FAIT Committee Meeting
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STANDING COMMITTEE ON FOREIGN AFFAIRS AND INTERNATIONAL TRADE
COMITÉ PERMANENT DES AFFAIRES ÉTRANGÈRES ET DU COMMERCE INTERNATIONAL
[Recorded by Electronic Apparatus]
Tuesday, April 11, 2000
The Chairman (Mr. Bill Graham (Toronto Centre—Rosedale, Lib.)): Colleagues, I'd like to call this meeting to order.
You'll recall this is another briefing in the study of the Caucasus region, which I'm sorry to tell members is still part of the ongoing saga of negotiations with—let me put it on the public record—the inaccessible, unaccountable, and generally impenetrable committee that decides these matters. We're still waiting for their lords and masters to tell us their decisions.
Sorry; I don't mean to bring the poor witnesses into this rant. This is not your problem. This is our problem.
We're very glad to have with us this morning some representatives of some very interesting companies: Mr. Carroll from World Wide Minerals; Mr. Homeniuk from Cameco, which is active in Kyrgyzstan; Mr. Grabowski of SNC-Lavalin, who we've had before the committee on other occasions about their activities; and a representative of AEC International of Alberta, who's going to be the president of Caspian Energy Consulting. And I believe he has come up to join us from the United States. Is that correct, Dr. Sobhani?
Dr. Rob Sobhani (President, Caspian Energy Consulting): Yes.
The Chairman: Thank you very much for coming, all of you. We appreciate that, and we'd be very interested in how you can help us understand the region better through your own experiences there.
We'll just take you the way you're listed. I'd ask if you could keep your initial presentations to ten minutes, because then we'll move to questions, and we always find it's most interesting when the members have an opportunity to ask the panel questions. That way we get more education.
So we'll start with Mr. Carroll and work our way through the list.
Mr. Carroll, could you go ahead, sir?
Mr. Paul Carroll (Chairman, President and Chief Executive Officer, World Wide Minerals Ltd.): Thank you, Mr. Chairman.
My name is Paul Carroll. I'm chairman, president, and and CEO of World Wide Minerals Ltd., which is a Toronto-based minerals company. We have been active in the mineral business for a number of years.
We went to Kazakhstan, which in this region is really our only direct exposure. In 1996 we responded to a request for proposals for operation and management with potential ownership of the largest uranium mining, milling, and processing operation in Kazakhstan, which was the operation of Tselliny Gorno-Khimicheskii Kombinat, better known as TGK, because most people over here can't pronounce it. This at one time had been the second-largest uranium processing facility in the Soviet Union. In fact as a result of the demise of most of the other facilities that were still operating, it could be the largest in what was the Soviet Union.
We responded to a tender. Although solicitations were more widespread, in fact only two bids were submitted, and we were the successful bidder.
We undertook to revitalize the conventional mining operations in northern Kazakhstan in a city called Stepnogorsk, which until the breakup of the Soviet Union had been a secret city. If you look at a map that's more than five years old, you won't even find it on the map of Kazakhstan. But that's not unusual for the atomic energy facilities in the former Soviet Union.
The Chairman: There's not much on a map of Kazakhstan anyway.
Voices: Oh, oh!
Mr. Paul Carroll: You won't even find the dot.
The Chairman: Okay.
Mr. Paul Carroll: But you'll find a railway spur, which goes from the main railway line to no place. That in fact is where Stepnogorsk is. As I say, at one time it was the second-largest producer of materials I'm told might make warheads, propulsion units for naval ships, and so on.
No uranium from Kazakhstan was marketed outside Kazakhstan. There is no domestic market. There is one rather antiquated nuclear power plant in Kazakhstan, but it gets its fuel from the Soviet Union. There are no next-stage fuel fabrication facilities in Kazakhstan.
We committed to take over the operation at TGK. After a due-diligence period, we took it over in the fall of 1996, and we commenced spending money. We paid some of the back wages and back pensions that had been in arrears. The operation had not been running for at least two years before we took it over.
After a number of months of operation, by the time we started to produce U3O8, which is the commercial product that comes out of a uranium mining and processing facility, we applied for export permits. As I say, there is no domestic market, so everything produced is for export, which from a foreign investor point of view is actually good news, in the sense that it's all export and it's all in hard-currency earnings, because the sales are all to nuclear power utilities in western countries. That was the good news.
The bad news was that when we applied for the permits, notwithstanding the fact that we were entitled to them, we were refused permits by the Kazakhstan government. After a few months of wrangling over trying to get the permits, we said, well, if we can't produce to sell, we're not going to produce. So we shut the facilities down, and the government retaliated by basically kicking us out of the country. So we spent about a year and a half in Kazakhstan operating, and we have been trying since August 1997 to recoup our investment, which to date amounts to about $24 million U.S.
On top of that we have a substantial loss of potential profits, which we have estimated, I believe conservatively, at as much as $300 million on a discounted, present-value basis.
It was a very substantial investment by a Canadian company listed on the Toronto Stock Exchange. The money was all raised in Canada, primarily through the equity markets. We have had great cooperation from the Canadian foreign affairs department and we've had great cooperation from the U.S. government, which of course has even more strategic interests in the area than Canada does.
This has been very unfortunate, and it's not a unique situation. This is a situation that many other Canadian mineral companies, small companies especially, have suffered in Kazakhstan. Two other companies come to mind—Kazakhstan Goldfields and Central Asia Goldfields—both of which have had similar experiences and both of which have recovery actions of some form or other against the Kazakhstan government to try to recoup investment.
It seems there is an open invitation to come to the country and spend money, and once you've spent the initial money, then it's tough luck for you. That's exactly what happened to us.
Our legal actions have primarily consisted of an action in the U.S. federal court for recovery, and there are U.S. connections for our business. We were selling to U.S. utilities primarily, and we were selling through a U.S. agent that was marketing our product. So there is a U.S. connection to our action.
We chose the U.S., for what are probably somewhat obvious reasons, as the forum where we were most likely to get redress. We've had substantial cooperation from the U.S. Congress. We actually had legislation passed last fall through the U.S. Congress that has made it a condition of further funding to Kazakhstan, under multilateral and unilateral aid facilities, that they show progress in redressing the disputes they have with foreign investors.
We've had the legislative action. We haven't had much action from the Kazakhstan government, but there have been a number of promises of action, and we have great expectations that we will ultimately be successful.
Mr. Chairman, I will close my opening remarks with that and wait for the others to do their presentations and then go to the question-and-answer period.
The Chairman: Okay. We won't ask you how much fun you had when you were there or anything. It sounds grim.
Mr. Paul Carroll: It's actually a beautiful country. In size, geography, and geology, interestingly enough, it is the equivalent of from the Lakehead to the Pacific Ocean and about half as wide. It's the equivalent of that area. It's a very large country.
The population is shrinking. The population, in the brief period we've been there, has dropped from 16.5 million to 15.5 million people. There was a lot of emigration of ethnic Russians back to Russia, some of whom have come back again, because things weren't so good there, as they found out. A lot of European Germans, for example, have gone back to Germany. They were ethnically German. So the population is actually shrinking.
The climate for foreign investment, I must say, has been abominable. The mineral activity in the country by foreign investors is virtually non-existent compared to what it was two or three years ago. I think foreign direct investment in the mineral business got as high as $300 million or $400 million U.S. annually. It's dropped down to peanuts today.
The Chairman: Thank you very much, Mr. Carroll.
Mr. Len Homeniuk (President, Cameco Gold Ltd.): Thank you very much, Mr. Chairman.
Honourable members of Parliament, ladies and gentlemen, colleagues, it's my pleasure to address the committee today.
First of all I would like to indicate that prior to my current position as president of Cameco Gold, which is a Cameco Corporation subsidiary, I was president of the Kumtor Operating Company, our main entity in Bishkek, and had the privilege of living in that country for five years.
Cameco is the world's largest publicly traded fuel company. The company produces uranium, mostly from two very large high-grade mines in Saskatchewan, and processes uranium for nuclear utility customers in two facilities in Ontario. Cameco is also a substantial producer of gold.
Cameco's activities in Central Asia commenced in 1992. The current major business activities include a one-third interest and operatorship of the Kumtor gold mine in the Kyrgyz Republic and a 60% interest and operatorship in a very large but yet undeveloped deposit of uranium, known as Inkai, in the Republic of Kazakhstan. These projects are complex undertakings and represent an interesting contrast in host foreign investment philosophy. I will discuss each project in the context of the relevant country's investment climate, political stability, and economic outlook.
But first I'll make a few general comments. There is no doubt that Central Asia, a region in close proximity to the People's Republic of China, Russia, the Caucasus, and several of the Islamic countries, is currently of concern to western nations from a geopolitical point of view and will become more so in the future. Already a number of embassies have been established by major world powers: the United States, Germany, Italy, and France. Therefore a more visible role for Canada in Central Asia in our view is warranted, both in the private and in the public sector.
As with most foreign investments, participation of Canadian companies in the development of the economy of Central Asia eventually results in substantial financial benefits back home. For instance, as evidenced by our project, Kumtor, during the peak of construction, over 500 high-paying jobs were created for Canadian citizens. Over 130 Canadians are currently employed now that the mine is in commercial production. Also, significant benefits have accrued to Canada as a result of the extensive purchasing of Canadian supplies and services. These will continue over the life of the project. However, significant business participation in the region is difficult without the support of a strong Canadian government presence.
One of the areas in which current and potential business investors would benefit from strong Canadian government representation in the region is in assessing and understanding the political institutions. Although every substantial investor does its own due diligence and draws its own conclusions, a well-thought-out political analysis conducted by experts is invaluable.
Each of the key countries in the region has adopted a slightly different—and in some cases, such as Turkmenistan, drastically different—political structure. For instance, whereas the Kyrgyz Republic continues to lead the region in pro-democratic reforms, despite some situations that have been reported in the context of the latest parliamentary elections, Turkmenistan on the other hand is a totalitarian country.
Uzbekistan, where President Karimov continues to advocate controlled democracy, represents a different set of challenges for investors from Kazakhstan, where, frankly, it is unclear whether President Nazarbaev, who has ensured his own prolonged rule, truly controls all aspects of Kazakhstan's economy.
Before I move on to Kumtor, I would like to focus on one other issue that inevitably crops up in the course of business dealings in the region, and I am speaking of corruption. Central Asian countries, by western standards, are impoverished. Their public officials are paid incredibly low wages. This combination sets the stage for demands for personal gain. Succumbing to corrupt practices is not only illegal under the anti-corruption statutes adopted by Canada, it is also bad business practice, marking the participant as fair game.
Cameco has consistently refused to encourage these practices and the result, at best, has been inaction or prolonged negotiation on some matters, requiring considerable effort and often ingenuity. On the other hand, only complete transparency will ensure the well-being of the project in the long run.
Again using Kumtor as an example, we have operated with the philosophy that we have no secrets, and have made all information, with the exception of the dealings with security issues, available to all project stakeholders, including the government, NGOs and local communities. This policy of transparency, in turn, serves to limit the offers we receive, taking some of the pressure off the project.
The Kumtor gold mine is located in the Kyrgyz Republic, 60 kilometres northwest of the Chinese border, at an altitude of 4,000 metres. It is in a very remote area, which represents substantial logistical challenges due to its high altitude and landlocked position.
The Kumtor project represents the largest foreign investment in the Kyrgyz Republic, a country one-third the size of the province of Saskatchewan, with a population of less than five million people. Like its neighbouring republics, Kazakhstan and Uzbekistan, the Kyrgyz Republic suffers from an undeveloped economy, yet while its neighbours enjoy significant natural resources and arable land, the Kyrgyz Republic has little of either.
Cameco Corporation, through its wholly owned subsidiary, Cameco Gold Inc., is a one-third owner of the Kumtor Gold Company, a joint venture formed for the development of the Kumtor gold deposit. The joint stock company, Kurgyzaltyn, an instrument of the government of the Kyrgyz Republic, owns the remaining two-thirds. The Kumtor operating company, a Kyrgyz-registered wholly owned subsidiary of Cameco Gold Inc., is the project operator.
