CANADIAN GOV'T: SOME OPPORTUNITY FOR U.S. ETHANOL IMPORTS TO MEET RFS
Oil Price Information Service, September 2, 2010

BY Rachel Gantz
Oil Price Information Service

The Canadian government estimates that the bulk of the country's just- finalized renewable fuels standard (RFS) for ethanol will be met with domestic production, although some imports -- mostly from the U.S. -- will be seen.

As announced on Wednesday, Canada will require an average 5% of all gasoline in the country to contain ethanol starting Dec. 15. Among the details of the RFS, the first compliance period stretches from the start date to Dec. 31, 2012. Thereafter, compliance will be based on the calendar year.

Additionally, unlike the U.S. version of the expanded RFS (RFS2), which has different carve-out requirements under an overall production target to reach every year, the Canadian version allows nearly all renewable fuel to help meet the requirement, except for black liquor. However, like the U.S., the RFS includes a system of tradable compliance units to ensure gasoline fuel producers and importers are able to comply with the regulation.

Canadian officials previously estimated that nearly 793 million gal of biofuels would be required nationwide to meet full implementation of the measure's renewable blending requirements. According to the Canadian Renewable Fuels Association (CRFA), there are 16 ethanol plants on line, currently producing a collective 1.41 billion liters/yr (369 million gal/yr), with several other plants under construction.

"Given the current production capacity, it is assumed that the increased demand for renewable fuel would be met through existing and increased production capacity," Environment Canada explained yesterday in a background document. "However, some level of imports, primarily from the United States, would be needed while the domestic production capacity expands. This would take place during the first four years of the regulations coming into force," the document noted.

Specifically, the production capacity for ethanol in Canada is expected to increase from 1 billion liters (264 million gal) in 2009 to nearly 2 billion liters (528 million gal) in 2011-2012, the document continued. For product above that amount, imports would be needed, primarily from the central U.S.

Canada has imported small quantities of U.S. ethanol for some time and will likely continue to so, especially since Canada enjoys tariff-free access to U.S. ethanol -- as a result of the North American Free Trade Agreement.

According to the Environment Canada background document, the agency estimates two, 130-million liter/yr (34.3-million gal/yr) ethanol plants would need to built in the Western part of the country and one, 210-million liter/yr (55.4-million gal/yr) plant would need to be built in Ontario to meet the incremental demand for ethanol in Alberta, Quebec and the Atlantic Provinces -- all by 2014. "For Ontario, although it is assumed that the additional facility would be built to meet the future demand for renewable fuel in the Quebec and the Atlantic Provinces, it is also probable that part of the excess renewable fuel volumes would be transported to other provinces in the West to cover the shortfall in supply in that region," the document noted.

Meanwhile, there are some exceptions to the ethanol mandate, including fuels used for special purposes such as aviation and military combat equipment, fuel used in the Northwest Territories; Yukon, Nunavut and Quebec, north of the 60th parallel, gasoline used in Newfoundland and Labrador and fuel exported from Canada or in transit through Canada.

The Canadian RFS also has a biodiesel element, requiring an average 2% biodiesel starting next year. However, according to the same Environment Canada background document, the biodiesel requirement will be "subject to successful demonstration of technical feasibility under the range of Canadian conditions."

The final regulations for the biodiesel mandate "do not specify a coming into force date," the regulation explained. "The coming into force date for this requirement will be determined at a later date subject to the technical feasibility of renewable content in diesel fuel and heating distillate oil. Natural Resources Canada is assessing the technical feasibility through their National Renewable Diesel Demonstration Initiative, and is expected to provide a recommendation in the summer of 2010."

According to CRFA, there are seven Canadian biodiesel plants on line, producing a collective 144 million liters/yr (38.04 million gal/yr), with several others under construction. However, the background document does not elaborate on how many Canadian biodiesel plants will be needed to meet the country's requirement, nor on any possible import opportunities.

To view the final regulation, visit: http://www.gazette.gc.ca/rp- pr/p2/2010/2010-09-01/html/sor-dors189-eng.html.

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