My feeling in this particular instance is that what you have here is, you have a set of opportunities that you can take advantage of. It might be an idea to sit back and look at various concepts and ideas that you've used up until now and re-evaluate them before, shall we say, the next wave of activity.

MR. EPSTEIN: I'm curious about what it is the government might do in these circumstances. You made one specific suggestion to us about SDLs - you've expressed some skepticism about them - but before we focus on that, I wonder, is there any other aspect of either government regulatory control or the general atmosphere that the government could take initiatives on?

DR. DAVIS: I can't really answer that. Once again, most of my contacts are not with the Nova Scotia Department of Energy, most of my contacts are with the CNSOPB.

MR. EPSTEIN: I regard the CNSOPB, which was invented by the federal and provincial governments, as an instrument to really take the lead here. I wasn't asking you to necessarily focus on the Department of Energy separate from the CNSOPB, I was asking about the general regulatory framework.

DR. DAVIS: I think the CNSOPB is looking at a lot of things I could talk about. For example, you could take the significant discovery licences. Under the significant discovery licence, the CNSOPB, the regulatory authorities could insist that the offending oil company drill a well, if I remember correctly. The problem, of course, was that drilling a well was regarded as such a Draconian measure that nobody every did it or nobody every demanded it. I'm aware of the fact that according to the CNSOPB - at least the people I've talked to there - they think that basically they have the legal recourse to force development now of an SDL. Exactly what the legal recourse is, I can't tell you, I don't know what it is. But it's clear that if there is anything that there's general agreement on, even in some oil circles, it's that this SDL regime is perhaps a bit unfair.

MR. EPSTEIN: Well, isn't the essence of the arrangement that companies are asked to commit to spending a certain amount of money on exploration during the time of the SDL? Do you regard that as unfair?

DR. DAVIS: No, I don't, they're not necessarily - you don't have to commit money to explore while you have an SDL. You can explore elsewhere, if you want to, but you don't have to explore on the SDL prospect, at least not until recently. Now, what the thing goes - what now is being discussed, I can't really tell you. I don't really understand what you mean by explore on an SDL licence.

MR. EPSTEIN: I think what happens is that the CNSOPB identifies parcels on the offshore and then invites companies to come in and say whether they're interested in bidding on these parcels. Then what they do is as part of the bidding, they also commit themselves, I think, to doing some explorations, spending money.

DR. DAVIS: That's not the SDL. What you have - it's called the work program that you submit when you begin exploring. That raises an entirely different set of questions. For example, when you give a company access to a tract of land offshore, you're giving them access to an asset that's worth money. What you want to do is, you want to be sure that they exploit that asset in accordance with what, shall we say, society wants and we interpret society at large and include the oil companies in that, as a matter of fact.

So what you do is you have what is known as a work program, which people submit. You also have a monetary bid; there's a bidding and a work program. It's very difficult to figure out how the two are fit together but generally what they do is they say, if you have a work program that costs $10 million, you bid $10 million and it's expected that you go through your work program. This is true.

Because of the way in which we've arranged something, if I bid $10 million, what I put up as security for what I'm bidding on is 25 per cent of that amount, that's in this particular case of $10 million it will be $2.5 million. Now, the minimum bid is, shall we say, $1 million. So what this actually means, if you really want to press the point, the indications

are that if a company is willing to put up $250,000 and give it to the regulatory authorities, they can make a bid on some of the properties which we have. This is good, because it means it encourages the market in offshore assets. The company may, for example, have no intention of doing the entire work program, or maybe only half the work program, but it's basically negotiating with other, bigger parties to come in and develop or join them in their exploration effort.

MR. EPSTEIN: It's not clear to me what you think the problem is. You were talking about SDLs in terms of promoting competition and promoting more actors. Is it the extent of time for which they exist?

DR. DAVIS: No, no, when we talk about SDLs we're talking about something different. We're talking about something basically where we made a discovery, it's economically interesting and you want to reserve it for development later on. Now, the problem here is that society, generally speaking - what we want in Nova Scotia is we want predictable developments on the offshore, because otherwise we cannot support our onshore industry. So SDLs were, as I said, just basically to give us breathing room.

What has happened is that companies are finding things and not developing them and deciding to sit on them. Now, most of the properties that they're sitting on, they can't develop anyway because - I'm getting into detail, I don't want to bore you, but they can't develop in any way for other reasons.

What you have in this particular instance is you have a regime in Great Britain - they had the same problem. They had lots of small fields that weren't being developed and they had a very, very clever minister in the Department of Trade and Industry who came up and negotiated with the companies and they developed something known as the fallow field scheme. Now, according to the fallow field scheme, if you find something and a committee looks at what you find, then they determine whether it's a significant find. After they determine it's a significant find, you have a period - I think it's about two or three years - to submit a development plan, or an argument as to why basically it's not a fallow field. If it's found that there's no real reason for your field not being developed, you're given a choice: you can either develop the field yourself or you can sell it to another party.

This is a voluntary program - I mean Danny Williams has gotten hold of it and has tried to force it down the company's throat. I think basically that was perhaps a bit unwise. What it has led to is it has led to voluntary industry participation in a regulatory regime that has increased the rate of exploration on the U.K. offshore.

MR. EPSTEIN: It's an interesting model, I'd like to learn more about it sometime. Can I also ask you about one implied part of what you just described? It seems to be that all the information, the geological information, then goes into a central repository. Do we have enough geological information about our offshore at the moment?

MR. CHAIRMAN: You have two minutes remaining.

[1:45 p.m.]

DR. DAVIS: Okay, fine, I won't take up any more than two minutes. We have the information. The problem is getting access to the information, because we have so much information. We have two dimensional surveys from 20 years ago, they're essentially disappearing, falling apart in various regulatory vaults. We have all kinds of stuff. The problem is that the information we have - we're talking about the regulatory authorities here - it's there, but it has been very complex and very difficult to get out to the individual people.

More important than this is the degree to which information is shared between companies on the shelf. That's the important thing because the fact that we have information, it is they who do the development. If I'm a junior firm and I want to come into Nova Scotia and I need to know something about what I'm getting into, if I go to a big firm Y and say, look, I understand you had seismic surveys done, shall we say, 15 years ago, can we have access to them? Big firm Y says, guess what, it will cost you $25 million, so you're not going to do anything. Or big firm Y can just say, I'm sorry, that's privileged information, we don't give it out to anybody.

What we've done here, and this is to the CNSOPB's credit, is that we have begun to establish a database which takes care of some of these problems. Firms are required to put their information into this database and this database, which is a digitalized database - I don't know how many terabytes it is and it's probably much too small - gives an executive the ability to sit at his desk anywhere in the world, work his way in and then he can pull up, as he wants to, various seismic results off the Nova Scotian Shelf. This is something that the rest of the world has been doing, this is one of the areas where when you ask, are regulatory authorities good or bad, right? They're good - I mean, in this case they definitely are good because they're getting at a major block in developing of offshore resources.

