Canada's renewable fuel projects are hit by a surge in US imports
Canadian renewable fuel producers will see lower returns from new facilities as a result of a slump in British Columbia’s low-carbon fuel standard (LCFS). This trend is expected to continue amid an influx of US exports.
The weakness in British Columbia's LCFS Credit Market reflects the growing pains of the international biofuels sector, where many regulators are clamping down on imports in order to protect their nascent national markets from an oversupply.
Low-carbon fuels cost more to produce than gasoline or diesel based on petroleum. LCFS programs bridge the gap between fuels with low emissions and those that have higher emissions.
Canada is behind the U.S. when it comes to domestic production of renewable diesel. British Columbia, the only province in Canada with a LCFS credit marketplace, was the one that encouraged Calgary-based Tidewater Renewables last year to build the first independent renewable diesel refinery in the country. Other companies are betting on credits to help build more facilities in British Columbia, and other provinces.
The LCFS also makes Canada a desirable outlet for a surplus of renewable diesel from the United States.
According to Will Faulkner of the industry analysis firm Carbon Acumen, U.S. producers have shipped at least 560 million litres (about 153 million litres) of renewable diesel into Canada in the first half of 2024. This is a significant increase from the 151 million-litre shipment in the same time period last year.
British Columbia's credits for the LCFS fell to C$207 and C$350 respectively in July, after trading at C$400 in more than two previous years. This sounded alarms in Tidewater.
In August, the company stated that the slump had hurt its ability generate revenue and blamed the weakening of prices on an increase in renewable diesel imported from the United States. Tidewater sold future credits and some assets to its majority shareholder to avoid financial stress.
Faulkner noted that the credit market transactions reported in September could have been finished before the July price crash. He noted that there hasn't been a significant drop in U.S. exports.
Tidewater produces renewable fuel only at its British Columbia plant, which produces 3,000 barrels per day, or 170 million liters of fuel annually. It is therefore highly exposed to the low credit value in British Columbia.
Sam Harrison, Navius Research's senior analyst, stated that the declining BC LCFS credit will also affect returns for energy producers who are diversified, such as Imperial Oil and Parkland.
Imperial will build a C$720,000,000 ($518.25,000,000) 20,000 bpd renewable-diesel facility in Alberta. This is the largest facility in Canada and it will be partially funded by LCFS credit granted by British Columbia.
Harrison stated that "this downward correction in the market is going to affect Imperial's ability to generate cash flow by selling renewable diesel into the British Columbian market."
A spokeswoman said that the Imperial project, which will start production in 2025 is moving forward and is a highly attractive project. She was asked about the decrease in credit.
Parkland refused to comment on the impact of declining LCFS credits values on a renewable fuel unit at its Burnaby refinery, which produces 55,000 bpd. However, they said that a stable policy climate had helped encourage low carbon fuel production in British Columbia.
Regulatory Challenges
Biofuels will play a key role in the global effort to reduce climate-warming emission from transportation. According to the International Energy Agency, global renewable diesel consumption will increase from 18.6 billion litres a year in 2023 to 26,4 billion litres a year by 2028. Demand could exceed 39 billion litres if policies are more aggressive.
British Columbia wants to produce 1,5 billion litres renewable fuels in 2030.
The provincial government said it was not considering any changes to the credit program at this time, since credit prices fluctuate naturally based on demand and supply dynamics.
The European Union, on the other hand, began to levy anti-dumping duties this year against Chinese biofuels following complaints that Chinese producers benefited from artificially low production costs. Since 2021, the EU has imposed tariffs on U.S. biodiesel and Canadian biodiesel following similar complaints.
Analysts expect British Columbia’s LCFS to be under pressure due to the oversupply of biofuel feedstocks from the U.S., which is compounded by low prices for biofuels that make renewable diesel more affordable to produce.
The Clean Fuel Regulation (CFR), which is Canada's equivalent to the LCFS, allows low-carbon fuel producers or importers to claim credits under this regulation. The CFR credits, introduced last year by the Canadian government, make British Columbia a more attractive destination for surplus U.S. renewable fuel.
The U.S. Department of Agriculture stated in a recent report that increased government support in the U.S. for renewable diesel producers could limit the growth of the Canadian industry.
The issue is that U.S. manufacturers can claim the federal Blenders Tax Credit of $1/gallon in the U.S. for producing and blending bio-based diesels in the U.S. along with Canadian CFR Credits, which are awarded for the sale of renewable fuels on the Canadian market, in addition to B.C. Faulkner stated. ($1 = 1.3893 Canadian dollars)
(source: Reuters)