The Kumtor project directly provides employment for over 1,650 workers, 92% of whom are Kyrgyz nationals, and the remaining 8% are mainly Canadians. It is estimated that approximately 5,000 additional jobs are created in the local communities to supply goods and services to Kumtor. The Kumtor project represents 19% of the GNP of the Kyrgyz Republic and accounts for almost 30% of the exports.
Between 1992 and 1994, Cameco negotiated a comprehensive investment agreement, which we refer to as the master agreement, regulating all aspects of the project development including taxation, operatorship, import and export rights, and financing. This agreement has undergone considerable public scrutiny in the Kyrgyz Republic, including extensive parliamentary and government hearings, with the participation of NGOs and various political and social organizations. This agreement continues to successfully govern the project.
The agreement also proved to be a sound foundation for the obtaining of financing for the project, which was the responsibility of Cameco Corporation. The $452 million required—all figures I refer to are in the currency of the United States of America—to construct the project and provide initial working capital were provided by a syndication of banks led by the Chase Manhattan, the European Bank of Reconstruction and Development, and the International Financial Corporation. Cameco Corporation supplied $45 million in equity, as well as a $122 million subordinated loan, and of course the Canadian Export Development Corporation provided an export credit facility for $50 million.
In addition, the Canadian Export Development Corporation, the Multilateral Investment Guarantee Agency, and the Overseas Private Investment Corporation provided political risk insurance for the project. Kumtor and Cameco continue to work very closely with the multilateral agencies involved with the project, especially with the EDC, to ensure their continuing support.
Multilateral agencies, such as the EDC, that enjoy the full support of the Canadian government often allow quick and effective resolution of some political problems that would otherwise prove detrimental to the project. Also in this context, the Canadian government, through Natural Resources Canada and Foreign Affairs and International Trade, has provided invaluable support to the project over the years.
As an example, I would like to mention the great assistance provided by the Canadian government in the aftermath of an accident that occurred in May 1998 to a Kumtor truck transporting cyanide. While it was made absolutely clear that the Canadian government would not condone environmentally risky practices, it did help contain the mass hysteria immediately surrounding the event. It endorsed and contributed to a very scientific and level-headed analysis of the situation. Its competent help in this instance was invaluable to the Kumtor project.
Among the very few large functioning mining projects within the CIS, Kumtor is unquestionably a success story. It came into production ahead of schedule in 1996 and has been producing gold ever since, without any material interruptions. Production will attain approximately two million ounces in the next few months. Nevertheless, the environment in which this project was developed is not an easy one.
First of all, being the largest investor in a small country comes with a price tag of high expectations and inevitable scrutiny of every action, no matter how minor. The project is not nearly as profitable for its owners as was originally contemplated, due to substantially lower gold prices, as well as a larger-than-anticipated capital cost. While this is purely a business issue for Cameco Corporation, for the Kyrgyz Republic, which had expected substantial financial contributions from the project into its meagre operating budget, it is a great concern, not only on an economic level but also on a political one.
We feel a certain responsibility for, and work very closely with the Kyrgyz government on maximizing, to the extent possible, returns from the project to the state budget. However, it is clear that no project can resolve all the economic problems of a country, no matter how large the project or how small the country. In this respect, we encourage other foreign investments in the Kyrgyz Republic for the benefit of the country, as well as for the benefit of the investor.
Cultural, economic and political atavisms surviving from the times of the Soviet Union continue to present significant difficulties to the smooth running of the operations. Overwhelming bureaucracy, unnecessary government interference, and ineffective judiciary are a few of the nemeses we fight on a daily basis. We have had to invest substantial effort in understanding and learning to function within the cultural environment of Central Asia, and particularly the Kyrgyz Republic.
Too often, in our view, foreign investors underestimate and misunderstand the challenges of operating in a foreign culture. Rather than understanding their own role and place within it, they try to force their business culture onto the host country and expect it, rather than the investor, to adapt. This approach rarely has positive results. We strive to make Kumtor a good corporate citizen of the Kyrgyz Republic, participating actively in its social, artistic, economic and cultural life, building what we refer to as a golden partnership; a long lasting relationship based on mutual respect and common goals.
The President of the Kyrgyz Republic openly encourages foreign investment, however, investments to date, with the exception of Kumtor, have been minimal and generally in the service sector. The Kumtor project was successfully fast-tracked during construction, however, operations frequently have to now deal with Kyrgyz bureaucracy that has changed little since the Soviet era, as well as with other bureaucracies in the neighbouring Soviet Union republics. In some instances, rather than deal with the neighbouring republics—to their detriment—we have chosen to deal with the People's Republic of China, who have a much more businesslike mentality, for the procurement of supplies.
Regulatory matters are also held over from the Soviet times, with some mining regulations dating back to the 1930s. Operating a modern mine under these conditions has proven to be extremely frustrating and burdensome. However, I am pleased to report that many of the existing Kyrgyz mining regulations are undergoing revision after years of lobbying by Kumtor. The new regulations will be predicated upon the existing Province of Saskatchewan mining regulations.
Politically the country has undergone significant change, with four new prime ministers and two new governments in the past two years. Parliamentary elections were recently completed in March. Unfortunately, in contrast to earlier claims that the Kyrgyz Republic was the most democratic country in Central Asia and had made efforts to introduce a truly elected government and a free market economy in the nine years since independence from the Soviet Union, it too seems to be turning autocratic.
The parliamentary election has been criticized by the Organization for Security and Cooperation in Europe for failing to meet international standards. Presidential elections scheduled for this fall will likely see President Akaev further tighten his grip on the country.
Cameco's interest in the Republic of Kazakhstan is a 60% ownership in a joint venture to develop and mine Inkai uranium deposits. The Inkai deposit is one of the largest uranium deposits in the world, with the mineral extracted using an environmentally benign technology known as “in-situ” leaching. Cameco has considerable experience with this technology, which it practices at two mines it owns in the United States.
After a period of extensive negotiations, Cameco acquired the rights to the deposit in 1996. In direct contrast to the Kumtor project, it is still seeking the government licences and approvals necessary to conduct an environmental assessment and commercial development of the test line. These final approvals are expected by mid-2000. The Inkai development plan calls for commercial production to start in year four for the project, expanding by a factor of three in year seven.
Kazakhstan has abundant oil and gas and other mineral resources. The potential of the oil and gas sector has preoccupied the government's attention. It has been extraordinarily difficult to divert this attention to smaller projects such as Inkai. The short-sightedness of this emphasis on a single sector became apparent with the decline of oil prices in 1998. Lacking a diversified economy, Kazakhstan then sought to encourage other investments, including mining, but it was ill-equipped to move on approvals, given the fact that most of the government's human resources were in the ministry of oil and gas.
With the recent oil price increases, the government is once again considering its attention on oil ventures, to the detriment of other investments. In spite of presidential exhortations to encourage foreign investments in sectors other than oil and gas, Kazakhstan remains paralysed with bureaucracy. For example, there have been no fewer than three presidential decrees and numerous official proclamations supporting the Inkai project, but the progress has been very slow. The Canadian government and local embassies have intervened at a high level on several occasions, with little result.
The fact that the Inkai project has yet to proceed despite the best attentions and aggressive appeals by its proponents illustrates the challenges faced in Kazakhstan, in contrast with the case of our investment in the Kyrgyz Republic. Kazakhstan will succeed in spite of itself only because of its endowment with abundant natural resources. The country and the region could achieve much more, however, if the government would create a more favourable climate by eliminating corruption and needless bureaucracy and reducing the tax burden on mining projects.
In conclusion, I would like to thank the committee on behalf of Cameco Corporation for the invitation and the opportunity to relate our experience in Central Asia. It is our view that a strong Canadian presence is both warranted and essential.
Thank you very much.
The Chairman: Thank you very much, Mr. Homeniuk. That's very, very interesting and very helpful. We've often had hearings on the issue of corruption and how it affects Canadian business opportunities abroad. Your comments were very, very helpful for us to try to get a better handle on that.
I know we work through the OSCE Parliamentary Assembly on these issues with a lot of the representatives from the very countries you're all from. And it's very helpful to have direct experience and testimony about it.
Let's turn to Mr. Grabowski from SNC-Lavalin.
Welcome back. It seems to me you were here just recently.
Mr. Daniel Grabowski (Area Manager, SNC-Lavalin Inc.): It was probably not myself. This is my first time before the committee.
The Chairman: I'm sorry. It was certainly somebody from SNC-Lavalin who was here when we were doing our EDC review.
Mr. Daniel Grabowski: Probably.
Thank you, Mr. Chairman, members of Parliament, ladies and gentlemen.
First of all, SNC-Lavalin would like to take this occasion to express its appreciation for the invitation to speak to the committee in regard to advancing Canada's foreign policy in the Caucasus and Central Asia region. It is our understanding that the committee is looking to assess the current political, social, and economic situation in this region of the world as well as to determine the best means of promoting Canadian foreign policy and business interests.
For general background information on SNC-Lavalin's activities in this region, our firm has been active for over 25 years in Central Asia alone, dating back also in the former Soviet Union to 1976. Over the years our firm has been involved in mining oil and gas and in infrastructure projects throughout the region.
Our project experience ranges from feasibility studies through to tender document preparations, equipment supply, construction supervision, training, technical assistance and start-up of operations.
Presently, our firm maintains a marketing office in Almaty, Kazakhstan. We have pursued and are currently pursuing mining projects in Armenia; oil and gas projects in Azerbaijan; hydro, oil pipeline, and agro-industrial projects in Georgia; oil and gas, mining, and civil construction projects in Kazakhstan; mining and power projects in Kyrgyzstan; an oil refinery in Turkmenistan; and oil and gas, environmental and mining projects in Uzbekistan.
Of particular note, SNC-Lavalin has executed over $700 million worth of projects in the Central Asia region alone. Examples of these projects are given in our advance notes that we presented to this committee and in which we speak of the Tenguiz oil and gas project and the Kumtor gold mine project with Cameco.
In terms of our viewpoint on the current political, social, and economic situation in the region, we have the following comments.
On the negative side of issues in the region, though the leaders in the countries have remained in power since the collapse of the Soviet Union, the majority of the other posts in government and industry have been the scene of continuous changes. This causes many procedural delays in a variety of ways, as decisions and plans are constantly being revised and re-examined. A further complication is the large bureaucracies that often seem to be contradictory to each other. From a business standpoint this complicates the necessary advancement of priority projects and their approvals.
Many of the experienced managers in the industries left after the collapse of the Soviet Union and were replaced by technically oriented and skilled personnel who unfortunately did not have managerial or economic experience.
In addition, most of the countries in this region have a shortage of hard currency earnings... attraction of financing and investments. This prevents them from successfully removing themselves from an increasing debt load and starting to undertake potential reforms. Many of the countries of the region, though they have abundant natural resources, are basically landlocked and subject to politics and economic issues in the region or in the neighbouring country, while others have natural resources and face the same political-economic situation.
Another issue that delays political and economic changes in the region is that laws motivating investors are still in the formative stages in many of these countries. Efforts in this area, though they are slowly making progress, are sometimes hampered by the continuous changes in government officials and their policies as well as by large government bureaucracies.
Given the shortage of foreign currency earnings and the lack of investors, this has led to increased poverty in the countries, corruption, criminal groups and their activities that have become more and more prevalent. However, some of the Eurasian countries are now starting to control this problem.
Lack of economic considerations in the past have also created massive integrated industries. As an example, a copper mine complex would also include an agriculture complex, like vegetables and bakeries and what not. Potential foreign investors interested in some of these industries were also limited in their abilities to reduce staff and the project scope in order to concentrate on making a mining complex itself run on a profitable basis.