One can argue whether they've invested enough money in it but let's face it, what you're talking about here is you're talking about people working under resource constraints and making the best of those constraints.

MR. CHAIRMAN: Thank you. Mr. Bain.

MR. KEITH BAIN: Thank you, Mr. Chairman. Thank you very much, very interesting. Mr. Preyra made reference to statements that the Premier made - I'd like to follow up on one that was made in that particular article as well, where it says, "We all know there is not one initiative, not one silver bullet, that will bring exploration back, but a package of well-thought out and strategically targeted initiatives. This includes making new geological information available to explorers, new policy and licence options, increased

investment in research, regulatory advances and of course promotion of our world-class companies, people and resources."

I think in listening to your conversation and with reference to Mr. Epstein, the geological information and the availability, I guess we can go from there to the CNSOPB and the Data Management Centre. Will the Data Management Centre, in your opinion, help?

DR. DAVIS: Yes.

MR. BAIN: How will it help?

DR. DAVIS: My problem is I don't know enough about the thing. I tried to contact the management of the Data Management Centre shortly before this meeting, and unfortunately I was unable to get them. For a while I was looking at Data Management Centres worldwide. The best one probably is in Norway, it's called Discus. There they have virtually everything in their Data Management Centre. They have very stringent policies about the nature of the data that goes into it. You always have the problem of confidentiality with the various firms, you also have the problem of the price which the firms want to have for their data, and this requires a relatively firm hand in establishing these Data Management Centres. The Norwegian Data Management Centre, I believe they invested something like $10 million to $15 million in it, it was a major investment. There is the one in Southwest Australia which basically they've invested $7.5 million and it's not nearly as ambitious as the Norwegians.

If I remember correctly ours is about $4 million to $4.5 million. The question, of course, comes up, what are you getting for the $4 million to $4.5 million? You may be getting as much as the Norwegians, because data management may have made progress in the meantime, but that's about as far as I'm willing to go.

Another issue is what policies we have to make or induce corporations to divulge information that they otherwise would not want to. This is a very complex negotiating issue not only because your corporations are going to be different, but because corporations have different interests. We have seismic firms that do only seismic in the offshore called spec firms. Their livelihood is seismics, so the idea of having to put their seismics on a database and maybe not charging the price they think they deserve for it justifiably upsets them. That's about all I can say I'm afraid.

MR. BAIN: The LNG market, I'm going to ask you to describe the LNG market that is out there, the sources that are there.

DR. DAVIS: The LNG market is undergoing rapid, rapid transformation. The main problem today is that you have unlimited demand for LNG, but a very limited supply. Your LNG liquefaction plant, which is the major investment in an LNG project, can run anywhere

between $5 billion to $11 billion to $15 billion. I think there's one in Sakhalin where they're talking about $25 to $50 billion, but that's also including field development. So it's a lot of money, and firms don't invest in liquefaction plants until they're very sure they're earning money.

Then you have the transport. The price of LNG carriers has fallen. It used to be somewhere around $500 million; it's now, I think, around $250 to $275 million and they're getting bigger. LNG carriers used to be dedicated to an LNG trade; in other words, basically, let's assume that you have El Paso - that's an American firm - and when they had their project they had an LNG terminal and Algeria lined up for it. They had a fleet of vessels which they owned 50/50 with Sonatrach, which was the Algerian producer, and then they had their own reception terminals in the United States. It was an integrated operation, the carriers were to be used to carry only LNG from the Sonatrach project.

Two things have happened. First of all, people are building LNG reception terminals all over the place. I don't know the current number for the East Coast of Canada including Montreal, but I think it's somewhere around four or five. A minority of these things are going to be successful because the dedicated liquefaction plants for these projects don't exist.

Having said that, LNG trade is becoming much freer. You're having what they call spot cargoes at LNG floating on the oceans waiting to nip into any LNG terminal which is willing to give them an advantageous price. If I were a betting man with regard to what's going on in Bear Head, I think that basically they would like to have a liquefaction plant and the entire shemozzle all lined up from Russia, but in lieu of that what they will probably do is settle for spot traders. That's the occasional cargo; you bid the price, the cargo comes in, they unload it and for a while you have the LNG and you're looking for other spot cargos on the market.

The other thing that's interesting about LNG is that natural gas prices today are generally regarded, we're always talking about world prices for natural gas - excuse me, that's a bunch of malarkey. I mean otherwise how can it be that in Europe they pay one particular set of prices for natural gas, in North America another, in Asia yet a third? Natural gas prices are regionally determined, still, to a very large extent.

Our problem with regard to natural gas prices now is that there is a surplus of natural gas available, suppliers think this is going to be a warm winter and prices accordingly have gone down. In Europe natural gas prices are indexed to crude oil products, so they have an entirely different way of pricing natural gas.

The interesting thing about LNG is that LNG trade may even out the differences between these regional markets so that eventually we get a world market price. I hope that answers your question. I can rattle on quite a bit about LNG and I'm not sure that you're interested in everything that I would rattle on about.

MR. BAIN: I got a couple of points out of that. Maybe it was a misunderstanding of mine, but you say that there's a large surplus, therefore the prices are down.

DR. DAVIS: Right.

MR. BAIN: But earlier on you said natural gas is something that there's a very high demand for but a limited supply. It seems to me that's a contradiction.

DR. DAVIS: We're talking about LNG in this case.

MR. BAIN: Okay.

DR. DAVIS: LNG, I'm separating that from, shall we say, the North American market necessarily. The demand for LNG is going to fall with the price of shall we say the commodity exchange price at Henry Hub. I mean that's the major LNG futures market.

I think enthusiasm for LNG is going to rise and fall with prices domestically. For example, several years ago the price per 1,000 cubic feet of LNG was somewhere around $14, maybe $15, $16 per 1,000 cubic feet. If it's $15, $16 per 1,000 cubic feet, if you make the calculation from Texas to Boston, from Boston up here, and then you make all the distance, shall we say the calculations of the cost of transport, you're talking about a price up here of maybe $10 or $12 per 1,000 cubic feet. In that case an LNG plant, an LNG reception terminal, is really attractive. However, if prices fall to $7, the difference between shall we say what you get for LNG in Europe or Japan, for example, and what you get for it in Nova Scotia is going to decline.

MR. BAIN: When you said that prices were regionally determined, what would be a region? Can we say the northeastern part of North America? Or North America?

DR. DAVIS: I can't really - I never really thought about that question. When I teach it I just say regionally determined and nobody asks me the question, but I would say that North America is one regional market, generally speaking, because everything tends to revolve around the NYMEX futures price at Henry Hub. Then you have a whole series of spot prices which are tied to the commodity prices. For example, you know our natural gas is tied to the prices in Dracut, for example, or Boston City Gate which, in turn, are tied into shall we say Henry Hub.

Europe has a different system. They have a system basically which is based on oil product price equivalents. So in other words, when the oil prices go up and the price of oil products goes up, the price of their natural gas goes up automatically, because the two are linked.

