Understanding the Present by Looking at the Past

October 29, 2019

Someone once said that “those who live the longest will see the most” and I would suggest, will understand the most.  History can be a great teacher and while it certainly is capable of being boring, when you are part of it, then it is different.   The history of the Consumer’s Co-operative Refinery Limited (CCRL) is not that well known by many, but it has played a big part in the development of this province.  There has been a big contribution by CCRL employees over the years that has enabled the complex to enjoy the current success it is now experiencing.

The story starts with the advent of mechanization on the prairie landscape.  Farmers were moving from the horse-driven plows to the huge oil-driven tractors.  You can still see these behemoths firing up around the province at local threshing bee’s if you are lucky.  These tractors were the high-tech of the farm industry at the time, and a group of farmers around the Wilcox district were eager to get on board with mechanization.  These machines worked well in heavy gumbo land and provided lots of advantages for the farmers. 

Fuel for these machines was provided by a few agents and prices were expensive.  The areas that were seeing mechanization soon had small batch kettle stills.  They would take a rail tank car of crude and process it in the stills to make fuel for the tractors.  Farmers liked the idea of modernization, but they did not like the high expense of fuel being supplied by the retailers.  The group of farmers around the Wilcox district decide to form a Co-op with the aim of providing cheaper fuel for their area.

They sold shares in their co-op for $5 and enlisted some help in getting a continuously operating refinery built.  A location was selected outside of Regina, on the north side of town.  The crude tower was bought from the Molson Brewery, where it had previously been a smokestack and was now retrofitted by the builders to provide for the continuous operation.  On May 27, 1935, the Consumers Co-operative Refinery began processing crude oil.  A photo of the original plant was given to me, by the Union, on my retirement. 

Consumers Co-operative Refinery, Regina, SK.
Farmer Owned and Operated.

It is interesting to note how the plant has changed from the original, to what it now encompasses.  Many expansions have taken place over the years and they all involved struggle, but the difficulties faced by the initial builders must have been great.

The original plant ran for a few months and then shut down.  It would restart as needed, and the small group of farmers began to see the benefits of their refinery.  An expansion took place and workers were bussed from Regina to the plant on the refinery bus and the refinery continued its success.  Mechanization took hold on the prairies and the refinery grew to meet the demand.

In 1942 a Union was formed by the workers.  I remember listening to Neil Reimer, one of the organizing workers, telling the story of why they wanted to form a union.  He said,

“Since we work for an organization that believes in joining together to form a co-operative to enhance their life, then the co-operative should have no objection to workers joining together to enhance their life”. 

The Oil workers’ Industrial Union, Local 1 was formed in October of 1942.  Neil went on to become the National Director when we were affiliated with the OCAW union, which was based in the USA and Canada.  He never forgot the small local and refinery that he first started out in, as a union member.  One of my favorite quotes from him was “that the refinery was a university in overalls”.

The refinery co-operative continued its success.  The prairie provinces were dotted with small co-ops and it was felt that by consolidating these smaller co-ops under one entity, it would be an advantage.  Bigger co-ops could offer better prices to its members.  Consumers Co-operative Refinery was asked to join in the consolidation movement of provincial Co-ops and the result would be the formation of Federated Co-operatives Limited (FCL).  There would be a lot of regional co-ops under the big umbrella of FCL.  The Wilcox area Co-op farmers decided to join the new organization.  Their small refinery would go on to be the jewel in FCL’s crown.

Times were good.  Population in the province was expanding as well as the economy.  When you looked at their oil industry, it was booming.  The Refinery was busy expanding, trying to keep up with the demands that the new FCL system was placing on it for fuel.  Many new processes were added to the Refinery to meet these demands.  Time and time again the employees of the refinery would work together to meet the challenges in the ever-expanding market.  Things were booming, until the early 1980’s.