Much of the fate of these countries is also tied to what transpires in the Russian Federation. During the days of the Soviet Union many of the countries in this region specifically had their resources transported back to or via Russia. Economics was not a consideration. Much of this logistical system is still in place today, and it is a cause for many of the economic hardships these newly independent states presently suffer.
Most of the countries in the region had and continue to have trade with other former Soviet Union states. However, many of these latter states had no money or foreign currencies to pay for the goods they received from these countries in this region. One example of this is Ukraine's debt to Turkmenistan for its natural gas.
On the positive aspects, many states in the region have abundant natural resources that have the potential to earn them hard currency. You combine this with a highly educated workforce available in each of these countries and the potential exists to create a sustainable economy and to improve the political stability for the country and for the region.
Most of the countries in this region have resource-based economies, which is similar to Canada. They have similar climates and weather conditions, and in some cases they have small populations within a large country, as in Canada.
Officials and business leaders in these countries have expressed to us a great knowledge of and admiration for Canada, but they often wonder why so few government visits have been made to their countries in support of Canadian business. Because of the similarities with our country, many Eurasian countries express interest in learning more about how the Canadian government addresses the different types of issues they are currently facing in their own countries.
EDC should be a major participant in these Canadian delegations, as it will allow EDC to get first-hand knowledge of Canadian business efforts in this market in terms of local conditions and issues, but also to get that knowledge directly from government officials and decision-makers, who are usually participants in these types of official visits. EDC is an extremely important partner on export projects, particularly in this region, where financing is difficult and riskier. Thus, direct knowledge of the region, the people, and the company activities becomes very useful.
An increase in CIDA assistance would also be most welcome in the region. As we mentioned earlier, managers with experience have left, so the transfer of Canadian expertise in key areas would benefit from these, particularly in the areas of management and economic know-how and assistance. Also, some of the technical assistance that can be provided by CIDA could be done on a repayable basis, and those repaid funds could then be recycled back to CIDA for reuse in the country and in the region.
In terms of government support, there's a major consideration for project awards in this region. Support is required for Canadian business activities and interest, as this is often seen as a big impetus for selecting a Canadian firm competing against other western companies that are receiving financial and political support from their governments. An increase in the number of Canadian government officials' visits to the region would not only promote Canadian government interests, but Canadian businesses as well.
Another fact implicating the region is that many countries in the region have strong ties to and relationships with Turkey, and the Turkish companies are very active in the region—a fact which is not unnoticed by many foreign companies, such as SNC-Lavalin. Many foreign businesses, particularly American ones, view Turkey as a gateway to Central Asia.
With that, I conclude my presentation.
The Chairman: Thank you very much.
We will go now to Professor Sobhani, who has come up to join us from the United States. We appreciate your coming.
Dr. Rob Sobhani: Thank you very much. This is my first time in Ottawa. It's a beautiful capital.
The Chairman: There you are. According to Mr. Grabowski, it's exactly like where we're trying to go, so maybe you can consider this as a visit to the region you're talking about.
I understand you're speaking on behalf of AEC International in Calgary, but that you're in fact a professor.
Dr. Rob Sobhani: Yes, I'm a professor at Georgetown University, where I focus on U.S. policy toward Iran, the Middle East, and the Caucasus. I also wear my business hat. I'm president of Caspian Energy Consulting, which is a company that has been active in the former Soviet Union now for ten years, representing major companies such as AEC.
The Chairman: Good, thank you very much.
Dr. Rob Sobhani: Thank you.
There's a lot of talk these days about whether or not the Caucasus is a great gamble, as some of you have heard today, or whether or not it's a great game, which refers to the renewed rivalry—one that goes back to the 19th century—among the Russians, the French, and the British in the Caucasus.
I'd like to argue that what we're seeing today is not the great game, nor is it the great gamble. In fact, what it is is the great gain. In my opinion, it's a gain in six areas for Canada. That's the way I see it.
Number one, it is a gain in terms of diversifying Canada's energy security needs. Some of you may know that at the current rate of production Canada's oil reserves will run out in seven years. At the current rate of production, Canada's natural gas reserves are depleting and will probably be diminished in eleven years. The oil deposits in the Caspian alone amount to 150 billion barrels, so what you're looking at in terms of the Caspian region is something along the lines of a North Sea.
Let me give you a comparison. It's 150 billion for the Caspian, while the Middle East has 676 billion barrels of oil. When you compare the Caspian to the Middle East, you're really saying that for one barrel of oil in the Caspian, you have six barrels of oil in the Middle East.
The opportunity for Canada is, once again, the fact that these are untapped resources. The 150 billion barrels of oil have yet to be discovered. The natural gas has yet to be discovered. This is a huge, huge opportunity for Canadian energy companies. That's number one in terms of Canada diversifying its energy resources.
Two, it's an opportunity—
The Chairman: You're certainly sounding like a professor when you say 150 billion barrels have yet to be discovered there. That's drawing a rather long bow, isn't it?
Dr. Rob Sobhani: It is, and that is why you have Mr. Clinton, Madeleine Albright, and everybody else in Washington all over these people, corrupt or not. The United States meets 50% of its energy needs with imports, so we are terribly dependent on foreign energy. In Washington, we view the Caspian as a major source for the future, which is why we're all over these people.
The second opportunity I see for Canadian companies... Something I'm proud of is a bumper sticker we've been giving out to the White House folks that says “Happiness is Multiple Pipelines”.
Voices: Oh, oh!
Dr. Rob Sobhani: If you look at the map I've handed out, you will see that the Caspian is a landlocked piece of property. Without pipelines you're not going to get any oil out of that region, and neither, for that matter, is this region going to matter. So pipelines are very important.
This is an opportunity for Canadian pipeline companies and the Canadian construction companies that have just testified today. The capital expenditure on pipelines alone in the Caucasus and Central Asia is $10 billion. That's the money that needs to be spent to build these pipelines. That's $10 billion that could potentially go to Canadian companies.
The Chairman: SNC-Lavalin is there, is that...
Dr. Rob Sobhani: Absolutely.
The Chairman: Okay. Now we're starting to understand.
Dr. Rob Sobhani: Now you understand, but the problem is, your Prime Minister is not there. We'll get into that in a few minutes.
Another opportunity for Canada is in the area of Canadian service companies. You have tremendous, tremendous companies in Canada that do service work in the oil and gas industry. The backlog of orders in the oil industry in the country of Azerbaijan alone is $50 billion. This $50 billion represents the capital expenditure that needs to be undertaken only for projects in the small, oil-rich Republic of Azerbaijan.
Once again, contracts that could be going to Canadian companies are today going to British, American, French, and Japanese companies.
Another opportunity for Canada is with regard to the fact that these are relatively small countries. Kazakhstan has a population of only 16 million people. Azerbaijan has only 7 million people. Turkmenistan has only 4 million people. But when you look at the oil and gas assets they have, and put the average price of oil at $20 a barrel, you're looking at $3 trillion in terms of the value of the assets.
Relative to the population, that is a huge, huge opportunity for Canadian exports in the future. Let me give you an example of what I'm talking about.
On the very first oil project in Azerbaijan, the cashflow to the Government of Azerbaijan from that very first project, over the lifetime of the project, was $44 billion. That's $44 billion to the Government of Azerbaijan to then turn around and give a contract to Canadian companies, whether it's a Canadian company selling diapers or whether it's a Canadian company selling shampoo or whether it's a Canadian company setting pipes or doing power generation.
There's a final opportunity here for Canada when one looks at the map of the Caspian. That is, the Caspian also could be viewed as a springboard into Iran and into the Persian Gulf region. This really is in terms of the long-term opportunities.
To give you an example, just recently, in the neutral zone between Kuwait and Saudi Arabia, the Japanese negotiations failed with the Government of Saudi Arabia. They left. This is a huge, enormous opportunity for the Government of Canada and Canadian companies looking for an opportunity in the oil-rich Persian Gulf. The Government of Saudi Arabia wants the participation of companies that bring with them not only their technical expertise, but also their governments.
Every time an American company visited with the President of Azerbaijan and said “Mr. President, I'd like a contract with you”, the President of Azerbaijan would tell them he'd never been to Washington before. “Well, here's an invitation.”
When the French companies Elf or TOTAL went to the President of Azerbaijan and said “Monsieur le président, we want a contract”, the President of Azerbaijan would say he'd never been to the Eiffel Tower, never been to Paris. “Oh, monsieur le président, bien sûr, come on, let's have you in Paris.” The next thing you know, he's in Paris signing a deal with Elf and TOTAL.
Well, the President of Azerbaijan has never visited Ottawa.
The Chairman: We'll take him up the Peace Tower. That will really knock him for a loop.
Voices: Oh, oh!
Dr. Rob Sobhani: The long and short of it is that there needs to be, as the previous speaker said, an enormous effort on the part of the Canadian government, starting with your committee. We arranged for the visit of the President of Azerbaijan with our equivalent of the foreign affairs committee. We went to the chairman, Mr. Gilman, and we made a case to him that American companies needed government support. He wrote a letter to Bill Clinton, and Mr. Clinton then invited the President of Azerbaijan. After that the President of Kazakhstan came, and after that all these other presidents came.
Why? Because the relationships with Canada and America and France form the bedrock of the independence of these countries. They see their assets as the only way to guarantee their independence.
The Chairman: I'll bet you didn't get Ben Gilman to go to Kazakhstan.
Dr. Rob Sobhani: No, no, no.
Voices: Oh, oh!
The Chairman: That's the difference between us and him.
Dr. Rob Sobhani: I'd like to end by emphasizing that you have an enormous opportunity, but the ball is in your court, really. To the extent that the Canadian Parliament and Canadian government get involved, the resources will belong to Canada, the contracts will go to Canada, and Canada will be a participant and a player in this very promising part of the world.
Thank you very much. I appreciate it.
The Chairman: Thank you very much. That's very interesting indeed.
Mr. Gurmant Grewal (Surrey Central, Canadian Alliance): Thank you, Mr. Chairman.
I welcome the opportunity to have all our witnesses here, and I would like to thank the witnesses for sharing their experiences. However, I have a few concerns.
Professor, you mentioned relationship-building, but do you think the lack of diplomatic representatives from Canada in the eight newly independent states is hurting our visibility as business people or our ability to do business there?
Dr. Rob Sobhani: Absolutely. There is representation in Kazakhstan, but there is no representation in Azerbaijan. Every week the President of Azerbaijan has a meeting with the ambassadors from the leading countries of the world. Canada is a leading country of the world, and yet there is no Canadian ambassador in Baku. Dr. Zbigniew Brzezinski has coined Azerbaijan as the cork in the barrel of the Caspian. It's a strategic country.
That is why, by the way, he has visited. The President of Azerbaijan has been to the White House a total of three times now simply because our ambassador is present there, and he promotes the idea. Of course, every time he comes there's a signing of an oil contract with an American company.
Mr. Gurmant Grewal: I would also like to draw your attention to the security in the region. What are the prospects or chances of any civil conflicts, particularly with the Islamic fundamentalists in the region or the terrorist threat we have been reading about in the media?
As well, there's the balance between Russia reasserting its desire to influence versus the impact of the Commonwealth of Independent States in that region. How do you balance the security issue?
Perhaps I can throw out two more quick questions before you give me those answers.
First, what is the record of bilateral and multilateral economic engagement in this region, particularly by such agencies as CIDA? What complementary role can be seen for these agencies in the future?
You shared your experiences, and we enjoyed that, but what can be learned from your experiences for those new entrepreneurs who will be going there? In short, would you like to give some ideas about certain dos and don'ts that can be helpful for the potential business people?
Dr. Rob Sobhani: I'll address the matter of security.
The Chairman: Okay. You want to do that. Does Mr. Carroll wish to speak next?
Mr. Paul Carroll: Yes.
The Chairman: Fine. Mr. Sobhani.
Dr. Rob Sobhani: The major threat that the region faces today is not external. It's internal. While there are external pressures from Russia and Iran, these are not translated into actual security threats.