Japan has its own set of contracts with shall we say Indonesia and Malaysia largely, and what they're doing is they are constantly renegotiating their contacts. The prices that they get are supposed to be pretty high. But you see in Japan what they do is they bring in the LNG to several ports along the Japanese coast so that Tokyo is supplied from LNG reception terminals in Tokyo, Kyoto and Osaka from LNG plants in that area, which means the Japanese don't have to invest in transmission lines across Japan. So in other words, LNG there is kind of a shortcut; we take LNG instead of building the equivalent in the Maritimes & Northeast.

MR. BAIN: Thank you, that's all for now.

DR. DAVIS: Oh, one final market, Russia. Russia is another regional market. Russian prices have no resemblance, not the faintest resemblance to world market prices anywhere else.

MR. CHAIRMAN: Okay, Ms. Whalen for 20 minutes.

MS. WHALEN: Thank you very much, I'm finding this very interesting. It's an area that we haven't had often at our meetings here and I've certainly learned a lot this morning. I can also say that when I was 22 I had no idea I would be here listening to you this morning, so we all have strange paths to come to our careers.

I had a number of questions I wanted to ask. I was interested, to begin with, when you talked about our moods here swinging between elation and despair, and I guess we've been doing that since the 1980s, when we touted that this was going to be the terrific saviour for us and would get us off equalization and we would come into our own economically, and so on. I think Nova Scotians are maybe a little bit jaded, because we keep hearing these terrific announcements and things don't seem to materialize.

[2:00 p.m.]

Certainly we had excitement around the natural gas pipeline being built and gas actually coming onshore, and we're enjoying royalties today that are quite significant and are helping to pay for many of our programs. I don't know if we're preparing for the future with that money. But there is news that doesn't encourage us, or me specifically as an MLA, that we haven't had any wells drilled this year at all, no new licences issued since, I think, 2004. As you mentioned today, natural gas prices are low and I'd like to pursue that with you, why they would be half the value of oil, for example, when they obviously have the power to fuel our economy, heat our homes and so on. I don't understand just why that pricing would be like that.

I guess the question I have is what you would see as being positive in this picture. The other thing I hear and I believe it's true is that the initial Sable project had a certain

lifespan that they believed it would go for. Now they're saying it's much less than it was originally, at least that seems to be the speculation, that we're going to exhaust that find in faster time. So that means having even built some of the infrastructure for that project, we're not going to be able to see the years of royalties flowing and the benefits that we'd like to see. Those are some of the things that trouble me with the industry, that it doesn't seem to be that we're capitalizing on opportunity if it's there. So I wonder if you could comment.

Certainly I'd like to know your thoughts on the natural gas prices and why they're different, but also what a Nova Scotian could take some heart in at this point in time, given those few figures and trends that we're seeing. I don't know if you're an economist as well.

DR. DAVIS: Okay, the question about natural gas prices has everything to do with the functioning of a commodities futures market. What you do is you have punters there who are basically betting on future prices of natural gas. When I say below $7, I think I'm talking about November deliveries, for example, so we're talking about future market prices there.

They are very volatile; they can go up or they can go down. They are also an object of speculation. If you get a lot of pension funds and everybody else putting money into shall we say a futures market, it will drive the price up and one of the big questions has always been, what is the percentage of speculators participating in shall we say the West Texas intermediate market in New York? I've seen studies which say that 20 per cent of the money there is pure speculation, people who don't know a damn thing about oil or natural gas. You can look at that two ways: you can say, well, only 20 per cent is not a major problem but when we talk about oil and natural gas, we're talking about a commodity that is extremely volatile to just small changes in demand, so 20 per cent can really drive prices way, way up. I've heard people say that the real price of oil should be about half of what it is today, maybe even less.

I was talking a short while ago about when futures prices at the natural gas market topped at about - I believe it was $18, but I simply can't remember, I'm getting too old at this kind of thing. That was largely due to a hurricane that hit the Louisiana coast and closed down a lot of the natural gas production in the United States. Everyone jumped into the market, the market went up and the prices went up too. When these fields came back on - this has affected company decisions. EnCana decided to become a specialist in natural gas when prices were high. The question is, is EnCana happy about that strategic decision today? I'm sure they would say that they are but, like I say, I'm an academic, I question.

The other thing is, what do you have to be optimistic about? Okay, a large percentage of the exploration wells - I made a count once upon a time - show signs of oil and natural gas. I think it is something like one in three. There are a lot of places where you drill in the world and you never find anything.

There is a consensus among geologists that the Nova Scotian area is so complex, nobody has really interpreted correctly and found where, what they call, the oil sands exist - this is the mother lode, if you will. That's what they're all drilling for and they haven't found it yet. What they're finding are bits and pieces from the mother lode. Now the mother lode may never exist, we just don't know, but there's a strong possibility that it will exist.

A third area is that Nova Scotia is still a relatively unexplored province. I know it sounds crazy - you count your number of wells in the hundreds here - but if you take a look at those which are truly exploration wells, the figure is somewhat smaller. I think it's somewhere around 80, 85, maybe up around 90 - not anywhere around the 140 where everything is, because a lot of the drilling is infield drilling around Sable Island and some other places.

Another thing is those resources that we find, you can take a look at it two different ways. You can say the resources aren't going to be there, but we have a term in oil and gas called reserve growth - that is an interesting term. The idea is that you find something, shall we say 100 million barrels and over time you don't produce and you say you're going to produce 80 per cent of that or 20 per cent, 20 million barrels. Over time you find yourself producing 30 per cent and then you take a look at it again and it's 200 million barrels.

The point is not that people are out to cheat or do anything along that line, the point is that technology develops. For example, in Denmark, we have the Dan Field. When it was first discovered, we had great hopes for it, but it was extremely porous and it had very poor permeability. The result was that instead of producing 10 per cent of the oil in place, we were producing 5 per cent, 4 per cent and everybody sat there wringing their hands about the Dan Field. This was before you had horizontal drilling and you had a whole series of additional technology. Today, Denmark produces 100,000 tons of oil a day and the biggest field there is the Dan Field and they're going to be producing something like 25 per cent of the reserves in place and we don't know - they may be producing 30 per cent before they're finished.

You have an Ecofisk, which is the same kind of field in the Norwegian sector - a very large field, very good producer. People were going to give up on it some time ago. Phillips gave up the licences, but somebody else came in and took it over and they estimate this field is going to be producing for another 70 years.

What you're going to do with regard to the resources you have, the people are going to be drilling, re-evaluating and everything else and there are very good chances that the reserves in place may actually be revised upwards as the operator and the consortium around Sable Island get more experience with what they have. It's also possible it will go the other way - I don't rule that out - but I think it's really impressive that the addition of a compressor platform at Sable Island has brought it really back on stream to such a degree that we're really making a lot of money in royalties. Another thing that I think is a bit interesting is that

when you explore for oil, you explore in two different senses. You explore in terms of area and you explore in terms of depth.

