CANADA: Biodiesel looks for a place in Canada By Lyndsey Smith

Biodiesel looks for a place in Canada By Lyndsey Smith

 

Biofuel is the “it” technology of the day and it seems no country wants to be left behind.
Both ethanol and biodiesel are touted as the solution to everything from agriculture’s cash crisis to smog.

For oil-import-dependent countries, investing in a biofuel industry is easy to justify, but as a net exporter of petroleum products, does biofuel and, specifically, biodiesel, still make economic sense for Canada?

 

The U.S. uses approximately 60 billion U.S. gallons of diesel fuel per year. The EU uses 50 billion gallons. That’s a lot of money flowing out of those economies. Not only are the U.S. and EU (European Union) dependent on out-of-country sources of petroleum, but they also rely heavily on oil from the volatile Middle East — a supply that costs lives as well as money.

 

Biodiesel can be made from any plant oil or animal fat, none of which have to come from the Middle East in barrels. It also helps that biodiesel produces from 64% to 92% fewer emissions, depending on the source, over its life cycle than petroleum diesel. For the U.S. and EU, biodiesel is a feel-good way to offset petroleum imports.

 

Though biodiesel sounds like the perfect solution to imported petroleum problems, the U.S. and EU are still years away from weaning themselves off Middle Eastern oil, if it’s even possible. Current estimates peg total dedicated biodiesel production capacity in the U.S. at 354 million gallons per year. (Production capacity does not mean total biodiesel being produced, only the capacity to produce that amount.) With more biodiesel plants coming on stream in the next 18 months, the U.S. will have the capacity to produce over 680 million gallons per year by 2007. That sounds like a lot, but even if consumption matches production capacity it represents just over 1% of total diesel used in the U.S. per year.

 

The EU’s projected biodiesel capacity in 2006 is just over 1.2 billion U.S. gallons — nearly 2% of total EU diesel usage. The EU’s capacity is on track to meet its current directive of 5.75% biodiesel by 2010, but feedstock supply has become an issue. Already countries are importing vegetable oil to meet the shortage biodiesel production has created. Estimates are that 10% of the EU’s total agriculture land would have to be seeded to fuel crops in order to meet the 5.75% directive.

 

Both the EU and U.S. have government-sanctioned demand, though their approaches are unique. The U.S. has more aggressive targets and incentives to spur on production of biodiesel. It has set a renewable fuel standard (RFS) of 7.5 billion gallons by 2012. From now until the end of 2008, biodiesel producers receive a tax break of $1 per gallon for biodiesel from first-use feedstocks, such as canola or soy oil, and 50¢ per gallon for biodiesel from second-use feedstocks, such as fryer grease.

 

The EU commission’s biofuel directive, unlike a mandate, has no enforcement, only a goal for each country to try and meet on its own. As such, the EU incentives vary by country, and in some countries tax exemptions can amount to nearly $300 per tonne.

 

In contrast to the hefty U.S. and EU diesel demand, Canada uses approximately 25 billion liters of diesel per year (based on 2004 numbers), or 6.6 billion gallons. What’s more, Canada has ample oil sources to supply domestic demand. No negative cash flow here. In short, biodiesel in Canada needs government investment to get started, and a 4¢ per liter tax break at the pump — Canada’s only current incentive — is clearly not enough to get the biodiesel industry going.

 

All that glitters …

John Baize is president of John C. Baize Associates, based in Falls Church, Virginia. At a recent USDA outlook seminar, Baize raised some interesting questions about the push for a 5% or more biodiesel blend in the U.S. and EU. Long term, he sees the U.S. in particular having a major meal glut on its hands, not to mention becoming a significant importer of vegetable oil.

 

“There is not enough vegetable oil available to feed the biodiesel market some envision,” he says. It would take 8.3 million tonnes of vegetable oil to supply 5% of U.S. annual transportation-related diesel consumption, Baize estimates.

 

“All of the vegetable oil consumed in the U.S. today for all purposes would not supply 5% of U.S. diesel usage,” Baize says. “At some point, (vegetable oil) prices will rise sharply and ration usage of vegetable oils both for biodiesel and for food in poor countries. Over many years the world might be able to produce enough additional vegetable oil to supply 5% of U.S. and 5.75% of EU diesel, but it will have to compete with growing global demand for food.”

 

Baize adds that one also must question the advantages of the U.S. reducing dependence on petroleum imports by shifting to biodiesel and becoming dependent on vegetable oil imports — and mother nature.

 

Biodiesel does have an undeniable value at a 2% blend with petroleum diesel. It increases lubricity, engine life and fuel economy, which add up to a 6¢ per liter benefit independent of any subsidy. “It can also serve the oilseeds industry well by preventing a buildup of surplus vegetable oil stocks,” he says. “But we do not have the capacity to produce enough biodiesel to make a major contribution to diesel supplies.”