With regard to the issue of Islam and Islamic fundamentalism, actually, when one really explores that subject, one arrives at one conclusion: what you're seeing is a revival of Islam, not necessarily Islamic fundamentalism.
Let me give you an example. The Martyrs Cemetery, which is the equivalent of our Arlington Cemetery in the United States, is a national shrine in Azerbaijan. There buried next to Muslins are Jews and Orthodox Christians, all buried next to one another in supposedly Islamic Azerbaijan. So the conclusion one draws is that 70 years of communism has exorcised religious fanaticism out of these people and what we see today is an interest in Islam. It's a revival of Islam, very natural.
The Chairman: Mr. Carroll.
Mr. Paul Carroll: I agree with the comment about security. I won't add anything to that.
I'd like to reply to the question on the dos and don'ts and what we have learned. First of all, I agree with Mr. Sobhani about the opportunity in the region, which is exactly what brought us to the country of Kazakhstan in the first place. It is a huge natural resource base. Our focus was hard-rock minerals, as opposed to oil and gas. With regard to the oil and gas industry, with the huge quantities of reserves in the Caspian Basin and on the land of Kazakhstan, I agree with all the things he said.
For some reason, hard-rock minerals mining seems to have been almost a forgotten industry in Kazakhstan, and I can't explain why that is. It's a very significant business. They have a lot of dilapidated mines—copper, zinc, chrome, and so on. A lot of western companies have come there. Some have had success. Most have had difficulty, like we did. But the opportunity is there, there's no question.
The matter of corruption is endemic. I can speak with authority only with regard to Kazakhstan. Kazakhstan is, for lack of a better way of describing it, a tribal economy. Under the period of the Soviet Union and the czars before that, Kazakhstan was a subservient country and was actually cooperatively or voluntarily, so to speak, co-opted to what became the Soviet Union. Under the command economy, the local people basically did what they were told.
I agree with the comments about products being shipped back to Russia in most cases. One of the most ridiculous examples was the bread industry. Kazakhstan is part of the steppe of the former Soviet Union. It's the wheat belt of that part of the world. Wheat was harvested, taken back to Russia, refined in Russia, and sent back in the form of bread. That's ridiculous. You're basically moving air around, which is very uneconomical. But it meant that the Russian central core of the Soviet Union controlled these countries.
The Chairman: Isn't that the way the British Empire used to work?
Mr. Paul Carroll: Absolutely, except that they have somewhat better transportation methods today than they did in the days of the British Empire, when they had to go by ship.
But the point is that under the Soviet command economy, there is no question that the Russians dominated the local business. The government owned all the businesses. Private enterprise is relatively new. It's an experiment.
We're also an active company in China, and there's a Chinese proverb, otherwise known as a curse, which is “May you be born in interesting times”. And the last ten years have been very interesting times.
We've been trying to do business in a business-like fashion by North American standards in one of the most sensitive geopolitical areas in the world, for all the reasons that have been said with such great emphasis by my colleague to the right here.
I think what Canada can do is join with the other nations. We don't have the economic clout the U.S. has. On the other hand, sometimes the U.S. economic and military clout is actually a negative for them, rather than a positive. I think we've been very successful in working cooperatively with other countries to develop better living conditions and better business conditions, and I think we have to keep on doing that.
The Chairman: Did anybody else want to add anything? Mr. Homeniuk.
Mr. Len Homeniuk: With regard to what we have learned from operating in Central Asia, unless an investor who goes to that country is willing to be very, very, very patient, you'll be wasting your time. Certainly any agreements have to withstand the legal scrutiny in those countries and also have arbitration mechanisms.
There's a long list. Lastly, the other very important one, which I have noticed for other investors coming to Central Asia, is that you have to understand these countries. You're in a foreign country. You have to recognize that. It's not Canada, and you certainly can't expect what we have here in Canada to be dominant there. So you really have to make sure that you respect the ways of these countries and their political institutions. I think you can make progress if you do that.
The Chairman: I want to ask a follow-up question on Mr. Carroll's description of his problems and things. I take it there are no investment treaties between Canada and these countries that guarantee arbitration in the event of investor-state disputes.
Mr. Paul Carroll: Not yet.
The Chairman: When you go there, do you have the practice of signing an investment agreement with the state that has conditions in it, including reference to independent foreign arbitration in the event of a dispute? Is it the practice to sign an investment agreement of that type?
Mr. Len Homeniuk: To my knowledge, all of the Central Asian countries require an investment agreement that very clearly spells out the terms. This has become prevalent since about 1995. Before that time Kumtor had what's called a master agreement, which is essentially the same thing. But yes, your rights are enshrined in those agreements. You have to make sure there's some mechanism to enforce them.
The Chairman: Usually that mechanism is a reference to ICC arbitration, ICSID arbitration, or something like that, is it?
Mr. Len Homeniuk: Yes.
The Chairman: Are these countries signatories to ICSID?
Mr. Len Homeniuk: They're certainly signatories to the Stockholm treaties in those areas—at least Kyrgyzstan is.
The Chairman: We can get that information.
Did you want to add something?
Dr. Rob Sobhani: In answer to your question, in Azerbaijan, for example, any contract you sign with an oil company becomes the law of the land. That's the major difference between Kazakhstan and some of these other countries and Azerbaijan. AEC, a Canadian company with absolutely no experience in Azerbaijan, walked into Azerbaijan and said we want this project, and within five months we had that project. The laws are such that if you sign a piece of paper, it is guaranteed by the Parliament and becomes the law of the land. That's a major distinction.
The Chairman: Before I was elected to Parliament I had some experience negotiating these types of agreements in various countries, and I found quite often that the laws could be changed just as quickly as contracts could be changed. So we go back to your enforceability problem.
Mrs. Francine Lalonde (Mercier, BQ): Thank you for being here. I must tell you that you have brought us to a world that we, the Standing committee on Foreign Affairs, are not used to travelling in. I was wondering if we might not go on a trip for Team Canada.
The Chairman: We are talking here of the dimension of the panel relating to business. There are other dimensions, namely human rights.
Mrs. Francine Lalonde: You will allow me to joke a little bit, Mr. Chairman. This is very instructive.
During the weekend, I read the latest issue of Foreign Affairs and in particular the article on Yeltsin's entourage, which is now Poutine's entourage, which controls and which has even taken over all oil operations in Russia.
Here then is my first question. In this immense region, who are the main players? You tell us that if Canadian companies want to have a share of the action, Canada will have to establish a presence. I understand that and I have heard this in Brussels, in the context of the European Union, as well as elsewhere. I understand this. Who are the main players? Are Russian companies active in this sector? How do they play? They seem to be playing a game that is not necessarily regulated by international referees. What then is the role of Russian companies?
Secondly, who are the major players and do you have relationships with the big oil companies that we know?
Thirdly, what is the interest for Canadians and Quebeckers? We understand the interest for companies, but what is the interest for the people? We are politicians. We are members of Parliament.
Fourthly, what are the stakes with regards to the OPEC and the price of oil? I am talking only of the oil issue.
The Chairman: Who's going to take a first cut at this? Professor.
Dr. Rob Sobhani: Thank you very much for the question. I think your questions number three and four are probably related.
To the ordinary Québécois, to the ordinary Canadian, the price of oil is very important. This is why, to give you the example of the United States, we have been very active in the Caspian. When I say we, I mean the government of America and the American oil companies have been very active in the Caspian, because there is a scenario, and I will give the scenario to you. By the years 2005-2010, in that margin, there is a good possibility that non-OPEC oil is going to go down and OPEC oil is going to then have to fill the gap. By 2005-2010, however, the Caspian Sea will be producing between three and six million barrels of oil per day.
This is the cushion the west needs in order to prevent a huge spike in the price of oil that affects the ordinary Canadian. And that is why today, in the year 2000, we are planning for projects in the Caspian so that by the years 2005-2010 we are able to bring this oil, three million to six million barrels, to the market so that we are not a hostage to the OPEC cartel, or, for that matter, individuals like Saddam Hussein.
But the Caspian is also important to Canada because it is a springboard for entree into Iran, into the Persian Gulf region, because it is geographically very close. And that is why it is terribly important for the Canadian government to be engaged, because it does involve the life of ordinary Canadians.
On your question about who are the major players and the role of Russian companies, one company that I know, Lukoil, which is the largest Russian oil company, acts like a western company actually.
Let me give you an example. When the first contract was signed with Azerbaijan we got a note from the Russian government, a very tough note, saying that your contract is illegal. It was a letter addressed to BP, Amoco, Exxon, the American companies and the British, from the Russian foreign ministry that said your contract is illegal, cease your activities. We politely threw that letter into the trash can and proceeded with our activities. But Lukoil was the company that was the intermediary that tried to soften the stance of the Russian government, and in fact it has. So at least one company that I know of has played a positive role.
I'll let the others talk about the other companies.
Mr. Daniel Grabowski: Yes, our firm has worked for Lukoil. They are a major player in the Caspian. In fact we did also some technical assistance and training in management at Lukoil, where they learned first-hand from Imperial Canada, for example. So they are very present in the region and they behave much like a western oil company.
Other companies that are investing in the region are the major U.S. oil companies, such as Chevron. Our original project in Tenguiz now has 45% ownership from Chevron. We still work there. All the major oil companies are there, and the mining companies as well are there. There are a lot of activities and opportunities. The Russians are among those who are participating in the region as well. Lukoil is a fine example of a western-style company.
The Chairman: The great game is now a corporate great game, as well as a game of empires. It's the new empires that are...
Mr. Len Homeniuk: I would just add a few comments. In the mining industry it's a little different, particularly in the uranium and gold mining industry, which were basically all controlled from a central committee in Moscow. Many of the Central Asian countries had no understanding of the mineral endowment their countries had, in particular in the Kyrgyz Republic. When we first started going there they had no idea that they did have a Kumtor, for instance.
Therefore, although Russia is trying to influence these countries, generally, because of the previous over-possessiveness, all the Central Asian countries have grabbed back their mineral endowments and are managing them themselves.
In addition to that, most of the Russian mining techniques are antiquated in comparison with those we employ in Canada or in the western world, and many of the Central Asian deposits could not be developed with that sort of technology. So it represents perhaps different opportunities in the oil sector.
I think that's all I wanted to say.
The Chairman: Thank you.
Mr. Paul Carroll: I can't comment so much on the Russian part because our activities are strictly in Kazakhstan and we're strictly in the uranium business, although we did make an attempt to get into the gold mining business, but we didn't actually do it.
The Russian influence was, as the other speaker has mentioned, the fact that until the breakup of the Soviet Union all uranium mining in every respect was strictly Russian-controlled within the Soviet Union. So, by definition, the Russians pulled back and the local Kazakhs were left with the responsibility of what do they do with these assets that they probably didn't realize they had. In fact these were secret facilities, and most day-to-day Kazakhs wouldn't even have known they were there, believe it or not.
In terms of the major players, I can tell you that in Kazakhstan there is basically only one major player, which is President Nazarbayev and his family—and he has a very large family, perhaps for obvious reasons—and to a lesser extent, members of what might be called the tribe he belongs to. In Kazakhstan I think there are five or six ethnic Kazakh tribes, which goes back to 200 years ago, when they were a nomadic people.
In some ways they are still a nomadic people. They basically live for today and set aside assets for tomorrow because you don't know where you're going to be tomorrow. I think there's a certain mindset with the ethnic Kazakhs. And that's not meant to be a derogatory comment; I think it's just a statement of fact.
But the fact is the Nazarbayev family and friends control everything, and you can't do anything of any significance in Kazakhstan unless either the president's family or somebody designated by the president's family is somehow or other involved in the project.
It's not that I can speak for the company, but the largest Canadian investment that I'm aware of in Kazakhstan is the Hurricane Hydrocarbons oil and gas operations. The control of that company has recently been taken over by the owners of the Shymkent Refinery, which merged. But the fact is the owners of the Shymkent Refinery are now the controlling shareholder of Hurricane.