I'm going to tell you a story about Norway - I'm sorry, and you can say, okay, this is about Europe and has nothing to do with Nova Scotia. In Norway, we had a firm called Phillips and they had the initial licence for the Norwegian offshore and they came in with a pledge to drill 30 wells. Around Well 29, they found one or two small fields and nothing else. Well 30, they were supposed to drill and they didn't want to drill it - you know they drilled Well 29, no results whatsoever.

The Norwegian authorities had a drilling program, a work program that required them to drill that well and they were supposed to drill it to 3,200 metres, but they figured that the oil sands they were looking for were somewhere around 2,500 metres. So they drilled and when they got down to 2,500 metres they told the Norwegians, forget about it, we've done what we had to, there's nothing there, we're going to drop it. The Norwegian authorities said - Norwegians are tough this way, they really are - drill some more. They drilled some more and they found Ecofisk, which was the biggest oil field they found thus far, and it was the field which transformed Norway into a producing country. They would never have found it if the Norwegian authorities hadn't insisted they drill something like 300 metres further.

What I'm going to point out here is that discovery of oil is a matter of chance. I was talking to one of the operators in your own offshore who was drilling a well and he said he was expecting to find something at such and such a level and then he looked at me and smiled and said, of course, we may always find something by accident. It's that chance that basically enters into the picture.

If you take a look at the wells they have been drilling offshore - I just did a count and it's very difficult to figure out the depth and everything else because the published records are very different. I think it was something like one out of four, it may have been one out of five wells that were going to be drilled to a particular targeted depth in Nova Scotia that was abandoned before it hit the targeted depth. There are various reasons for that. You can have wellhead pressure that basically is too large for the drilling rig to take, or you can have the fact that if we don't find oil in this layer we don't think there's any oil further down or natural gas further down. There are any number of reasons, but the question still remains, are we talking about a future Ecofisk or are we not talking about something else?

I can run through the North Sea, Block 712 in Norway, same kind of thing, drilled a little further and they found something. Morecambe Bay, the big field in offshore Liverpool which is the swing field for all of the U.K., Gulf Oil drilled right through the thing and never even realized they hit natural gas. British Gas found it, went to Gulf and said, do you want it back again and Gulf said no, so BP took it and developed it. Fulmar field - they were drilling in there and didn't expect to find anything.

This is very funny - Royal Dutch Shell had just given up a large block of Norwegian

territory, but as a last idea they decided to drill in a particular area and my God, they found Fulmar and then they took a look at everything they had given up and they found out that it was the same kind of structure. So they asked themselves, what are we giving up? So they went back - this wasn't Norway, this was in the U.K. - to the British authorities and they made a very special plea and they got the area back. Now, whether they found anything in addition to Fulmar, I don't know, but it's that kind of chance game that you're talking about. It is very difficult to come up with a positive answer one way or the other, but there is grounds for optimism. There's another point, but maybe I'll stop there.

MS. WHALEN: I appreciate that and you've given us a better sense about the risk and I guess chance involved in drilling. We haven't had that much activity, as you said. I had the figure of about 200 wells that have been drilled and there are literally thousands in other places like the Gulf or the North Sea and that sort of thing. So we do seem to be in our infancy, even though this has been talked about for so long. My feeling is, as somebody who would like to see the province progress and be able to see the benefits of this, believing that there is some benefit to be had, is how we're structured to take advantage of these opportunities, to at least explore these opportunities and get the companies in.

As you've talked about, if we can get more exploratory wells being drilled and more interest even from small companies, we'll have more data to base it on, more chance as you said, that they just accidentally go to the right area and find something promising. We don't seem to be doing that.

One of my roles in the Legislature is Finance Critic and each year we see the millions of dollars coming back to the province from licences that are forfeited - companies leaving and saying they have to pay some sort of penalty for doing that. That's discouraging news and so I'm looking to see - you've had roughly four years here, you said, of observing our industry, getting to know it and seeing how we manage ourselves. Is there anything you can suggest in terms of the structure of government and I guess our regulatory regime that would encourage this? Are there other jurisdictions that have offered different kinds of incentives to get some activity going? So that's a broad one too, because it's . . .

DR. DAVIS: That's a very broad one and you've got me really thinking there.

MS. WHALEN: I don't feel we're aggressive enough so my question would be, are we doing enough, in your opinion as an observer sitting on the sidelines?

DR. DAVIS: This is my own personal opinion and it shouldn't reflect on anybody and definitely not on any particular political Party in this context, thank you very much.

[2:15 p.m.]

Oil and gas exploration is a really nasty business. I used to run a game for my graduate students, I called it oligopoly - it was kind of like a build-off of Monopoly - and they were all invited to bid for various blocks and after they got the blocks every year they could invest in an exploratory well. I had chance cards, depending on what they - if they found something, they also got a chance to develop it over a period of time and they had to pay interest to the bank the entire time. I had other chance cards which basically had the incidental things like an offshore strike or a supply boat rams your drilling rig so stop all production for a year kind of thing.

My students really got into this game and they really got vicious and when I drew a chance card saying there's a strike, they would just blow their stacks. The pressure is so hard and the amounts of money and the chances of you finding things are so little that basically, even though they approach it as kind of tolerant Canadians or, shall we say, understanding Danes, it was really interesting to see some of the Marxists sitting and screaming at me because I had drawn a chance card that basically meant they had a loss. If we transfer this experience into oil and gas, you have the same thing.

The oil and gas industry is essentially a mature industry - it's in decline and this sounds like a contradiction. If you take a look at the segments of the oil industry which pay, you can cross the following off: marketing and distribution - that's largely the job of jobbers and various others; refineries - they're constantly buying and selling refineries depending upon whether there's an instantaneous profit to be made or not; transportation - margins on transportation are extremely thin. The one area that pays is offshore, because you have a chance of getting an economic rent from what you find and that is what pays. This means that whenever you're negotiating about an offshore prospect, you're dealing with some really tough negotiations. They don't give anywhere, they don't give up a nickel unless there's a good excuse for it. This is where we get into the question of opportunism and good business, and it does require that you have a very firm stand on things.

Danny Williams has his own way of handling this - you don't have to be a Danny Williams. The Norwegians have their own way of doing it. But you have to remember that laws in different countries are different because we have different conceptions of what is fair. In Norway, they say you perform according to what the Norwegian Petroleum Directorate says or you can forget about drilling anywhere else in this particular area for the rest of your corporate life. This means you damn well respect what the Norwegians say. If I have another regime where basically the companies can go and appeal virtually every regulatory decision, what you're going to do is get into a case where you have an appeal and then it goes to a higher court and then to another higher court and it will take you forever to do something. Once again, what's fair . . .

MS. WHALEN: Where do we stand in that spectrum?

DR. DAVIS: I've always thought of Canada as being one of the more fair legal regimes where people have the ability to appeal. They don't even have to appeal to the Supreme Court of Canada, they can appeal to NAFTA. There are any number of things that can happen offshore that basically can be seen as a case for expropriation, and they can go and demand some kind of return. Now, whether they do or whether it's bluff, you find out. Danny and the companies - they played a game of bluff and Danny . . .

