By Susan Olson, Ph.D.
Managing Director of Ag & Biofuels, Genscape
Biomass-based diesel mandates for blending in transportation fuel have increased in many nations worldwide over the last year. In several of these countries, domestic biodiesel production is underutilized and many of these same countries are net exporters. These increases don’t necessarily create the opportunity for suppliers looking for another destination; however, they do seem to the signal that the global demand for biomass-based diesel is increasing.
Most countries with any significant, commercial biomass-based diesel production have consumption mandates or driving subsidies. Among countries that commercially produce biomass based diesel, they can be categorized as follows: 1) net exporters; 2) balanced; or 3) net importers.
Countries in Asia, such as Malaysia and Indonesia, are net exporters. Thailand is balanced, supplied wholly by its own production. In South America, Argentina is a net exporter, Brazil is balanced and Peru is a net importer relying 100% on imports for its mandates. The EU as a whole represents mostly balanced domestic supply and demand although feedstocks come from around the world. North America is mixed: Canada, although it imports as much as it exports because of economic and geographic reasons, has been balanced in net terms. The United States is a net importer, with about 20% of supply coming from abroad in 2014 and 2015. Based on Genscape’s proprietary tracking of biodiesel imports, vessel deliveries through July 2016 total 70% more than the same period in 2015. Renewable diesel imports year to date are comparable.
Currently, the U.S. and Peru are unique as countries where imports play a substantial role in fulfilling biomass-based diesel mandates. In the U.S., few restrictions exist for imported fuels under the Renewable Fuel Standard and Low Carbon Fuel Standard mandates. In fact, foreign producers often benefit from a share of the U.S. blender’s tax credit through commercial agreements with U.S. importers that blend the fuel.
The U.S. import policy differs from most other countries in that these countries have restrictions on imports via mandate, tariff, or regulatory policy according to the USDA FAS GAIN reports. For instance, the EU levied anti-dumping tariffs for biodiesel first in 2009 against the US and then in 2013 against Argentina and Indonesia. The Renewable Energy Directive also creates constraints for imports into the EU because of the rules governing accountancy of the carbon reduction. Brazil has a 14% tax on biodiesel imports. The Thai government effectively disallows imports. Peru is in an anti-dumping dispute with Argentina, the source of most of its biodiesel.
Combining information from recently published GAIN reports with other published data sources and Genscape proprietary data and analysis, further detail is provided within this article about selected countries with biomass-based diesel mandates and their trade trends. The study is not exhaustive but attempts to paint a representative picture of the growing global biodiesel demand through these examples.
- The Government of Indonesia has implemented an increasing biodiesel blending mandate since 2008, which was most recently raised to 15% in late 2015. However, consumption has consistently fallen well short of the blending targets, much less than half the target in most years. There was a precipitous drop in biodiesel production in 2015 until the government began subsidizing biodiesel production via a levy on palm oil and palm oil product exports.
- 2016 and 2017 are anticipated to bring greater production and also greater consumption with the subsidy in place, about 650 and 690 million gallons, respectively, compared to 310 million gallons in 2015. Capacity utilization is expected to be about 34% in both years as refining capacity continues to come online.
- With greater consumption, dwindling exports were anticipated in the FAS GAIN report, from about 91 million gallons in 2015 to 26 million gallons in 2017. However, Genscape and the EIA both show continued healthy exports from Indonesia to the U.S. in 2016. In fact, Genscape monitored shipments indicate that U.S. imports from Indonesia are already ahead of the total Indonesian exports expected by the FAS report for 2016. Over the last two months, Genscape monitoring indicates eight shipments from Indonesia arrived in June with another five shipments arriving in July. More prospective PME shipments from Indonesia are being monitored as they travel to the U.S.
- Malaysia has a National Biofuels Policy administered by the Government of Malaysia. An increase in the national blend rate to 10% is planned for the end of 2016 but is more likely to occur in Q1 2017 according to the USDA report. The B10 timeline has been delayed because of concerns raised by vehicle manufacturers about a blend rate above B7 according to the Ministry of Plantation Industries and Commodities. There have been a series of increases in the blending rate from 1.3% in 2011 to 7% in 2015. There are discussions of a B15 blending rate by 2020.
- Consumption is estimated at 203 million gallons in 2017 at the 10% blend rate. At the B7 level, 139 million gallons were consumed in 2015 and 2016 is expected to be similar. No biomass-based diesel imports have been recorded for Malaysia. Even with increased consumption, exports are expected to rise from 52 million gallons in 2015 to 66 million gallons in 2017. Most exports are to the EU.
- Nameplate capacity of the 20 bio-refineries in Malaysia is 760 million gallons. In 2015, the utilization rate was 19%. With B10 blending and increased exports in 2017, the capacity utilization would be about one-third. The FAS notes that only a few of the Malaysian plants are operating. Some have been converted to make alternative products from palm oil, the predominant feedstock for biodiesel production.