I can't tell you exactly how they've done it, but I have reason to believe that you can trace control of that entity back to the president's family. That's a Canadian company. It's the largest Canadian investment in Kazakhstan, and I think it's now effectively controlled indirectly by the Nazarbayev family.
The Chairman: Why don't you sue them while you're suing everybody else? Never mind, don't answer that question. Your lawyers are probably looking at it.
Mrs. Francine Lalonde: Mr. Grabowski has something to add.
Mr. Daniel Grabowski: Isn't there a question about CIDA's role, possibly, in the region, just as one of the questions? Do you agree?
The Chairman: Yes.
Mr. Daniel Grabowski: The role of CIDA would be very important, as was mentioned by Paul. Many of the managers had left the region after the collapse and you were left with very technically oriented people who didn't have any management or economic know-how. I know that CIDA, central and eastern Europe, has a technical assistance training program with managers, which we've used with Lukoil, and it's been very successful, because they got to see how we operate, how their equivalents operate in Canada. So it's important for them to be there and it's a very key issue that we think Canadians can provide to the region.
As was mentioned earlier, the Canadian government's support of EDC's participation in the region would be of much help—much, much help. We have a lot to gain for being proactive with them, transferring our know-how and letting them get to know how we do business.
The Chairman: Mr. Homeniuk, very briefly.
Mr. Len Homeniuk: Mr. Chair, I should mention that CIDA has been very active in the Kyrgyz Republic and we've worked with them on at least two projects to provide similar things: training for Kyrgyz managers and setting up of operations, that sort of thing. So there have been at least two projects, and they're very active in the region.
Also, you asked what does it mean for the average Canadian in these regions, and I tried to point out that in our operation it's meant very substantial jobs for Canadians working in these countries, as well as procurement of supplies here in Canada. I would estimate that out of the $450 million U.S. that we spent on this project, probably greater than one-third was returned to Canada in some fashion. So it is a very substantive amount of money, at least to us anyway.
Mr. Daniel Grabowski: More interaction between the Canadian government and CIDA, for example, leads to what Rob was saying in terms of presence and recognition of Canada. You have to be seen. If you're there for the tough times, you should also be rewarded for the good times with your presence.
The Chairman: Thank you.
Mr. Bernard Patry (Pierrefonds—Dollard, Lib.): Thank you, Mr. Chairman.
First of all, I would like to thank our witnesses for this morning.
We can see that in the Caucasus and in Central Asia there is major environmental degradation, and probably this is a legacy from the former Soviet Union. I'm thinking, for instance, of the wetlands on the shore side of Azerbaijan or about the nuclear wasteland.
Recently we finished our review regarding EDC and our recommendations. There was one recommendation regarding environment. My question is for Mr. Carroll or Professor Sobhani. Because in the Kumtor Mine EDC is involved, what type of assessment has it done regarding the environment?
Mr. Paul Carroll: I was going to say, with respect to the uranium operations, we took over conventional mining operations in Kazakhstan when we started. We hired a number of technical specialists to do the due diligence for us before we concluded our deal with the government.
On the environmental side, we hired a firm, Golder Associates, which is one of the best known and best respected environmental engineering firms in the world in the mining business. They did a complete environmental review, what we call a phase one environmental review, of all the facilities. And actually, to our surprise and to their surprise, the environmental conditions were very well satisfied by the former operations. Perhaps unique to the uranium business is it was the Cadillac of all businesses. As one of our people said, they saw more titanium and stainless steel in those facilities than they've seen in their life. In fact, one of the comments made on the facilities by one of the specialists, the head of the team from Golder, was that the mill at Stepnogorsk was actually better than most mills in North America in terms of environmental compliance. So we basically started off with a good footing and then it was a question of going on from there.
One of the advantages of working toward ISL or in-situ leach technology, which is where we were headed when we were abruptly stopped—and Mr. Homeniuk can speak better to this, because they're doing the same thing—is that's a very environmentally friendly form of mining. There basically is no disturbance of the surface. So we were looking to operate in a very environmentally friendly way.
I think basically these countries today do adhere to international standards of environmental compliance. In terms of what we all see in the media, I have an expression, which is believe half of what you know, and nothing of what you read in the newspaper. I think the media builds on this environmental thing, and I think you'll probably find when you're there that what you may have preconceived about environmental compliance is just not the case.
The Chairman: You don't understand. We believe in the media what we read about you; we just don't believe what we read about ourselves.
Some hon. members: Oh, oh.
Dr. Rob Sobhani: With regard to the environment—
The Chairman: Could I ask Mr. Homeniuk if he could speak to that? Cameco had quite a spectacular event that was reported in the media some time ago, so they've had some personal experience with that.
Mr. Len Homeniuk: Thank you, Mr. Chairman.
In the feasibility stage of our project there was an environmental impact statement done, the same as it would be for Canadians. In fact, my colleague's firm did that for us. That environmental impact statement was reviewed by all the project lenders, including the EDC, and by outside experts—NGOs and various other organizations. It was approved.
Then, as a condition of the lending, in which EDC was a major participant, there was a master environmental agreement drawn up called EMAP—environmental management action plan—which specifies all of the release limits and detailed environmental aspects, such as monitoring, where we monitor, and all those sorts of things.
At Kumtor we agreed to abide by the most stringent of the Kyrgyz, Canadian, and World Bank environmental regulations. So our operation is by far more environmentally sensitive than it would be in Canada, for instance, in terms of the regulations we follow.
Also, with regard to the EMAP, we have an outside auditor inspect our operation once every three years. Recently we have agreed with a committee of NGOs that they would have the right to monitor and inspect our facilities as they wished. So the environmental scrutiny is there, and EDC has been part of all of these endeavours.
With regard to the reference Mr. Chairman made to the cyanide accident we had, for those of you who are not aware of it, one of our trucks hauling cyanide had a traffic accident and basically ran off the road. The cyanide ended up in one of the rivers. About 1,700 kilograms of cyanide were dissolved over a six-hour period. This sounds like a very substantive amount, but in reality the environmental effect was minimal compared to what we have read about in some of the more recent accidents in Romania.
However, what was created at that time was mass hysteria among the people. As soon as the word “cyanide” is mentioned, everybody is concerned, and rightly so. We found ourselves in a very difficult situation with regard to what the media were printing. It was so far from reality that we had a great deal of difficulty trying to put it back into perspective. We had very significant help from the Canadian government in doing that, in terms of sending out technical experts to do the monitoring and assess the damage that was done. At the end, the Canadian contingent, along with the Russian contingent and several other international experts, came to the conclusion that the damage was minimal and issued a report on that, which is on the Internet for everyone to see.
Certainly in my paper I acknowledged the help of the Canadian government in that endeavour. It proved to be very beneficial.
Mr. Bernard Patry: I have another question for Professor Sobhani. They talk a lot about Turkey as a gateway for this new area. I'd like you to comment on the present or future in regard to Iran in that area.
Dr. Rob Sobhani: My parents are Iranian, so I speak with a little prejudice here, although I was born in the wheat fields of Kansas. So I come to the area from Kansas.
Iran is certainly going through a major fundamental transition. Iran has had a history of democracy. In the 1905 revolution they had—the constitutional revolution—the minutes of the parliamentary meetings talk about the rights of women, gun control, and the rights of the press to be present at the meetings of the parliament. This was in 1905.
Today what we're seeing is the culmination of this struggle between the traditional forces in Iran and the more secular-minded forces. So the future of Iran actually is brighter than what one sees today in the pictures on television.
It is a society that is driven by young people. Fifty percent of the population is below the age of 21, so they are desperately demanding more freedom, more openness, which by the way poses an enormous opportunity for Canadian companies, because my government brings baggage to the table. Canadian companies don't bring any baggage, but a plus, to the table.
The Chairman: They don't bring any money either.
Voices: Oh, oh!
Dr. Rob Sobhani: In terms of opportunities, I emphasize the oil industry because Iran's oil industry is in desperate need of modernization. Canada and Canadian companies have the technology and the management to do the exact same thing an American company can do. Iran is on its road to reform. There will be hiccups, no doubt about it, but it is well on its way to a more open and plural society.
Mr. Bernard Patry: What about the role of Iran in the other countries in Caucasus and Central Asia?
Dr. Rob Sobhani: In the early 1990s, Iran's role was very negative. They were trying to undermine some of these regimes, some of the weaker ones like Azerbaijan. With the election of President Khatami, ideology has been taken out of Iranian foreign policy and pragmatism has been injected into Iranian foreign policy.
What you see today is a more pragmatic approach to the whole region. Iran is interested in stability because war will create refugees, which means they're going to come into Iran, for example. What you find in Iran today is a more pragmatic foreign policy. With the exception of the Arab-Israeli conflict, you will see a pragmatism, which includes the Caspian, and cooperation with the other Persian Gulf countries such as Saudi Arabia.
The Chairman: Do you believe the dialogue of civilization that President Khatami has proposed is fundamentally accepted by the rest of the regime? I was in Iran last year myself. We were very closely following this issue. It's clear that there's an internal struggle going on. What's your judgment as to who's winning the internal struggle? I think the young people are, but—
Dr. Rob Sobhani: Precisely. President Khatami is the catalyst. President Khatami is the face to the reform. You or I could have been the candidate and they would have elected us because it's a grassroots effort. It's an effort by the people to change the system. I'm not suggesting the Islamic Republic, but they want to change the system so that the socio-economic demands are met. Every year Iran needs to produce one million new jobs. That's a huge task.
The Chairman: Thank you.
Mr. Grewal, I'm going to go back to you, but it has to be five minutes this time, not ten.
Mr. Gurmant Grewal: Thank you, Mr. Chairman.
I feel Canadians generally are not very proficient in their general knowledge of south Caucasus and Central Asia. Can you kindly throw some light on the basic nitty-gritty of setting up a business from a Canadian point of view, information about currency control, the financial institutions, the banking in the country? What are the requirements for a business? Immigration? Can you give some information about the type of government in various countries or human resources records and so on? That gives background information for our Canadian investors to prepare themselves before they go.
Mr. Paul Carroll: I can only speak with any real experience with respect to Kazakhstan. Setting up a business there is more or less the same as it would be here, other than the fact that it's much more bureaucratic than it is here, where it could be done in five minutes. There are different forms of business enterprise that they have established. That part of it works fine except that it is very bureaucratic.
The banking system in Kazakhstan, even in the last five years, has improved dramatically. There are three or four of the major rural banks that now have full branch operations in Kazakhstan. Those are ABN AMRO, Citibank, and Deutsch Bank. I guess that's only three. There may be somebody else.
Mr. Gurmant Grewal: Currency conversion is not a problem?
Mr. Paul Carroll: The tenge is a pretty convertible currency. We started in 1996, when I think the tenge was about 68 to the U.S. dollar. In the two-year period when we were most active there, it eroded to about 75 or 76 to the U.S. dollar, less than the Canadian dollar did during that same period of time.
Mr. Gurmant Grewal: Right.
Mr. Paul Carroll: During the period after that, up until the presidential election in January 1999, when President Nazarbayev was re-elected—which was somewhat of a rigged game—they miraculously managed to keep the tenge at more or less the same level, with slight erosion, notwithstanding, for example, the Russian currency problem.
Mr. Gurmant Grewal: Okay.
Mr. Paul Carroll: After he got elected, it fell off to about 150 to the U.S. dollar. It has come back a bit since then.
Mr. Gurmant Grewal: We have a very short amount of time for anyone else who can talk about immigration requirements.
Mr. Len Homeniuk: I would like to make the point that certainly from our investment in Central Asia, we feel that a much stronger Canadian presence is required there. Mr. Sobhani mentioned there's no ambassador in Azerbaijan. To my knowledge, there's only an ambassador in Kazakhstan. All the other Central Asian countries do not have one.
It's precisely that kind of role. To answer the question you've asked, there should be a Canadian presence in these countries.
As far as immigration goes, in order to get Canadians working in these countries, it's not a difficult matter. It's similar to the process you would go through here. You would make an application and visas would be granted, but we've never had any difficulties with that.