MS. WHALEN: Sounds like they're tougher though, they want to be like the Norwegians.

DR. DAVIS: Not really that, but basically Danny had all the cards in his hand. He had political support and no oil company in its right mind walks away from 800 million barrels of oil. Now, that's another thing about this - the terms of the things are tightening. First of all, the big companies have cut back on virtually all of their expenditures with R&D. Exxon Mobil, the largest firm in the world in terms of turnover and capitalization, spends less on R&D than Schlumberger, which is a seismic service firm which services the world industry. They have cut back on . . .

MR. CHAIRMAN: I'm going to have to cut you off at that point and turn it over to the NDP. You have 14 minutes.

MS. WHALEN: They'll come back to us.

DR. DAVIS: Okay.

MS. VICKI CONRAD: Thank you for your presentation. I may be making comments and I hope that I'm not repeating too much. It does seem like the government, for many years, has been putting the cart before the horse in terms of offshore exploration. We've always expected to hear of that great windfall happening and to have created many jobs with the exploration and development of the offshore and that has yet to be seen, except for some of the royalties that we're seeing off of Sable.

It's apparent that we have a long way to go in terms of our infrastructure. As you mentioned earlier, we just don't have that good infrastructure in place for full development of our offshore. Part of that is recognizing that, for many years, we haven't had a good grasp on the geological data that is so necessary to attract companies to come in and explore, and also understanding that the SDL is not working in terms of the regulatory framework. I do understand, though, that the CNSOPB has been working on making some changes to the significant development licence.

Based on your comments, you had mentioned that many companies have their own criteria and needs before they set up shop, they also have their own criteria for the technology they are using. Many companies are moving forward with new technologies all the time and

not all of that technology for each company is the same new technology. So I'm wondering, in your opinion, do you feel that based on the regulatory framework as it is now, whether or not government and also the CNSOPB are ready for those new technological changes in terms of the regulatory framework? As new technologies come on stream, regulations will have to be adjusted to reflect those new technologies and especially the environmental regulations around the impact that new drilling techniques may have, especially around the Scotian Shelf where the landscape there is very sensitive to any type of exploration.

So do you think that we are being ready given the fact that we have so many changes to be made within the existing framework already, are we ready to make the other leap to new changes?

DR. DAVIS: My problem is I'm not competent really to talk about the environmental aspects of things and the impact of new technologies on an environment. I know some instances, but to give a considered opinion, I can't really do that. I can say something about exploration technology though, generally speaking.

I have no doubt that the government is going to be prepared for that kind of thing.

The government is well aware - I'm sorry, the regulators, let's not talk about the government, it's the regulators that we're talking about. The regulators are well acquainted with a lot of things which are developing in the world of oil. I would say perhaps they're even more cognizant of what's going on in the world outside them today than they were three or four years ago.

The technology, which I think has the most interest for Nova Scotians, is seismic technology. You see, one problem with the Nova Scotian offshore is the formations are so complex that the seismic has not been giving us an accurate picture of what's down there. So, in a sense, all of Nova Scotia is waiting for further seismic developments that could be used to interpret what is down there. This is what I'm told by experts. I can ask questions and this is what they tell me. I have no doubt that basically the regulators are well informed about that and are very interested in seeing new seismic techniques being used.

Some other things that occur to me, one of the things is that the cost of developing an offshore project in many cases is falling. I know this sounds strange but if you go to the North Sea, they have new production technologies where you can dispense with platforms, you can dispense with accommodations, you can dispense with a lot of things. You just wind up with a pole out there, if that, with maybe a light on it and a ladder so that people can climb up there once in a while and look at the wellhead. In other places, you have your wellhead underground, very often you have a production vessel which can be - after you worked on one field for three years you can move it to another field. So in other words, the capital costs aren't lost on anything.

This means that basically the corporate returns on certain oil and gas fields will increase in the future. Then the question is, once again, what's fair? What is fair for them to keep, what is fair for you to keep? I don't have the answer to that.

MS. CONRAD: You mentioned, too, that many companies are paying tremendous amounts of money to come in and set up shop, or if they are thinking about coming and setting up shop for exploration, it's a very costly endeavour and in some cases some of those companies are needing to bring in their own skilled workforce. What do we need to do here in the province to ensure that we have the skilled workforce that companies can come and contract with? Is that part of what we need to be doing to attract companies here? What type of workforce do we have on the ground now that exists?

DR. DAVIS: Okay, I'll be very quiet here because I've come here - I know OTANS, I know people in OTANS, I respect them a lot. I know that we've invested a lot in, shall we say, onshore benefits from offshore activities. Unfortunately, the trends are not going in our direction. I think an awful lot of the onshore effects that we're getting, or will get in the future, are the effects that basically fairly low-skilled labour would give in any case - number crunching, cleaning platforms, perhaps building offshore modules levied onto a platform.

There are two developments that basically hurt us here. One is that the technology is getting more and more complex and the skills needed to use it are also getting complex. For example, you're talking about LNG - I'll talk about LNG plants for just a second - you're talking about putting an LNG reception terminal and the jobs it will create. Building an LNG tank is a highly, highly skilled occupation. I doubt very much whether firms will employ Nova Scotians just off the street to build these things. When you build them you want to build them as quickly as possible, you want to have skilled labour doing it and the tendency would be to bring skilled labour from outside. So the question is, what are the onshore effects of LNG? I don't really know - this is just what I know from general experience.

The other thing that basically hurts us is that the entire contracting policy in the industry has changed. Exxon Mobil has been compared to an investment bank. Why? Because what they do is they finance a project, they give the general guidance for the project, but then they outsource all the contracting to very large service firms - Mossburg in Norway or Snamprogetti in Italy, which are very, very large service firms. These large service firms then go out and subcontract and subcontract. So basically the oil company is essentially insulated from risk; a lot of the development risk is being assumed by these service firms.

Now this has meant that a lot of smaller service firms have been closed out of the industry, because the tendency has been not to subcontract in the same patterns as previously. In Norway, for example, there are a lot of small supply firms which are really hurting, which have really objected to the current trends in, shall we say, offshore contracting.

MS. CONRAD: Thank you. I'm going to pass over to my colleague.

MR. CHAIRMAN: You have until about 2:32 p.m.

MR. PREYRA: I've got about three minutes, I believe. I have just a quick question following up from an earlier question I asked about the future of the offshore and discussion about whether we're pessimistic or optimistic. I wanted to ask you a more specific question about the Atlantic Accord. Based on what you said earlier about the future of the offshore and the unpredictability of royalties and presumably the Crown share, how reliable are these projections of royalties, for 2018, for example, which is where most of our revenues are supposed to come on stream? What do you make of the Atlantic Accord and its projections for Nova Scotia?

DR. DAVIS: With regard to the Atlantic Accord, I would be a fool to say that I know the Atlantic Accord to any degree of depth. I'm not an accountant, I'm not a lawyer and what you have here - I'm amazed at your sophistication and ability to deal with complexities such as what's in your Atlantic Accord.

