In October 2002, Premier Lord and his Cabinet approved a plan by NB Power to convert its Coleson Cove generating facility from heavy oil to Orimulsion.

When the approval was announced, there was no signed Fuel Supply Agreement (FSA) in place between NB Power and Petroleos de Venezuela, S.A. (PDVSA) or Bitumenes Orinoco S.A. (BITOR).

BITOR is/was owned and controlled by PDVSA which in turn is wholly owned and controlled by the Venezuelan Government. As a matter of interest, Venezuela is the only supplier of Orimulsion in the world.

A year and a half after Mr. Lord’s announcement, there was still no fuel supply agreement and NB Power sued BITOR and PDVSA. In a Statement of Claim filed with New Brunswick’s Court of Queen’s Bench in February 2004, NB Power said that it had spent or committed $463.7 million to the conversion project.

Further, it claimed damages of $2 billion as representing the cost differential between Orimulsion and heavy oil, fuel-cost savings that NB Power would have realized over the next twenty years if Venezuela had agreed to supply the Orimulsion.

The 2004 lawsuit was dropped by NB Power when its current President David Hay announced he would return to the negotiating table with BITOR. Apparently negotiations hit a brick wall because two weeks ago, NB Power quietly launched a second lawsuit, this time claiming damages of $2.2 billion, an increase of $200 million over the first claim plus $560 million for the Orimulsion conversion, an increase of nearly $100 million.

It’s instructive to review the sequence of events recorded in NB Power’s Statements of Claim. On July 12, 2001, the utility filed an application with the Public Utilities Board (PUB) for approval of the Coleson Cove Orimulsion conversion.

On December 17, 2001, BITOR provided NB Power with a “draft” fuel supply agreement setting out the terms under which BITOR would sell Orimulsion to NB Power. In January 2002, the PUB heard NB Power’s application and approved its Orimulsion conversion plan. Ten months later, Premier Lord announced Cabinet’s approval for the project.

On March 17, 2003, six months after Premier Lord’s announcement, Stewart MacPherson, then President and CEO of NB Power sent a letter to Dr. Hercilo Rivas, Managing Director of BITOR advising that “a (revised) draft Orimulsion Supply Agreement” had been prepared and that he was planning to meet with officials of BITOR America to finalize the Agreement. Dr. Rivas responded on March 21, 2003 advising that the Agreement still required approval by BITOR S.A.’s Board of Directors and PDVSA’s Board of Directors.

In late April 2003, PDVSA’s Board of Directors approved the Agreement that NB Power had negotiated with BITOR America and Mr. MacPherson and his Director of Business Planning, David Reid traveled to Caracas to execute it. BITOR S.A. refused to sign the Fuel Agreement.

In January 2004, Mr. MacPherson flew to Boston to meet with PDVSA in-house lawyers. They indicated the FSA deal was back on but asked MacPherson to send a letter to Dr. Ali Rodriques Araque, the President of PDVSA to help expedite the Agreement. Dr. Araque did not reply to the letter and in February 2004, NB Power filed its first statement of claim against PDVSA and BITOR.

In November 2004, AJM Consulting Inc. presented a Report to the New Brunswick Legislature’s “Crown Corporations Committee” chronicling the Government’s handling of the Coleson Cove conversion. The Report indicated that Cabinet approval for the conversion was given without anyone being aware of contract problems between NB Power, PDVSA and BITOR or that delivery of Orimulsion could be problematic.

Apparently no one bothered to ask NB Power if it had a firm contract for the supply of Orimulsion. It’s hard to imagine how someone could make a $750 million decision without knowing whether the decision was based on fact or wishful thinking.

And what about the news of the day?

Just a few weeks after Premier Lord’s go-ahead announcement, a national strike was underway in Venezuela. Employees from PDVSA joined the strike, shutting down a large portion of the Venezuelan oil industry. Surely someone in the New Brunswick Government was aware of the situation and must have sensed there could be a problem with Orimulsion, even though it wasn’t until six months later on May 7, 2003, that the Venezuelan Government ordered PDVSA and BITOR not to sign an FSA agreement with NB Power.

To drive home the point, PDVSA announced in September 2003, that it was dissolving BITOR and would not be increasing production of Orimulsion. That didn’t seem to slow down the conversion process at Coleson Cove.

In its second Statement of Claim, NB Power says that between May 7, 2003 and December 31, 2003, the Utility awarded an additional 39 engineering and construction contracts to complete the Orimulsion conversion at Coleson Cove. By December 2004, the conversion was approximately 60% complete and NB Power was on the hook for $559.9 million. It appears from the Statements of Claim that nearly $100 million (the difference between the first claim and the second) was spent on the Coleson Cove conversion after Venezuela killed the Orimulsion deal.

This lawsuit, even if successful will drag through the courts for years. In the end no one will benefit except the lawyers because there will be no way to collect damages. BITOR’s assets and PDVSA’s assets are in Venezuela not in New Brunswick.

The people who will pay the damages will be the residents of New Brunswick. The loss in fuel cost savings is estimated to be at least $100 million a year for the next 20 years. If the price of oil continues to rise, it could be much higher.

When Judge Gomery is finished with his Sponsorship Report, he should move to New Brunswick and take on Coleson Cove. It’s ten times bigger than the Sponsorship fiasco.