Mr. Gurmant Grewal: Thank you.
Dr. Rob Sobhani: Let me give you the nitty gritty of another aspect. In order to be successful—and every single gentleman here would attest to this—you have to have a personal relationship with these people. They think with their hearts, not with their minds. That's the bottom line of doing business there. If you touch their heart, if you drink lots of vodka with them—seriously—and go to their level, you may be the beneficiary of their largesse. So it really depends on your capacity for openness in terms of allowing them to entertain you, wine and dine you, and you'll be the beneficiary.
The Chairman: So you're going to send the politicians to go and drink while you guys do the... I'm starting to understand what's being talked about here.
We're going to go to Eleni Bakopanos.
Ms. Eleni Bakopanos (Ahuntsic, Lib.): Thank you, Mr. Chairman.
My first question is for Mr. Carroll. In your recommendations in the paper you presented to the committee, you talk about resolving the outstanding trade and investment disputes as a condition precedent to further unilateral and multilateral funding. If we take the fact that was brought up also by Mr. Homeniuk concerning corruption and bribery and we set up more barriers or more rules, are we not then prejudicing Canadian companies in doing further business?
Mr. Paul Carroll: I could write a book on that one.
Ms. Eleni Bakopanos: It's not an easy question.
I agree that we should have standards, and let me put it on the record that I agree with you that there should be that type of precondition to any business deal. But the fact of the matter is that you've all said there is not the same system in place in order to assure that the rules of the game are equal for everyone. Therefore, how are you going to get around that fact?
I might take the question even further and say there are certain countries—you brought up Turkey, or other countries as well—that in fact subsidize some of the companies that go into this area. We as Canadians don't subsidize that type of business in the Caucasus or in that part of the world.
So you're setting quite a few rules before Canadian companies can go in, then.
Mr. Paul Carroll: Right.
The fact is, you could write a book, and in a sense I guess I have written a book. I'm still writing the book. It's a work in progress.
As a businessman, you have to be an optimist. I think every businessman, every entrepreneur, is an optimist. Therefore you assume that if you see an opportunity and handle it and implement it correctly, you will be ultimately—and I emphasize the word “ultimately”—successful.
One of the problems in any of these countries—in fact it's not unique to Central Asia and the south Caucasus—is there are a number of companies representing a number of countries. I think the business ethics of countries, and therefore of the companies that come from those countries, varies from place to place.
I won't mention any of our other UN members, but I think in Kazakhstan, for example, there's a handful of countries that are particularly involved there, and reference has been made to the fact that, unlike Canada, there were long historical connections from certain European countries and of course from Russia.
What we did, obviously not as effectively as we would have liked, is that... We are active in China and in Mongolia, and we've been in a number of other countries where a lot of the issues are the same but the method of implementation may be different. What we found is that you always need a local partner. When you go into a country that is really strange to you, you need a local partner. That may be the government in most cases; certainly in the mining business it tends to be the government. You need somebody that's a private enterprise partner.
In Kazakhstan we did that. We did a bit of canvassing around before we got involved, and we allied ourselves with a commercial enterprise that had been operating in Kazakhstan, a company called Tsesna Corporation, the principals of which came from what we thought was the right tribe, but in fact they were a commercial enterprise that had been and still is very successful in capitalizing on business opportunities in the country and the region.
I was once quoted as saying that Kazakhstan is a place where you want to deal C.O.D. What I meant by it was that if you're doing a transaction that has a fairly short life to it, like a trade transaction where you're selling something and you hope to get paid within six months, or a year at the most, preferably even C.O.D., the problems are less than if you're trying to do something which is, as in the mining company, by definition, long-term. You can't pick that up and take it away. You have to be there.
Ms. Eleni Bakopanos: Can I just take the question a little further? Passing legislation in Parliament is fine, but I would venture to say that we're probably better off as a government by trying to work through the OSCE or other organizations that these countries in fact want to be members of, that have certain standards, therefore making them adhere to those standards already existing in terms of treaties they've already signed, in terms of other agreements they've signed. I would say that we should start there, perhaps, because we would be penalizing Canadian companies in some ways... That's what I'm saying, but I'm not disagreeing that there should be regulations.
I would like to ask a short question if I have time, Mr. Chairman. Continuing on the issue of the environment, my colleague, Dr. Patry, actually asked the same question, but I would like to take it further. In National Geographic there was a recent article on the Caspian Sea and the pollution that is taking place in the Caspian Sea. It was quite a disturbing article, considering the fact that a lot of the companies that do business there are in fact dumping into the Caspian Sea.
So I'm glad to hear that you have standards and that you follow Canadian standards, but that article was quite disturbing. I don't know if any of you want to comment in terms of the pollution taking place—and that's just one example.
Dr. Rob Sobhani: Once again, I think, that pollution mentioned in that article is a legacy of the former Soviet Union. There's a city north of Baku called Sumgait, which was the Soviet Union's petrochemical heartland. If you walk into that city and stand in the centre of the city for literally five or ten minutes, you will feel like you've smoked two packs of cigarettes; it is that polluted. What we have done, with the help of multinational companies, is to bring some of the children who have cancer as a result of this pollution to western hospitals and try to treat them.
Every single oil company contract has a major clause with reference to the environment, because it is the responsibility of those of us who live in a good environment to try to transfer that. We've made sure that the contracts that are signed have clauses relating to the environment, to make sure that at least from here on in we take care of the environment.
Ms. Eleni Bakopanos: In terms of cleaning the environment, are the companies...
Dr. Rob Sobhani: It's very costly.
Ms. Eleni Bakopanos: We know that. It has been costly here. We haven't done it.
Dr. Rob Sobhani: Exactly—and they haven't done it there, unfortunately.
Ms. Eleni Bakopanos: Thank you, Mr. Chairman.
The Chairman: Mr. Rocheleau.
Sorry, Mr. Homeniuk.
Mr. Len Homeniuk: I was just going to add, if I may, that with regard to the playing field in doing business in these countries, Canadian corporations certainly have to abide by the Canadian rules, and in order to be competitive, we have to offer something else. Quite often, that is a better deal or advanced technology or whatever.
But I would like to say that these countries all like doing business with Canadians. Canada is very highly thought of, in fact, more so than the United States, I'm pleased to say, and many other countries. In a lot of ways we are a partner of choice, just from the reputation of our country, which makes those of us working there very proud.
Mr. Daniel Grabowski: They admire Canada on the environmental issues, in particular, on the way we handle the issues.
The Chairman: Mr. Rocheleau.
Mr. Yves Rocheleau (Trois-Rivières, BQ): A little while ago, officials from the federal Department of Foreign Affairs appeared before us to give us information on this part of the world. I would like to quote a sentence from a document they gave us and I would like to know if you are in agreement with the statement. They said the following about the Caspian Sea:
Iran, along with Russia, maintains that the undersea resources of
the Caspian Sea belong to the five states that share its shoreline.
I would like to know if this is a source of conflict between these five countries. In your opinion, does this mean that other players are coveting the undersea resources of the Caspian Sea, be they private or public? Are there other governments, other countries or other private companies that in your opinion have their eye on the Caspian Sea and its riches?
Dr. Rob Sobhani: It's a very good question, but I disagree, respectfully, with the position of the foreign office here. The issue of the division of the Caspian, from the perspective of the companies working there, is resolved. They are taking the position that the Caspian is divided between sectors.
So Chevron, working offshore in Kazakhstan, for example, believes that it's working in the waters of Kazakhstan. The countries surrounding it are all more or less in agreement—Turkmenistan, Azerbaijan, and Kazakhstan. Until recently Russia was opposed, but is now in agreement that things should be divided among sectors.
Iran is the lone standout. The reason Iran is the lone standout is that Iran and its foreign policy have always been anti-American. So to the extent that they could find an issue such as the demarcation of the Caspian to point to yet another American conspiracy, they were going to use that. Since America is the majority shareholder in the contracts in the Caspian region, the position of the Iranian government has been: well, we can't allow these imperialists back into the Caspian, we do not agree with the sectoral division of the Caspian, and therefore we object.
The tone of the Iranian objection has changed. It was very loud. It was very diplomatic. But to take examples from 1990 and today, it has changed dramatically. Iran still objects, but that objection comes through the form of a letter from a deputy minister and the oil company, whereas before, in the 1990s, it would have been opposition from the foreign minister himself, for example.
Note also that since the election of Mr. Khatami, Iran has appointed an ambassador—a career ambassador—called Mr. Majadi, who is now responsible for the Caspian. His goal now is no longer the demarcation issue so much as it is promotion of Iran's interests in the businesses that are happening in the Caspian. It points to a more pragmatic approach, but the demarcation issue is, from the perspective of those of us who are working in the region, a non-issue.
Mr. Yves Rocheleau: Do I have any time left?
The Acting Chair (Hon. Diane Marleau (Sudbury, Lib.)): You have two minutes remaining.
Mr. Yves Rocheleau: We talked about the environmental issues. What are the working conditions and the wages of the people over there? And what about child labour? Do these countries exercise some control or is everything up to the discretion or the self- discipline of private entrepreneurs?
Mr. Len Homeniuk: I think you'll find that the laws in these Central Asian countries are similar to those of Canada with regard to age limits and benefits and all of these sorts of things. At Kumtor, for instance, we have a labour union that speaks for our employees. There are very many similarities to our country. Wages, of course, in the private sector and the public sector... In the Kyrgyz Republic, for instance, an average salary these days might be $60 U.S. a month. It's a very impoverished country. They have a very difficult time putting food on the table.
Very interestingly, all the families I have met have the same concerns as Canadian families: their livelihood. They want a job, they want education for their children, a good standard of living. It's the same.
Mr. Yves Rocheleau: May we assume that not only Canadians but also locals are being hired over there?
Mr. Len Homeniuk: In our operation, which employs 1,650 people, 92% are local employees, national employees. As I mentioned, we have extensive training programs, some of them with CIDA, to bring Kyrgyz employees up to western standards in terms of mining. By this I mean they're just not familiar with the equipment and the technologies we use. So yes, most of the jobs are local jobs.
Mr. Daniel Grabowski: This is a point the governments like to emphasize to the companies coming in: please provide some assistance to us in management and other activities so our people can get better conditions.
The Chairman: Mr. McWhinney, sir.
Mr. Ted McWhinney (Vancouver Quadra, Lib.): I wanted to get us back to some of the questions on the investment problems you face. Mr. Homeniuk, you refer to this master agreement. Did your company make that with the Kyrgyz Republic or with the state agency?
Mr. Len Homeniuk: That's a very good question. As I indicated earlier, any company operating in this part of the world wants to make sure they have taken all the legal steps necessary to protect their investment. Our agreement is with both. It is with the Government of the Kyrgyz Republic. This agreement was reviewed at that time by all 31 ministries of the Kyrgyz Republic and all 31 ministers signed off on it. In addition to that, our joint venture partner, State Concern Kyrgyzaltyn, was also a signatory to this agreement.
Mr. Ted McWhinney: Was there any provision for arbitration or dispute settlement? The Soviet residue would at least have left the Gos Arbitrazh group. Was there any provision in that agreement for arbitration or dispute settlement?
Mr. Len Homeniuk: Yes, there was. There were several sections on it, with all disputes being subject at that time to arbitration in Stockholm and subject also to the laws of New York, whichever was appropriate.
Mr. Ted McWhinney: In Stockholm, was it by a Swedish group or simply a neutral forum?
Mr. Len Homeniuk: It's the UNCITRAL.
Mr. Ted McWhinney: Oh, you operated under UNCITRAL rules.
Mr. Len Homeniuk: Yes.
Mr. Ted McWhinney: Did your company set a target time for amortization of that $452 million investment? You mentioned that a third had gone back to Canada in wages. What about the remaining $300 million?
The Chairman: It was purchase of equipment, not wages.
Mr. Ted McWhinney: Purchase of equipment, okay. What about the remaining?