 

Baize also raises the question of biofuel by-products and what to do with all of them. Between ethanol and its dried distillers grains (DDG) and biodiesel’s canola or soy meal, the feed market will have to grow significantly to consume all this “value-added” product. Baize warns of the coming protein glut. His research shows that each ton of DDG used in a swine or poultry ration instead of actual corn displaces the need for 0.4 tons of soymeal. So the by-products of ethanol and biodiesel become competing products in a saturated market. Is that good news for livestock producers? Absolutely. But how long before this pulls down the price of feed barley or wheat? Farmers may gain on the canola or soy side for biodiesel, but lose in other markets.

 

Canada’s role for biodiesel

As a major supplier of canola, Canada could benefit from the increased demand for oil from the U.S. and EU. Certainly a 2% biodiesel-blend mandate would mean a firming up of the low-end price of canola, and could also create enough of a market to eat into any low-quality harvests we may encounter.

 

Barb Isman, president of the Canola Council of Canada, says the council took 2 years to fully research biodiesel before ultimately deciding to support its development in Canada. “The U.S. has mandated biodiesel and has incentives in place to increase canola crushing capacity and biodiesel plant capabilities. If Canada’s government mandates even a 2% to 5% biodiesel blend but doesn’t provide the incentives for the biodiesel production to happen here, we’re going to sell our raw canola or our canola oil to the U.S. and buy back biodiesel. It’s that simple,” Isman says.

 

She believes Canada should develop a domestic industry for 2 reasons:

• Rural economic growth

• Decreased dependency on export markets

Isman has some concerns over Canada depending on shipping seed rather than end-products. “Exporting raw products, like seed, carries trade risks that final products do not,” Isman says. “We’re just coming off a 9-year de facto moratorium on canola seed into Europe. Trade disruption does happen. At the very least we’d rather ship higher-valued oil than seed but, in fact, providing for a domestic market is the first choice.”

 

Putting a number on “rural economic growth” potential is a tough one. Biodiesel is just the latest in a long line of processing ideas that are supposed to bring wealth and prosperity to rural Canada. The current thinking is to encourage farmer buy-in of the biodiesel plants, and set up several small plants across western Canada. To date, all biodiesel plants don’t conform to this idea.

 

Perhaps the greatest benefit to rural areas will be reflected in crop prices, not on dividend cheques from processing plants. “The EU’s rapeseed production has grown from 11,174 million tonnes to 14,150 million tonnes, and rapeseed futures on the MATIF (French Future Exchange) are trading at $50 to $60 per tonne higher than the WCE (Winnipeg Commodity Exchange).”

 

Isman wants plants built in Canada. The Canola Council of Canada has a 4-step approach to making that a reality. “First we need a government-mandated biodiesel-specific renewable fuel standard,” she says. “Secondly, we need incentives in place to ensure that the investment in this industry happens north of the border, not south. Third, we need a quality standard in place that ensures a performance product so that everyone can use this fuel. And lastly, we need mechanisms in place to encourage grower equity investment in this industry.”

 

All 4 pieces of the puzzle must be in place or, Isman says, we’ll end up importing biodiesel from the U.S., potentially made from Canadian canola. Or we could end up with inconsistent oil quality, leading to difficult adoption and ultimately the failure of an industry.

 

How likely are we to see all these pieces of the puzzle fall into place? An RFS, such as what exists in the U.S., could happen. In fact, the Conservative government was elected on a platform that included an RFS of 5% biofuels by 2010. Note the RFS is for biofuels, not specifically for biodiesel. There is also a 4¢ per liter tax exemption on all biodiesel currently blended in Canada, and 3 provinces — Manitoba (11.5¢ per liter), B.C. (14.4¢) and Ontario (15¢) — have implemented further tax breaks.

 

Politically speaking, Canada has made commitments within the Kyoto Protocol to significantly decrease greenhouse gas emissions, and biodiesel can absolutely play a role in achieving those goals. However, with a new government that cut funding to several climate change and Kyoto-linked projects within its first days in Parliament, it stands to reason that the Kyoto factor for biofuels expansion may subside. With no political drive for change, only economics will move the industry forward.

 

On the subject of vegetable oil shortages, Isman is less pessimistic than Baize. “The Canola Council firmly believes that initial government investment is necessary to get this industry going. From there, we know that with proper research we’ll be able to push canola yields into the 80 bushels per acre range with 48% oil, and we’ll develop new juncea varieties to be grown on more arid land. That way, we’ll be producing enough canola to satisfy both the food and fuel markets at home and abroad. As long as the return on investment is there, we see all this happening,” Isman says.

 

Still, without the political clout of groups like the American Soybean Association, which has had a levy in place for the building of the biodiesel industry for the past 15 years, will Canada miss the biodiesel boat? Canada has no large-scale biodiesel plant and no plans to build any in the immediate future. Companies and investors are waiting for significant government commitments — the so-called “favorable environment” that exists in the U.S. — before they’ll build. Until that happens, can biodiesel stand on its own economic merit? With supposed impending vegetable oil shortages, glutted protein markets and possible trade disruptions, would keeping out of the biodiesel business be such a terrible thing for Canada? We’ll have to wait and see.