[2:30 p.m.]

Having said that, I will say something about royalties and royalties alone. To my knowledge, the royalties that are mentioned in the various documents that we've seen in the Atlantic Accord are the royalties only from the Sable Island project. In other words, they haven't calculated Deep Panuke in there. That's the first thing.

The second thing is, will royalties dip? Yes, they probably will dip as prices go down, but not significantly because your royalty regime is a rather interesting regime. It's built in four trenches - each trench basically your royalty amount depends upon the rate of return that you're getting on your original capital investment. The thing is that the field has been profitable enough in the past that you're now up into the last trench, so basically, in terms of proportion of the royalties that are involved there, in terms of revenues, you should be getting a very satisfactory return in the future.

Where natural gas prices are going to go, I don't really know. I would estimate currently that the price at the measuring point, if you will, outside the gas processing plant on land, somewhere in the range of about $7 per 1,000 cubic feet, and then the royalties would be assessed as a percentage of that $7 per 1,000 cubic feet.

MR. PREYRA: So if you were negotiating the Atlantic Accord, then how would you structure that agreement? Would you front-load it or back-load it?

DR. DAVIS: I'm sorry, I don't think I would be - I can appreciate where you're going. You have an expression in this country, "You don't want to go there." (Laughter) It's a nice expression, I really like it.

MR. PREYRA: I do but you don't. (Laughter) I think I can pass on that question and pass on to the Liberals, I believe.

MR. CHAIRMAN: The Conservatives - Mr. Bain, please.

MR. BAIN: Thank you, Mr. Chairman. Just a few questions, I guess. I'd like to go to Maple LNG that you referenced. In the notes that you gave us, you say that apparently it has no firm commitment further up the LNG chain to dedicated natural gas or to an existing plant. What other sources of natural gas are out there that Maple LNG could access?

DR. DAVIS: You see, this is exactly where the problem lies because if you have a limited number of liquefaction plants and those liquefaction plants are all dedicated to a particular project, then you are relegated to picking what is left over and that's the spot cargos.

I'm unprepared to answer this question. I would like to have had a list of all the liquefaction plants that are currently being planned and everything else. I have a degree of prejudice with regard to Russian gas. It is known that the Russians are very good at writing memoranda of understanding and then when they sign a contract, their interpretation of the contract is that it's a basis for further negotiation. The industry is filled with stories about firms which have gone in and offered the Russians everything and walked away thinking they had a contract, and it turned out they didn't have a contract at all. This is particular to Gazprom, so there is that aspect of the entire thing.

I'm a little skeptical about Itera. The skepticism could be totally misplaced - they could have changed considerably as a firm and everything else - I just simply do not know. I was raising the question, what you need is a firm liquefaction plant, you need to be absolutely sure you're going to benefit from it.

4Gas, which is the partner in this particular arrangement, they run LNG reception terminals in about five or six different countries. They may be relying on 4Gas basically for a reasonable supply of LNG for the Nova Scotian project. Once again, we're getting into the realm of speculation. You would have to ask 4Gas, I'm sure they would be able to tell you.

MR. BAIN: There are lots of small finds of oil and gas, or there have been. I'd like to ask you your assessment of the possibility of tying all these small finds in together and to one platform. Do we have the technology? Is something like that feasible? Is this the right time to be doing it or what might be?

DR. DAVIS: There's no question about it, it's the right time to do it if you're talking about tying various small fields together. One of the problems with your small fields is that they require considerable capital investment with the pipeline to join them. We have something known as stranded gas fields in the field which we talk about. For example,

they're talking about fallow fields in the U.K. and if you can prove that your fallow field is a stranded gas field, they'll leave you alone. What they won't do is they won't leave you alone if it turns out that you are a consortium that can't agree as to whether to develop a field - that's when they step in.

There are two things about tying these various things together. First of all, is the current technology the best way of doing it or are there technologies coming up which are even more promising? Here we get into the area of compressed gas of which there has been quite a bit of talk about here on the Shelf. The idea being that what you'd do is you'd load up compressed gas from the small fields and then deliver it as compressed gas onshore and sell it from onshore. They have been talking about compressed gas for years now. I think they're using a variation of the technology somewhere in Southeast Asia, but it may be a wave of the future, I don't know.

It could really revolutionize things, because suddenly what you could do is you could load up with gas from one of the small significant discoveries off Sable Island and deliver it directly to City Gate, Boston. The question, of course, has to do with distances, you can't deliver compressed gas over too long a distance, otherwise it becomes uneconomic.

MR. BAIN: You're somewhat pessimistic or you were pessimistic as to your assumption that EnCana will not be approving the Deep Panuke project. I want to change the situation - what if EnCana does approve the Deep Panuke, where are we going?

DR. DAVIS: I think that's a good question. I think it's really great if they do, I don't think there's any question about it. Your offshore industry is crying for contracts and this promises employment for them for some considerable time in the future. It means that your regulators have a justification for continuing to exist. Although it's a small field, you'll begin to get another production history from another field which basically - if it goes at all well - it could well attract other bidders to the Nova Scotian offshore. I see it as being a really critical decision that affects us because if it doesn't go through, then the question is, when are they going to develop it? Then you have all kinds of questions - what is the role of government, what is the role of the regulators going to be in that instance with the role of government and everything else, and to use the expression one more time, I don't want to go there.

MR. BAIN: But there definitely is a positive side to the whole story, it's not all doom and gloom.

DR. DAVIS: Not all doom and gloom. Like I said when I began with my introductory comments, I hope I'm wrong, I couldn't be happier to be wrong.

MR. BAIN: You mentioned earlier, too, about the onshore activity and the employment that will be created, and reference has been made to a contract that was awarded

to Laurentian Fabricators in Sydney. I think they're a prime example of what can be done on the onshore. We do have the workforce, we do have the technology that we can produce this, that they don't have to get it in. I'm giving the opinion this time - I think that's the positive side of it.

DR. DAVIS: I don't think there's any doubt that there's a positive side of the thing, but the question is, do we progress beyond becoming metal bashers and into more sophisticated technology on our offshore supply side? That's one question. The second question is, are there jobs which Nova Scotians could fill? Well, because oil companies prefer to deal with somebody from the Gulf of Mexico or from Texas, or something along that line, they employ them instead of a Nova Scotian workforce. I think in both of those areas that - one area is kind of dubious, but the second area I have no doubt that there will always be something for Nova Scotian offshore. Then again, we're also avoiding if there were reasonably large finds, it could be that some of the service firms that we've been talking about - the big, large international ones - would basically begin to locate closer to Nova Scotia.

One of the questions I have that I have always been rather curious about, your ties to the great province to the north of you, the one that ran off with a large portion of your offshore land claim not terribly long ago, they have a lot of activity. What is to keep Nova Scotian offshore suppliers from entering Newfoundland and Labrador - their offshore? It would seem to me that there should be some opportunity for them there.

MR. CHAIRMAN: Ms. Whalen.