Mr. Len Homeniuk: A good part of that was spent on local equipment purchases as well as equipment purchases elsewhere. At the time we had planned the project, I believe the amortization period was about six years, but that was with a gold price of about $375 U.S. The gold price these days is $290, so the project is under considerable financial stress, as are all mining projects in the world.
Mr. Ted McWhinney: I see Cameco has a subordinated loan of $122 million and an equity contribution of $45 million. What have you told your shareholders in your annual reports on that issue?
Mr. Len Homeniuk: We believe it is a good investment. We've consistently operated with full disclosure of our situation in the Kyrgyz Republic. The mine fortunately has a long life, so there will be a return to the shareholders in due course, but it's certainly not right now. We've told them that.
Mr. Ted McWhinney: What about the cyanide spill? That's a concrete example of the problem situations. How was that resolved from your viewpoint? I mean the machinery, the process.
Mr. Len Homeniuk: That's a very good question again, sir. As I had mentioned, the Canadian government helped us a great deal in establishing a committee that looked into it with environmental experts from several different international organizations in the world, including the World Health Organization. They concluded that the damage was fairly minimal. Nevertheless, a lot of people were displaced and a lot of anxiety was caused, for which we had to pay.
We did make a mistake; we admit it up front. It was certainly our driver, and he was not obeying our corporate rules.
We arrived at a monetary settlement with the Kyrgyz Republic. In order to determine that the settlement was fair, not only to our shareholders but to the people of the Kyrgyz Republic, we took it to the world arbitration board in New York. An arbitrator reviewed the settlement agreement and concluded that it was fair and just for all parties.
Mr. Ted McWhinney: You settled that by direct negotiation, with reference by both parties to the arbitrator in New York.
Mr. Len Homeniuk: Yes.
Mr. Ted McWhinney: Do you find there has been investment by neighbouring countries in the Kyrgyz Republic? For example, Iran is investing in certain areas. Was there Iranian investment? Are you aware if any neighbouring countries—not the United States or western countries—have made any special arrangements under the UNCITRAL rules?
Mr. Len Homeniuk: I don't know if they've made any arrangements under UNCITRAL rules, but there are certainly extensive investments by surrounding countries, such as Kazakhstan and Russia. Turkey is probably the biggest foreign investor. So all the countries surrounding Kyrgyzstan have some interest there. I expect, similarly, some Kyrgyz companies have interests in the surrounding countries.
Mr. Ted McWhinney: And as far as you know, under the common rules you've invested under...
Mr. Len Homeniuk: Sorry, I really couldn't answer that.
Mr. Ted McWhinney: I notice, Mr. Carroll, you don't give us quite the advantage of the detailed figures Mr. Homeniuk did, but you mentioned a $24 million investment loss. How did you explain that to your shareholders?
Mr. Paul Carroll: I continue to explain it to them every day. I purposely didn't put that kind of detail in the paper. Certainly staff is well aware of it. If anybody wants to do detailed research, we have a very comprehensive website. Of course it's all detailed in our financial statements that are sent to shareholders.
Our investment was done in the form of a loan to the government and the government company. It was in U.S. dollars. There were stipulated things that were to be paid with the money, as well as working capital, which included payment of past wages and pension benefits. When we took over the project, the wages were six to twelve months in arrears, as were pension benefits. You have to understand that when we took over the TGK operations, we inherited 10,800 employees in the city of Stepnogorsk and outlying smaller towns.
Our actual investment today in cash dollars would be about $21.5 million; the rest was interest. It was an interest-bearing loan, so that was accruing. We had a two-year option to buy the operation, and in the meantime we managed it and funded it. We had the right under the contract documents to then exercise the option at the end of 1998. At that time we would have converted all our loans into equity, and in fact on our schedule we probably would have had to pay up a little bit.
When we did the contract in the first place, we expected there would be a small payment to be made. In fact we were spending money at a much faster rate, so I suspect we would have been overfunded by the time we took possession.
Mr. Ted McWhinney: Do you have any experience, like Mr. Homeniuk's, of concrete cases referred to dispute settlement?
Mr. Paul Carroll: We have a very comprehensive series of agreements. We have a provision for arbitration, as well as UNCITRAL rules.
Mr. Ted McWhinney: Did you have actual cases that arose under that procedure, to your knowledge?
Mr. Paul Carroll: In our contract, the provision for arbitration... We have several contracts with different parties, so it's a little more complex than the way I'm explaining it. As it happened, we had different arbitration provisions in different agreements. You had to be there to understand how that happened. We chose not to follow arbitration, which was permitted. We did have an unofficial or informal arbitration in 1998, which unfortunately led to nothing. It was just a stalling tactic on the part of the Kazakh government.
We had been assured, for example, by the Kazakh ambassador in Washington, who is also the ambassador for Canada, that the government would repay our investment, that they were obliged to repay our investment. He invited us to have an informal arbitration, which we did. It led to nothing. So in frustration we began a lawsuit.
Mr. Ted McWhinney: How are you handling it through the U.S. courts? Is there a submission to jurisdiction by the Kazakhstan Republic? Or are you simply acting against funds they—
Mr. Paul Carroll: This matter happens to be very pointedly before the court at the present time. I'd rather not get into that in any detail. The answer is—
Mr. Ted McWhinney: Would you be able to answer on the jurisdiction? Has Kazakhstan accepted jurisdiction?
Mr. Paul Carroll: They're disputing jurisdiction—
Mr. Ted McWhinney: Do you mean sovereign immunities?
Mr. Paul Carroll: There's a waiver on sovereign immunity in the contract.
Mr. Ted McWhinney: They're in effect reneging on their waiver of sovereign immunities?
Mr. Paul Carroll: Yes. They reneged on the contract itself too.
Mr. Ted McWhinney: More important would be, from our viewpoint, that they're reneging on the acceptance of the jurisdiction.
Mr. Paul Carroll: At the present time there's about eight inches of pleadings back and forth on the question primarily of jurisdiction before the judge.
Mr. Ted McWhinney: Over how many years has this...
Mr. Paul Carroll: This is two years.
Mr. Ted McWhinney: I would estimate you spent a good percentage of your $24 million in lawyers' fees.
Mr. Paul Carroll: Actually, relatively speaking, a small amount... but significant.
Mr. Ted McWhinney: You are aware that there is an increase in interest in arbitration in the region. There was an international conference in Teheran last November, I think, very well attended by western and Iranian people, including the chief Iranian judge on the U.S.-Iran tribunal. He happened to be a graduate of the Harvard Law School and an ex-student at George Washington.
In a certain sense this illegal acculturation is occurring. Perhaps it's a little more optimistic, but I do appreciate your answers, and I do appreciate the specifics you've given, Mr. Homeniuk and Mr. Carroll.
Thank you, Mr. Chairman.
The Chairman: I didn't get out of Ted's question or the answers which jurisdiction in the United States you are suing in. Is it the federal court in New York?
Mr. Paul Carroll: It's the U.S. federal court in Washington.
The Chairman: I see, Washington. They often go to New York, though, in these cases. I was just curious why—
Mr. Ted McWhinney: I think it was Washington because of the international conflicts.
The Chairman: And the issue of sovereign immunity I guess is really—
Mr. Paul Carroll: Suing the Republic of Kazakhstan within the U.S. Federal District Court scenario is the right jurisdiction for that.
The Chairman: You have Professor Sobhani here to tell us that Washington is an imperial capital too. You have to go there as well.
Dr. Rob Sobhani: There are 22,000 lawyers in Washington, so you can figure that one out.
The Chairman: Madam Marleau.
Ms. Diane Marleau: On something I think I heard from Mr. Homeniuk, did he sign an agreement with NGOs? Did you say that? It isn't part of your presentation, but could you give us a little more detail about what kind of agreement it is? Perhaps even giving us a copy of the agreement might be nice.
Mr. Len Homeniuk: Yes. Actually I believe the agreement is on a website, but I can certainly provide you with a copy.
Ms. Diane Marleau: It is on the website. Good for you.
Mr. Len Homeniuk: Basically, as a result of the cyanide accident, I guess in some respects, quite legitimately, there were a number of NGOs concerned with how we were operating. We felt clearly that we had nothing to hide. This was an unfortunate accident, nothing more than that.
Some of our project lenders, particularly the European Bank for Reconstruction and Development, had experience with this. I believe it was in Czechoslovakia where the local NGOs would get together and form an NGO committee that would be managed by a western NGO that would be able to procure funding and put some organization to it.
They held a request for proposals. I believe it was an NGO group out of London called Flora and Fauna International that were given the contract to put this NGO group together. I believe there are 87 local Kyrgyz NGO groups belonging to this group. They've visited the site, spoken to all the communities we deal with, to all the stakeholders in the project. They have issued several reports, of which a major one should be in the works right now and completed very soon.
Ms. Diane Marleau: Thank you.
The Chairman: Madam Lalonde.
Mrs. Francine Lalonde: I have two completely different sets of questions.
First of all, following on the heels of Mrs. Marleau, kyrgyzstan society, at least from your description, Mr. Homeniuk, seems to be more developed and more democratic than the others we have heard talk of and read up on. Do you have an explanation to that?
Secondly, I would like to deal with the uranium issue. I believe that two of you are active in this industry. We know that uranium can cause health problems and environmental problems, and there may also be a race under way to acquire these resources, uranium being extremely important in this part of the world. There are therefore also strategic considerations, so to speak.
Mr. Len Homeniuk: If I may, I think it's a matter of record that the Kyrgyz Republic is the most democratic of all the Central Asian republics. I believe this stems from President Akaev, who was not an indigenous communist leader of the country. He was elected in 1991. He had previously been an academician, and therefore, I think, more fervently embraced the democratic principles.
As well, upon the dissolution of the former Soviet Republic, the United States quickly moved into these countries, established embassies, and provided them with major support. I believe there was a major push on behalf of the U.S. government to target several of these countries, particularly the Kyrgyz Republic, perhaps because it was the smallest to become democratic and could be an example.
Mrs. Francine Lalonde: It is also the furthest.
Mr. Len Homeniuk: Yes.
So that's basically what happened.
With regard to the uranium industry, all of the uranium our company mines is used for fuel in nuclear reactors, of which there are some 450 around the world. The process of mining and processing uranium and using it in reactors is very safe. It uses well-known, well-proven technology.
In addition, I would like to mention that using uranium as an energy source has been determined to be one of the most environmentally friendly as compared with the other options available, natural gas and coal. So there still is a huge demand for uranium and a growing number of reactors in the world.
Certainly the deposits in Kazakhstan—and Mr. Carroll might like to add to this—in terms of in situ leaching are world-class deposits. They're probably the best deposits of that type in the world.
As you are aware, the major uranium deposits in the world are in Saskatchewan, where we operate.
The Chairman: Mr. Carroll.
Mr. Paul Carroll: I agree with everything he said. The only thing I can add is that certainly, by our due diligence and everything else I've read about the country, Kazakhstan has roughly 25% of the world's in-ground reserves of uranium.
For all intents and purposes, all of those reserves are amenable to extraction by in situ leaching methods, which basically means you stick a pipe in the ground—I'm oversimplifying, of course—and pump a solution down, and then you bring up a concentrate. You don't have to create either an underground or an open-pit mine. You process it and you recycle the solution. That's why it's called “in situ” leaching.
In fact, your comment about the strategic significance is quite right, because that's what attracted us to the country in the first place. Obviously that's in part what attracted Cameco to the country as well, because they have the Inkai deposit, which is one of those undeveloped deposits.
The Chairman: That's one of the advantages of coming here: you learn one another's industrial secrets.
Mr. Paul Carroll: I don't think I actually learned anything today.
Voices: Oh, oh!
The Chairman: Oh, I was just trying to give the committee some additional...
Mrs. Francine Lalonde: May I finish up with a very short question, Mr. Chairman?
The Chairman: Yes, go ahead, Madam Lalonde.