Markets changed in the 80’s.  The economy in the USA stalled. Airlines, railroads, in fact just about anything that moved slowed down.  In the US desert, there were miles of dormant aircraft and railroad equipment lying idle, just waiting for things to turn around.  Lots of unemployment in the USA and naturally this spilled into Canada.  The Refinery was running at 60% capacity, which is bordering the noncompetitive number that is thrown around the industry.  For the first time, things did not look good.  The Alberta refineries were owned by the major oil companies and they had oil production income and could weather the storm much better than CCRL.  Markets had to turn around.

The market slowly turned around, but the best thing that happened was the refining industry’s leap to use the “bottom of the barrel”.  Heavy oil became the way to make more money out of a barrel of crude and the “crack spread” was what made the money.  Refiners in the USA developed technology that could crack the big hydrocarbon molecules and improve the bottom line. 

In Saskatchewan, there was a desire to develop the province’s heavy oil deposits and through a series of failed plans, FCL and the provincial government began talking about a heavy oil upgrader.

 I want to quote from, “The Frontier Centre for Public Policy” a report titled “Saskatchewan Megaprojects in the 1980s: The Ugly, the Bad and the Good”, written by Ross McKitrick from September 2016.

“2.3 Negotiations over the CCRL Upgrader

In sharp contrast with the negotiations with Husky, the private sector partner in the Regina proposal refused from the outset to accept any financial risk.  Indeed, the opening stance of CCRL was so lopsided in its risk allocation that the province ought to have walked away.  Instead, its acceptance of the opening terms signaled a weakness in its position that would bedevil the undertaking throughout its lifetime.

CCRL had been invited to join the Plains Consortium but had refused.  After the 1982 election, the Devine government approached the owners of the CCRL refinery in Regina, FCL, about building a heavy oil upgrader in Moose Jaw.  This option was soon shown to be much more expensive than adding one to the existing CCRL site in Regina.  While CCRL management agreed that an upgrader would ensure a secure input supply, it would also impair CCRL’s ability to exploit price fluctuations in the spot market for light crude.  Since a network of retail co-operatives in Western Canada owns FCL, it must undertake democratic consultations with the retail system owners when contemplating management initiatives.  Therefore, in early 1983, the FCL network undertook a debate on the upgrader option and eventually settled on four conditions for entering into negotiations

1) CCRL could not be placed at financial risk

2 ) The retail system owners would not make any financial investments in the project

3) There could be no risk of financial loss

4) CCRL must manage the facility

This extraordinary list stated, in effect, that FCL/CCRL would invest nothing in the project, bear none of the risk and yet assume full managerial control.  Mark J Stobbe drily notes: “If this had been the opening position for a normal, commercially driven, partnership arrangement, this position would have inevitably been interpreted by the Saskatchewan government as a fairly simple and straightforward no”.

With these demands at the ready, in August 1983, FCL and Saskatchewan (alongside then-federal energy minister Jean Chretien) announced their intentions to begin negotiations.  Provincial representatives at the talks soon balked at the FCL position, but FCL went over their heads to the Cabinet and had one of the negotiators removed, paving the way for Saskatchewan to eventually capitulate to their demand not to face any financial risk.

The initial plan proposed the creation of a new commercial entity known as Newgrade Energy Inc., which would own and operate the upgrader at the Regina CCRL site.  Thirty per cent of the estimated $635- million construction cost was to be covered by an equity investment split evenly among FCL, Saskatchewan and another yet-to-be-identified private sector partner.  The remaining 70 per cent was to be borrowed, with Saskatchewan and Ottawa each guaranteeing half the loans.  Furthermore, the FCL equity investment was funded by a loan from Saskatchewan that was to be repaid out of upgrader profits (to a maximum of 40 per cent) and up to 5 per cent of CCRL profits.  Newgrade would be responsible for all costs of operating the upgrader and capital investments in the CCRL refinery that were necessary to accommodate the upgrader.  CCRL agreed to buy the output of Newgrade according to a pricing formula set out in the agreement.