MS. WHALEN: Thank you. There really isn't enough time here today, I don't think, to do justice to this subject - it's so big. I wanted to go back to those SDLs that you were speaking about and the fact that they're fairly unique, that it's part of our regulatory structure that isn't seen elsewhere. Did you say that they do have it in Newfoundland and Labrador as well, and would we be the only two places that you know of?

DR. DAVIS: The problem with SDLs, very simply, is that when you find a prospect that's an economic prospect and you're a company, you're talking about an option that you have; they call it a real option. A real option is something which you can exercise sometime in the future to make a lot of money. The big question is, if I exercise the option tomorrow, I may earn $10 million; but if I exercise that option five years from now, it may be $100 million, because the world changes. What you try to do is you try to build in your models how the world would change and how things would become more to your advantage. What you do, if you're a hypothetical firm and you're looking at the Nova Scotian offshore, is you put it in along with all the other options you have.

A lot of these options you have a value and the value is basically also related to time. An option that lasts only three years is less valuable than an option that lasts 10 years, which

is less valuable than an option that lasts for eternity - that's one side of the thing. The other side of the thing is while the value of your option increases with the length of time you have in order to exercise it, it also is one of many options. So if I'm a firm and I'm exploring 30 different countries, I have 50 different options and all of those options have to be developed within two to three to four to five to six years and then you have one option that doesn't have to be developed at all - people would be very happy if you just hang onto it - which option are you going to choose first?

MS. WHALEN: So that's why ours could languish essentially.

DR. DAVIS: That's the theoretical case of why they could languish, and that's the theoretical case behind the British fallow fields.

MS. WHALEN: Are we able to take that out of the accord or to reverse it? You mentioned that the CNSOPB has been doing some changes or something more promising. Can we just take it away?

DR. DAVIS: I had hoped to talk to the lawyer at CNSOPB prior to talking to you, because I'm informed that they're working on it but exactly how they're working on it, what it means and everything, even if they were I doubt that they would tell me.

MS. WHALEN: Further to that alone, you've talked about the only rationale for us to do that would have been to see our onshore services catch up and be able to benefit greatly from offshore activity.

DR. DAVIS: That was the original purpose, yes.

MS. WHALEN: Now you've said that the subcontracting new model that's going on for the big oil companies is really undermining that and we're not apt to see the onshore activity in the model or in the way we ever expected it. So it means that this should be re-evaluated because it's just not standard anymore, it's not going to benefit Nova Scotia in any way.

DR. DAVIS: I don't think you'll find many people agreeing with you publicly.

MS. WHALEN: No? Okay. So we think we have something good in the SDLs do you think?

DR. DAVIS: No, I don't think that, I just say I don't think they would agree with you publicly, because the problems are really severe. Suppose you take away an SDL and the firm claims that you're expropriating property, they can take that to NAFTA if they want to.

[2:45 p.m.]

MS. WHALEN: It's because we gave something too rich in the first place.

DR. DAVIS: One could say that.

MS. WHALEN: Something with such value to them, as you say, they can wait for eternity to benefit.

DR. DAVIS: I'm being - don't quote me on that one.

MS. WHALEN: No, but essentially we've set no time frame.

DR. DAVIS: This is where we get into that problem that I began - how do you have a system that's consistent and fair and at the same time avoid opportunism? The system, as it was designed, SDLs are not designed for the purpose of hanging onto them forever. But what we were running into is opportunism, or what you can call good business sense.

MS. WHALEN: Do you have any specific suggestions that you would make for improvements to those SDLs, if you were in charge, or if they were consulting with you? So this is hypothetical.

DR. DAVIS: Yes, hypothetical. I think there are various ways in which you might be able to get people to exercise their SDLs that are legal. You can try harassment, where every year that they haven't developed you want a 500-page report on exactly why they haven't developed, read for and approved by the board of directors of the firm that's involved. That would bring it to the firm's attention every year, that they have that little thing lying off Nova Scotia and it just might induce them over time to, shall we say, give it up.

Another problem with a lot of your significant finds is they are located along the Sable offshore energy pipeline. Now even if people disgorged those, and they all happen to be owned by, shall we say, the corporate owners of the pipeline, you're going to have a hard time producing from them, because the only way of transporting the gas is through the pipeline, and who controls the pipeline? The pipeline is going to be controlled by the people who you have taken it away from - not a good policy.

MS. WHALEN: I see, gotcha. I had a couple of other questions around the LNG plant that you were talking about. I wanted to ask you, and this just shows, I guess, a lack of my knowledge, but the Canaport that you refer to in your writing, you didn't really speak about.

DR. DAVIS: I was avoiding Canaport because I noticed that I called our project here the Canaport project, and of course it is Bear Head.

MS. WHALEN: Okay, I wasn't sure if they were one and the same.

DR. DAVIS: Canaport is a rather interesting thing, because what Irving has been clever enough to do is find a firm which basically is particularly engaged in natural gas sales in Spain. The firm has made lots of finds in North Africa and other areas that are much closer to Spain. The firm Repsol also has a liquefaction plant in Trinidad and actually may have more than one train, and currently - I could be wrong on this - what they're doing is they're producing LNG in Trinidad and some of it basically, from what I understand, goes to Enagas in Spain.

Now what they're thinking of, and you'll have to check this - I'll have to check it, so if you want to use it sometime in the future, call me and I'll find out - what we're talking about is a swap. What they do is, you arrange for an LNG liquefaction plant to be built in Algeria, which you can do because Algerians have a lot of experience and Algeria is very close to Spain. So suddenly you're developing Algerian natural gas and just taking it a very short distance to a reception terminal in Spain, and then you have your capacity in Trinidad which is available. What better to do than send it to Canaport? So what you do is you earn money all the way around. You cut out the long transport across the Atlantic, you supplant one set of suppliers with another and then you have an outlet for that supply. So I don't think there's any doubt about the fact that the Canaport thing is going to go and it will probably be quite a success.

MS. WHALEN: But the Bear Head one has a lot more uncertainty around it.

DR. DAVIS: The Bear Head has been plagued by the fact that we haven't had a true LNG chain behind it. Anadarko, I understand, had a memorandum of agreement with some suppliers that fell through. What you have now, once again you have an asset there. To be absolutely fair to Maple LNG, what they do is they have an asset there; they have a reception terminal under development and what they want to do is to make money with that terminal. If they make money, we make money.

The Maple Leaf - I call them Maple Leaf in one of my declarations and I apologize for that. That actually refers to a ball that they're holding in Boston, I believe it's November 7^th, to introduce North Americans to the idea of LNG from Canada. So they are busy attracting attention. I think the general idea is to build up demand in North America and then go across the ocean, or to Trinidad or to whatever the place is, and say look, we have the demand here, won't you supply us on a long-term basis, but that requires that there's a liquefaction plant available that they can use and the Russian Itera, according to my information, doesn't have an LNG plant. Now, they may be planning one.