Mrs. Francine Lalonde: Mr. Homeniuk, am I right in saying that it is your company that negotiated a contract with Russia for the disposal of MOX?
Mr. Len Homeniuk: Yes, our company signed an agreement with Russia to market the heavy uranium that would be the result of their disarmament program.
Mrs. Francine Lalonde: Thank you.
The Chairman: I just have a couple of questions.
First, Mr. Grabowski, you've provided a paper, and in the paper you had a section entitled “Best means for promoting Canadian foreign policy interests”. You suggested more government support and more government officials' visits. Presumably you would approve of the committee visit because you would think it would be helpful in that line. You think EDC should be a bigger player, and that CIDA might be a bigger player. Those would be your four core conclusions, but you didn't actually mention those when you were talking to the committee. Would you mind if we used those as part of our official conclusions? Obviously those are recommendations, and they're the types of things we want to be able to put in our report or recommendations. That would be helpful.
Mr. Daniel Grabowski: Please feel free.
The Chairman: Thank you. If you want to speak about them, go ahead, but I think we've seized what the thrust of them is.
Mr. Daniel Grabowski: You're very right, these are very key issues in the region. I think Mr. Sobhani had mentioned them. You have to have a government presence, and you have to have a constant presence over there.
They'll recognize a certain fact. If you've been there during the tough times, your patience and your durability there will be rewarded. And if you can have government support, you have more chances of success. All our competitors are receiving government support either financially or politically, so it helps in being competitive in this market. And it's a market that's emerging, so if we can be present from the beginning, this will pay off and be rewarded.
The Chairman: The problem we have a little bit is the problem of priority and resources, because you'll appreciate that we're told the same thing when we go to China, we're told the same thing in various parts of Africa, and we're told the same thing in practically every developing economy. It's almost a sine qua non that there's a role for government that exceeds that of business in say Europe or the United States. I think we might even find that we would get the same story in Latin America. It then becomes a question of how we allocate government resources, and whether or not the Canadian interests in the region are substantial enough and whether the potential of the region is substantial enough. However, that's for us to grapple with, and we'll look at that.
Just going on the potential of the region, can any of you help me with one question? What is the size of Canadian... We have some idea about the mineral activities in these countries, but in the Azerbaijani oil play, we hear the figure that Canada's participation is around 4% or something like that. Is there any way to quantify what the Canadian participation in that region is?
Dr. Rob Sobhani: Canadian participation in Azerbaijan is very minimal. The major presence is the company that I represent, the Alberta Energy Company. They have 5% of a major structure in the South Caspian, which, if proven and discovered, is 9 billion barrels of oil. That's a sizeable structure.
The Chairman: What does that do to their share price?
Dr. Rob Sobhani: If you're an AEC shareholder, you'll be a very rich person.
To give you a comparison, the partners in that one project in which AEC has 5% are BP Amoco with 15%, Exxon-Mobil with 15%, the Turkish Petroleum Company with 10%. And I know that if you take the totality of all the contracts, you will find that Exxon-Mobil and BP Amoco are by far the dominant players. Beyond Alberta Energy, there is very little Canadian presence.
The Chairman: Do you see a future interest of Canadian oil and gas companies in that, given what you said about the resources that are available in Alberta at this time?
Dr. Rob Sobhani: Absolutely, and not only in the upstream discovery, but also in the downstream—refining, pipelining, and getting the oil out. There are enormous opportunities. As I've said, $10 billion needs to be spent to build these pipelines.
The Chairman: I understand the opportunity, but do you get a feeling that Canadian companies are starting to come as well? Or have they even realized—
Dr. Rob Sobhani: At least in Azerbaijan, I don't, because I think there is this gap. They're there, but their flag is not there. The way it works, the Maple Leaf needs to be there. If they don't see the Maple Leaf, it's difficult, because when they're negotiating with the president, the prime minister, or the oil minister, his first question is to ask where the ambassador is. The response is “Sorry, Canada doesn't have an ambassador”. That immediately takes away from the bargaining position.
The Chairman: In 19th-century history we learned a phrase, “trade follows the flag”. So
some things just never change.
Dr. Rob Sobhani: Exactly.
The Chairman: So what is it that the other one—
Dr. Rob Sobhani: This is the reverse of Iran, because the situation in Iran is different. Iran is desperate for Canadian investment and is desperate for oil investments. Therefore, whether the Maple Leaf is there or not is not as important as it is in countries like Azerbaijan, Kazakhstan, or Turkmenistan, where they see the flag as a guarantor of their independence. That's really the key difference.
The Chairman: Well, certainly the Iranians have been very forceful in pushing us for a higher level of Canadian government contact with Iran, but that relates to human rights issues and everything else that we have to look at very carefully.
On the Baku-Ceyhan pipeline, we have heard too that the United States' strategic interest is not to want a pipeline to go south through Iran—which would be the shortest way to go to the Persian Gulf—but that it would prefer this sort of Turkish route, which is much more complicated, in having to go to the Caspian Sea and everything. Could you just—
Dr. Rob Sobhani: There are two aspects to the Baku-Ceyhan pipeline. The fundamental crux of American foreign policy in the Caspian region is the following: the uninterrupted development and transportation of Caspian oil to international markets. That's why Baku-Ceyhan plays such an important role in U.S. foreign policy. It is the cornerstone of American foreign policy. Having said that, it's not the cornerstone of commercial companies. It's not the cornerstone of Exxon, and it's not the cornerstone of BP Amoco. It is the most expensive route, and it takes you through territories that are unchartered. So you have a conflict here between the U.S. government position and the position of the oil companies.
The cheapest route is Iran, of course, if you do a swap with Iran. In other words, you deliver Caspian oil to Iran's refineries in the north, and then you get the same amount of oil in the south. It's not building a pipeline through Iran. There's a distinction. It's a swap through Iran, and that's the cheapest. The Baku-Ceyhan pipeline is going to cost you $3 billion, whereas a swap with Iran is going to cost you $400 million.
The Chairman: Thank you very much.
I think that brings us to a close.
Oh, Dr. Patry, did you have another question?
Mr. Bernard Patry: I always have some questions, Mr. Chair. This is very interesting.
I just have one thing that I'd like you to comment on, sir. We didn't touch upon the ethnic tensions. We know the borders that exist right now were delineated in the time of Stalin, and that creates a lot of problems like the one in Nagorno-Karabakh. When a leader takes power, it seems it's to the detriment of some other ethnic groups living in the country, and the system or pluralism is not accepted now.
I think you mentioned that you lived there for five years, like Mr. Grabowski lived there. Do you feel this ethnic tension in these countries?
Mr. Daniel Grabowski: I didn't say I lived there.
Mr. Bernard Patry: No? Mr. Homeniuk. Sorry.
Mr. Len Homeniuk: That's an interesting question.
Of course Mr. Stalin drew the borders—and particularly the one between Kyrgyzstan and Uzbekistan—such that there would be this tension there all the time. That was done on purpose, and he did a very good job. Those tensions are still there, and in the Kyrgyz Republic they do flare up from time to time in the south of the country. The north of the country, which borders Kazakhstan, is relatively quiet.
I can say that in the five years I spent in that country, I never personally observed anything that would have concerned me at all with regard to that. Transiting these borders is a very simple matter.
Mr. Bernard Patry: Okay, thank you.
The Chairman: So it was sort of the divide and rule theory of the previous Soviet Empire.
Mr. Yves Rocheleau: In the context of the break-up of the Soviet Union, what is the general feeling of these peoples towards the Russians on the one hand and the Americans on the other?
Dr. Rob Sobhani: That's a good question.
The fundamental premise has to begin with the fact that for seventy years they had big brother. Now big brother is gone and they don't want big brother. That's why Turkey, while welcome, cannot do everything. It acts as if it's the new big brother, and that is to the detriment of Turkey.
We, as the United States of America, also have limits, because they do not want to have Uncle Sam as the new big brother. The premise is independence. Whatever powers can guarantee that independence, they will welcome that.
The attitude toward Americans, as far as I can tell, has been very positive, especially when we've been able to bring delegations over to the United States. For example, every year we bring a group of twenty journalists to the United States and have them go visit with an American family, not in Washington, D.C., but in Kansas. We have them go visit the offshore oil we do in the Gulf of Mexico so they can see what it is to do offshore work. That really has created some good chemistry.
Of course there are always complaints and there's always going to be criticism of the United States. But from the people's perspective, so far—knock on wood—it's been all right.
An hon. member: Very interesting.
Mr. Yves Rocheleau: Is there some kind of hatred for the Russians on the part of these people generally speaking?
Dr. Rob Sobhani: It depends.
Mr. Paul Carroll: I can comment a little bit on Kazakhstan. In Kazakhstan, with a population of approximately 16 million people, about 45% of the population is ethnic Kazak. The Russian population proportion has shrunk a bit because there's been some emigration back and forth. I would say it's probably 40%. The rest is made up of German, Korean, and other minorities, including some other “-stans”, due to the cross-border type movement that's taken place over the years.
Certainly the uranium business was 99.9% Russian. They didn't trust—to use that word—the local people to control something as strategic as uranium, for obvious reasons. It's more pointed in that particular industry than it is generally speaking. Under the Soviet system, pretty much all of the top jobs were held by Russians, ethnic Russians, some of whom maybe were sent there originally as expatriates, but eventually the families became acclimatized to living there and they've been there for generations now.
When the Soviet Union fell apart in 1991 and Kazakhstan got its independence in December of 1991, there was first of all some emigration of Russians back to the Russian portion of the Soviet Union, the Russian Federation. Basically all the Kazakhs went to the head of the class because it was quite clear that the Kazakh ethnic groups were going to take control. It happens that, unlike in some of the other republics that became independent, Nazarbayev was ethnic Kazakh, but he was a Russian commissar in charge of Kazakhstan. That's not the same for every other country in the region. So that maybe accelerated the process there.
When we arrived in 1995-96, you started to see the Kazakhs learning on the job, senior management. Because they hadn't held the senior management jobs historically, they were amateurs. They were learning. The government people and the governments at that time owned most of the businesses. They were run by basically amateurs, the uranium business being an exception. Even in the uranium business they slotted a Kazakh in at the top, but the president of the actual uranium agency knew nothing about uranium. That's true today. In fact, the fellow who's the president of Kazatomprom is a car dealer.
The Chairman: Actually Mr. Rocheleau's question was a little more direct. Is there sort of a hatred towards the Russians?
Dr. Rob Sobhani: There is a hatred, but it's not overt. In Azerbaijan, for example, the hatred is very real. On January 20, 1990, Mr. Lebed and his paratroopers came into Baku and killed 300 civilians under the guise that these were Islamic fundamentalists. Well, this has a negative connotation. To this date, Russians are viewed with enormous suspicion in Azerbaijan. In Georgia, with President Shevardnadze, there was the same type of experience.
Armenia had a different type of experience. As far as Russia is concerned, Armenia is Russia's aircraft carrier in the Caucasus. That's the strategic importance of Armenia. So Armenians have a different perspective of Russia.
As you move toward the other side of the Caspian to Turkmenistan, it's negative to neutral. In Kazakhstan, it's different. So it depends on the historical experiences these people have had with the Russians.
Mr. Paul Carroll: I agree with that, but there is definitely friction to hatred, depending on individual circumstances, in Kazakhstan.
The Chairman: As a guest of the Commonwealth of Independent States parliament, I sat between the speaker of the Azerbaijani parliament and the speaker of the Armenian parliament. I very nearly ended up as lunch between the two of them. They were going to eat me on the way to trying to get to each other. It was an extraordinarily uncomfortable experience, but we threw the interpreters to them instead. It's a tough area.
Anyway, I think we'll end this very interesting session. I want to thank you all very much for coming. It was fascinating, and we appreciate your frankness, your expertise, and the fact that you've come from far to help us. We really do very much appreciate it.
The staff may want to contact you for additional questions we may have.
Colleagues, thank you very much. We're adjourned until this afternoon at 3:30, when we'll have Ms. Minna before us.