- In October 2015, the Thai government endorsed an updated Alternative Energy Development Plan (AEDP), which targets an increase in biodiesel consumption from 1.23 billion liters in 2015 to 5.1 billion liters by 2036. The plan is to increase the blending rate from the current rate of B7 to B10 in 2018 and to subsidize the use of B20 in trucks on a voluntary basis starting this year. In 2016 production is expected to be at about 65% of capacity to meet 1.3 billion liters of demand.
- There is virtually no biodiesel import and export trade to and from Thailand; less than one percent of biodiesel is exported and the same is true for imports for consumption. The Thai government restricts imports to protect the domestic palm industry.
- The biodiesel mandate is structured to rely on domestic palm as feedstock for methyl ester. Depending on the palm oil yield which varies based on weather conditions, the biodiesel blend mandate may be waived to some extent. Both 2015 and 2016 have been subject to reductions in the mandate due to anticipated constraints on the availability of palm oil.
- Without a sustained, enforced national mandate, Australia’s biodiesel consumption has not been a consistent part of the transportation fuel supply. Record consumption of 135 million gallons (about 37.5% utilization) occurred in 2014, but only 45 million gallons of consumption is expected in 2016. According to the USDA reports, five out of eight facilities have closed or are in receivership. Imports have fallen as a means to meet demand due to an excise imposed on imports beginning in July 2015.
- The Queensland state government passed a biofuels mandate in December 2015 that requires 0.5% blending of biomass-based diesel in the diesel supply. The mandate is expected to take effect in January 2017.
- European Union
- The EU’s Renewable Energy Directive calls for a 10% minimum rate of energy consumed by the transportation sector. The target is obligatory for all member states. Each state sets its own roadmap to getting to the target. Based on 2015 data, the blend rate for biodiesel was about 7.1% and is forecast to increase to 7.4% in 2017. These continued gradual increases are expected based on member country plans. In 2017, for instance, three member states increase their mandates (Spain, Portugal and Germany). The FAS forecasts that the 7.4% blend rate translates to 3.8 billion gallons of biomass-based diesel consumption in 2017. Consumption for 2016 is anticipated at 3.7 billion gallons.
- EU imports went from 25% to 5% of consumption across 2013 after a series of anti-dumping measures. Import supply was effectively displaced by domestic renewable diesel. EU renewable diesel production capacity is currently utilized at almost 90% with capacity set to increase in 2017. Biodiesel production capacity is utilized at 45% with no major anticipated changes.
- The EU member states engage in a very low amount of international trade in biofuels currently. Less than 4% of consumption was imported in 2015 and less than 2% of production was exported.
- Canada has a national biomass-based diesel mandate of 2% blending, excluding heating oil, and parallel provincial mandates supplement this requirement. In the past, Canada has effectively exported the majority of its domestic production and imported a volume similar to its consumption. The USDA FAS forecasts a change in 2017 where production will increase by 38% and exports will only represent about 55% of production. Imports are expected to remain flat. Capacity utilization domestically is expected to increase from 73% in 2016 to 92% in 2017 with increases in available capacity.
- Canadian imports are a combination of biodiesel and renewable diesel. The FAS report indicated that national consumption of the two products combined would be about 140 million gallons in 2016 and 200 million gallons in 2017.
- Similar to the California and Oregon programs, the British Columbia Clean Fuels Program has an overall goal of reducing carbon emissions by 10% in 2020 using 2010 as a reference year. Carbon reduction mandates increase year over year.
Per the regulations, a supplier of diesel sold into British Columbia must blend a provincial annual minimum of 4% biomass-based diesel.
The overall carbon intensity targets must also be met, and the compliance scenario presented by the B.C. Ministry of Mines indicated that increasing renewable diesel consumption is expected to help satisfy increasing carbon avoidance requirements. Genscape analysis indicates that in 2016, a demand of 35 million gallons of renewable diesel would be expected to meet the compliance scenario in 2016 which is about a 10 million gallon increase over 2015. Similar demand increases would be anticipated for 2017 and 2018. Because of the structure of the program, credits from any fuel type could meet the offset requirements.
- Canada also hosts Ontario’s Greener Diesel Regulation. The mandate for biomass-based diesel blends increased from 2% in 2014/15 to 3% in 2016 and will increase to 4% in 2017 and years following.
- United States, Renewable Fuel Standard
- The U.S. Renewable Fuel Standard (RFS), administered by the U.S. EPA is the primary driver for U.S. biomass-based biodiesel demand. The mandate for 2016 is 1.9 billion gallons and 2.0 billion gallons in 2017. 2018 is proposed at 2.1 billion gallons and the mandate should be finalized by the end of November. Recent growth in the mandate has been at a rate of 100 million gallons per year. Ten years from now, Genscape estimates that the U.S. annual demand could grow to between 2.8 and 3.5 billion gallons of biodiesel. Based on the current methods for establishing the RFS volumes, the mandated volume is unlikely to extend above proven supply capabilities.
- With an increase in discretionary production and some additional non-operational facilities coming online, Genscape estimates that U.S. biomass-based diesel production could reach 2.2 billion gallons annually (utilizing 85% of a 2.6 billion gallon capacity). The U.S. Energy Information Administration currently shows the U.S. domestic capacity at about 2.1 billion gallons with a utilization rate increasing from 60% in January to more than 75% in May. With activation of marginal capacity internationally, Genscape estimate that 600 to 800 million gallons could be delivered from international sources to the U.S. to satisfy biomass-based diesel mandates. Note that this does not include palm-methyl ester. Neither of these estimates include any new facility plans, the inclusion of products from refining of bio-crude products or contributions from renewable jet fuel.