At this point, Saskatchewan was on the hook for 35 per cent of the project in the form of loan guarantees and 20 per cent in the form of its own equity stake and the financing for FCL’s, for a total of 55 per cent of the project cost.  Meanwhile, it had promised to FCL complete managerial control and immunity from any financial losses.  Clearly, this was a weak bargaining position, and the situation would only worsen in the years ahead.  The size of the loan guarantees meant that Saskatchewan was always over a barrel: it would face catastrophic budgetary losses should the project be shut down and a default occur, which pretty much forced it to cover what would soon be chronic operating losses.

Negotiations about the details moved slowly after 1983, and by mid-1985, they were stalled.  No additional private sector partner had come forward.  Saskatchewan wanted to revisit some issues in the sharing of risk, but FCL and CCRL considered any such discussions an attempt to renege on the initial agreement.  Another source of difficulty was that the Newgrade board was comprised of FCL and Saskatchewan representatives with competing priorities, which led to internal dysfunction.  In spring 1985, the Devine government referred the file to the Crown Investment Corporation (CIC), which promptly determined that the project was not viable.  CIC flagged the high debt load and high probability of operating losses in the early years as particular concerns.  Other concessions proposed by the Saskatchewan government faced written objections by government analysts and negotiators.

CCRL meanwhile began to seek more-favorable management fees and a reduction in board oversight.  Notwithstanding the exceedingly good terms FCL had won from the province, in June 1985, it concluded the project would never be viable or beneficial, and it indicated its intention to pull out.  FCL was particularly concerned that the project would never pay off its debt, and this would hamper the ability of CCRL to source the lowest cost crude input.  Saskatchewan asked FCL to hold off making this decision public while it worked out a response.  The response took the form of seven more concessions: an offer to buy out 5 per cent of FCL’s equity stake and cover the missing equity from the non-existent additional private sector partner.  This raised the debt portion to 80 per cent.  The offer was sufficient to convince FCL to stay on board, and construction work began in October 1985.  However, the federal government soon balked at the arrangements, and in response, Saskatchewan agreed to indemnify Ottawa up to the full amount of its loan guarantees.  The entire project risk was now on Saskatchewan, and every other party involved had signaled a belief that the project was financially doomed.

Even with the loan guarantees in place, lenders were slow to come on board.  Financing to cover construction costs was secured, but Newgrade was expected to run out of cash within its first two years.  As of the fall of 1987, the basic agreements were signed and construction was underway, but lurking on the horizon was a dramatic fall in oil prices that would lock Newgrade into operating losses for many years to come.

Newgrade was operating in the red.  However, its problems were exacerbated by the awkward management structure wherein CCRL had autonomy in management, and FCL and Saskatchewan appointed members to its Board of Directors, whose priorities were often in conflict with theirs.  For example, shortly after CCRL switched to Newgrade synthetic crude, its customers discovered its diesel fuel congealed at low temperatures.  FCL faced the ire of its customer base of Prairie farmers and sought an immediate solution.  The engineering solution would require a costly change to CCRL’s equipment, which raised the question of whether CCRL or Newgrade should pay for it.  In addition, the government representative on the Newgrade board wanted to research whether less costly fixes were available.  CCRL management, however, opted for speed, directly implementing the engineering solution and resolving the customer complaints but creating internal acrimony that affected the board for years afterwards.

By 1992, just as principal payments on the Newgrade Upgrader were to begin, Saskatchewan faced a serious fiscal crisis.  The 1992 NDP budget closed 52 hospitals, slashed nearly 10 per cent of the civil service and hiked taxes.  By then, Saskatchewan had lost $232-million on Newgrade, including $75-million in 1991 alone.  While covering the ongoing operating losses was ruinous, an even worse situation would have existed if the upgrader were to go into default, since the loan guarantees would be triggered and would effectively push the government of Saskatchewan into bankruptcy.  Saskatchewan appealed to FCL to change the operating agreement and place more financial risk on CCRL.  FCL rejected the demands, and the province responded in November 1992 by publicly attacking FCL’s position and by appointing retired Supreme Court judge Willard Estey to conduct an inquiry into the project.