MS. WHALEN: Also, if I'm correct in what I understood was that you said they could actually be successful by simply not having a stable source of supply, but just trying to capture the floating spot prices in the ships that are travelling that are carrying gas.

DR. DAVIS: That's right. LNG tankers are really very complicated vessels. In the good old days you had dedicated LNG tankers to a particular project. LNG tankers are becoming so common on the market that you now can charter them to deliver natural gas. This creates all kinds of interesting perspectives. One is that you're going to get more of a spot market in natural gas with chartered vessels floating out in the Atlantic that will deliver . . .

MS. WHALEN: To create more competition, essentially . . .

DR. DAVIS: It will create more competition. It will mean that, shall we say, if you have a reception terminal such as the Maple LNG terminal, you're in business. I believe it was in 2005 or 2004 - I have figures - most of the LNG entering North America at the time that year was spot trade, not dedicated.

MS. WHALEN: So it is a possible platform for a company to operate, you would see it as a possibility?

DR. DAVIS: Absolutely.

MS. WHALEN: Do I have any time left, Mr. Chairman?

MR. CHAIRMAN: You have until 2:54 p.m.

MS. WHALEN: Oh, I do have some time, because I have another avenue I would like to explore with you. On the CNSOPB, you said that's where you had more contact than with the Department of Energy. I'm wondering what resources they have. They're fairly unknown, I would say, at the Legislature. Maybe a few people know about them, but I'm not familiar with them and they seem to be very much in control of how our industry will unfold. So who are they? There's a board with nominated people who would sit on that, but do they have any resources that support them similar to the Department of Energy?

DR. DAVIS: Well, you see, one of the things - I don't know about their resources, they haven't told me about their resources. By reputation, they are very competent scientists, geologists, their infrastructure is quite competent. Their policy-making apparatus has been developed considerably in the last several years with the new chairman - or chairperson.

With regard to resources, I have a harder time. Of course, I think that they're probably pressed for resources, who isn't in government nowadays? There are some things that I think would be nice. It would be nice if they could have a better Data Management Centre, one that's larger, but that depends also on the nature of the information which they're capable of getting. If the information they're getting is valueless, it doesn't make much sense throwing several million after the thing. But once again, I don't know anything about that. They lead a very quiet existence and I think they like it that way.

MS. WHALEN: Yes, they do.

DR. DAVIS: But generally speaking, I mean I've talked to people from both the department and from the CNSOPB and I've been very surprised, they are very professional and very competent, in many instances.

MS. WHALEN: Given the way we're structured, what is the role of the Department of Energy, really, in this picture? It doesn't seem to me that they have much of a role to play. Maybe I'm jumping to conclusions.

DR. DAVIS: I don't think you're jumping to - well, the question is, and this has made me rather curious, too, when I came here first I looked and saw the formal division, which was that Nova Scotia takes care of royalties and the CNSOPB takes care of everything else. I said to myself, boy, Nova Scotia got a raw deal there, they only take care of royalties.

Now mind you, royalties are very important and if you want to get into a real battle about anything in the world of oil, just begin talking about royalties with some of these companies, they'll have you to dinner. But in terms of virtually everything else, it seemed to me that the CNSOPB basically was the authority.

I'm not sure that's the case. I think they talk a lot between themselves and I'm not sure that the CNSOPB does things that the Energy Department disapproves of.

MS. WHALEN: So they may work in co-operation . . .

MR. CHAIRMAN: I'm going to have to cut you off there, you've run out of time.

DR. DAVIS: They do disagree on things.

MS. WHALEN: Thank you very much.

MR. CHAIRMAN: Dr. Davis, if you'd like to present some wrap-up comments, we'd appreciate them.

DR. DAVIS: Oh my, well, I'm going to go back to what I was going to talk about, and that is the need to basically look at our policies and try to reduce the amount of leeway for opportunism. It is difficult and I think one of the reasons why I've agreed to appear here is that I think these issues are not generally known in Nova Scotia.

I think more public awareness of some of the issues would certainly help things considerably. I think that your regulators have a very hard job, I mean they are at the whim, if you will, of the politicians on one side - that is you people - and of the companies on the other. They have no way of really defending themselves. They can't take ads out, I can't see

the Department of Energy taking an ad out saying an oil company is behaving like, shall we say Danny "Chavez" Williams. I mean the idea of regulators doing anything along that line is just out of the picture. I think they deserve our support. They also perhaps deserve some qualified criticism when criticism is due.

I don't look at the future of Nova Scotia in negative terms. I think that you're not a Norway, you probably never will be, but you may be a Denmark and Denmark has been exporting oil and natural gas for the last 10 or 15 years. It amounts to about, we produce, I think, roughly $4 billion to $5 billion worth of hydrocarbons a year. It basically has turned Denmark around financially, and it's a larger country than this - 5 million people. It's not a country that people notice so I think there's room for - oh, and one final thing, international oil is being constrained.

This is a point I wanted to talk to you about and I think I will follow that up. They have put all their money into finding large fields. The 10 largest fields in the world today provide something like one-quarter of the oil. When the big oil companies go after oil, they're going after the giant fields and they gamble. They cut back on their infrastructure, they cut back on their personnel, they cut back on virtually everything. The idea is, if I have five giant fields that I'm developing, it's a heck of a lot better than having 100 small Deep Panukes. I mean, 100 small is a lot of problems - you can cut back on your staff, you can do other things.

The problem is, they haven't found these large fields. Every year they're producing less and less in relation to their refinery runs, which means that Wall Street is not going to be happy about firms that don't replace the reserves which they are producing.

A consulting firm outside Washington, D.C. has stated that 77 per cent of the known world oil and gas resources are in areas where privately owned oil companies cannot invest; that leaves 23 per cent. So irrespective of what is going to happen in the future, Nova Scotia is in a pretty good position. You have a good fiscal system, you treat people fairly, there are signs of oil and gas activities there, it's just a matter of waiting. I think basically if everything turns out, your dream for turnaround may eventually come, but it may not come in the way which you expect it to, however. That's it and on a positive note.

MR. CHAIRMAN: Thank you, Dr. Davis, and as has been said around the table, it's too bad we wouldn't have had a longer meeting today for your discussions. It's a very complex issue and your input on this has been very enlightening for myself and . . .

DR. DAVIS: May I add one final point?

MR. CHAIRMAN: Sure.

DR. DAVIS: I was told to keep things simple for you people, that you would basically throw me out on my ear if I began to get technical. I want to compliment you all for listening to all this complexity for a long period of time and not throwing me out on my ear. Thank you very much.

MR. CHAIRMAN: I don't think you would ever have to worry about that with this committee. Again, thank you so much for coming, I'm sure there will be some follow-up discussions with yourself and different members of different caucuses, and I hope that does indeed happen.

Our next meeting is going to be November 13^th, a Tuesday, 9:00 a.m. to 11:00 a.m., Offshore/Onshore Technologies Association will be here. I'm glad we split the meetings, it was by chance we did that, but I think it was a very good chance that we did it.

Thank you, we are adjourned.

[The committee adjourned at 3:00 p.m.]