Estey’s report appeared in spring 1993, and it concluded that the project had too high a debt load to be fiscally sustainable.  It recommended eliminating the loan guarantees and obtaining from the project partners a cash injection and an agreement to share future losses.  FCL immediately rejected this proposal.  In May 1993, with FCL still refusing to budge, the province drafted Bill 90, which would override the original contracts and force FCL to take on the financial risk associated with Newgrade.

What ensued was a political battle between the management of FCL and the Romanow government for the backing of the co-op members throughout the province.  The government was roundly attacked for proposing to tear up contracts, but FCL was also criticized for holding on to what appeared to be an exploitive position that put the whole province at risk.  By July, public opinion had swung behind the government, with a poll showing 54 per cent supported the legislation and only 28 per cent opposed it.  In August, FCL relaxed its position and agreed to invest $75-million and take on a loss risk of up to $40-million going forward, contingent upon Ottawa contributing $150-million.

However, in 1993, the Chretien government was elected, and fresh uncertainties arose, as the new government failed to signal any interest in supporting Newgrade.  The situation remained unresolved up to March 1994 when creditors sought funding to cover new losses.  At that point, if Saskatchewan refused, the upgrader would go into default.  The Saskatchewan premier asked the finance department to prepare plans for handling a $600-million loan default.  Discussions thereafter involved all parties including the federal government.  Finally, in June 1994, Ottawa agreed to contribute $125-million and in exchange renounced any further interest in the project.  Contributions from other parties cut the Newgrade debt to $234-million, and with lower interest payments, the upgrader was finally profitable.  It would go on to become a money-making asset for the province, paying off its remaining debt by 2007, at which time Saskatchewan sold its stake to FCL for $325-million.”( end quote)

To say that the construction and operation of this new plant was tough, really does not do justice to the amount of work put in by all refinery staff and contractors.  To go from a low-pressure plant to a high-pressure plant is a big jump, fraught with many obstacles.  There were many difficulties; mechanical and operational.  Once the project was given the go ahead, it was determined that the project would go non-union for construction.  This caused a lot of issues for all employees at the Refinery.  The building trades unions set up picket lines around the plant and the new construction site.  There were some incidents of violence and damage to property which resulted in the project becoming a union worksite.

When Bill 90 was drafted by Saskatchewan, the relationship between the partners was very bad and I can recall a meeting that was held by the FCL Chief Executive Officer at the Refinery.  The FCL CEO told management and workers that FCL was intending to move its Head Office from Saskatoon to Alberta and that they would walk away from the Refinery.  They felt they could buy finished product from suppliers and still supply their system.  A question was asked about retaining the management personnel and the answer rang out loud and clear “We won’t need you”.  The meeting attendees were instructed to tell all their family and friends that the Co-op needed to stop Bill 90 and if it went through there would be repercussions.

Local 594 Executive members met with Crown Investment Corporation representatives to discuss the impact on the local union members who were caught in the middle of this fight.  Premier Roy Romanow sat in the meeting and explained the dire consequences that the provinces finances were in, and how there had to be a solution to the funding problem.  We obtained a sympathetic ear and the membership of 594 was left with an uncertain future.

As Dr. Ross McKitrick has pointed out, the project did turn around and FCL emerged with a sustainable mega project.  I don’t think any of the workers in the plant knew how much trouble the upgrader project was in from the start, and throughout its startup phase.  It took a lot of work to get over the operational problems and FCL should be thankful that all of the employees involved with the successful operation of the upgrader and later expansions have allowed FCL to have net profits of close to $1 billion per year.

I was asked to write this report due to a reference I made in my retirement speech, where I said “that it had been a great achievement for me to have been part of one of the best success stories in this province.  Over the years the plant has continued to grow and overcome many different obstacles, and this is a testament to the skills and ability of the people who work there and continue to work there.  I have been fortunate to work for such a good company and I am very grateful to have been able to participate in the making of this story.”

I hope that the current principals of FCL can understand how the hard-working employees at CCRL, have paved the way for the success that is derived from this refinery.

Ray Limacher, Past Local 594 President