- Another driver of demand is the Blender’s Tax Credit (BTC), which provides a $1 credit to a U.S. taxpayer that blends bio-mass based diesel. When it has been forward looking, the BTC has driven demand to levels 30% higher on average than the RFS requirements. The value of the BTC to producers tends to be offset, in large part if not wholly, by lower RIN prices. However, the BTC value incents fuel blenders and distributors to blend higher rates of biodiesel, which creates the additional demand. Some U.S. distributors regularly blend biodiesel at rates up to 15% when the tax credit is active.
- The long-term fate of the BTC is undetermined. Until broader US tax reform, possible outcomes include: continuation of periodic reinstatement, sunset with a fixed number of years, permanency and discontinuation. Until White House leadership changes, inertia would tend to point to the former for 2017/18.
- There is an active U.S. domestic lobby to convert the credit to a producer’s credit rather than a blender’s credit that has gained recent momentum. Parallel bills have been introduced in the house and senate in 2016 (H.R. 5240 and S. 3188). Prior efforts to convert the credit from a blender’s to a producer’s credit have been unsuccessful. If the campaign is successful this time around, U.S. producers would have a more competitive environment or a competitive advantage compared to non-U.S. counterparties.
- United States, California Low Carbon Fuel Standard
- At the state level, the U.S. is host to California’s Low Carbon Fuel Standard (LCFS). After being established in 2009, the program was most recently recertified in 2015. Increasing carbon reduction mandates are established through 2020 with a provision for those mandates to continue year over year after 2020. Recertification could be deemed necessary for program continuity beyond 2020. The program is fuels agnostic, with credits or deficits generated based on the carbon intensity (CI) of the participating fuel.
- ARB’s 2015 outlook scenario would indicate a need for 250 million gallons of renewable diesel and about 130 million gallons of biodiesel for 2016 and then 300 and 160 million gallons, respectively, for 2017. There are some blending constraints for biomass-based diesel in California that come into play without additional infrastructure growth. Bear in mind that any credit offsets can meet the mandate and that the credit bank carries over from year to year.
- There has been some recent speculation that the future extent of carbon reductions in LCFS could be bargaining chip as the California cap-and-trade program is considered legislatively beyond 2020. In early August, an aide to California Governor Brown made a statement reinforcing the governor’s commitment to furthering California’s climate objectives and working with the legislature to get those initiatives through sometime before 2018.
- United States, Oregon Clean Fuels Program
- Similar to the California LCFS, Oregon’s Clean Fuels Program was initiated in 2009. The Oregon Environmental Quality Commission adopted rules to achieve a reduction in the average carbon intensity of the state’s transportation fuels portfolio by a minimum of 10 percent over 10 years. In 2015, the Oregon legislature passed S.B. 324 which allowed for the full implementation of the Clean Fuels Program within the calendar year 2016. Currently there is a single biodiesel producer pathway approved for the program. Oregon also has an existing renewable fuel standard which requires blending of 5% biodiesel into the transportation diesel supply.
- Argentina implemented a national B10 mandate in April 2016. A large part of Argentina’s growing domestic mandate is met by smaller biodiesel plants on the interior of the country.
- There are 12 large-scale biodiesel plants in the port areas of Rosario and San Lorenzo that were built primarily for exports. These bio-refineries were built alongside the major soy crushing operations at the ports. In total these facilities have an estimated capacity of 750 million gallons per year. Their operation is discretionary based on international demand and profitability for exports. Every year exports have exceeded domestic consumption in Argentina, according to FAS records.
- In total, Argentina biodiesel exports are expected to be 400 million gallons in 2016 and 450 million gallons in 2017 based on the GAIN report. This would be a significant increase from the 2015 exports of 236 million gallons of which the US received about 150 million gallons.
- From 2013 forward, the U.S. has become the major delivery destination for exports from Argentina. The EIA indicates 66 million gallons arriving in the U.S. from Argentina in 2016 through May, with 30 million gallons coming in May alone. And Genscape monitoring indicates very strong imports for the months of June and July. With those hefty summer volumes, the imports from Argentina year to date 2016 exceed what the U.S. received in all of 2015.
- For now, Argentina is continuing to send biodiesel to Peru pending results from a recent anti-dumping dispute raised against Argentina by a Peruvian biodiesel producer. The normal rate of exports to Peru is about 80 million gallons per year.
- With increases in consumption and exports, production is expected to increase to 710 million gallons in 2016 and 820 million gallons in 2017 from 544 million gallons in 2015. For the sake of comparison, utilization is expected to be at about 57% in 2017 whereas utilization was at 40% in 2015.
- Brazil’s biodiesel mandate, the National Biodiesel Production Program (PNPB), has been in place since 2004. The blending rate started at 2% in 2008. Gradually the statutory blend rate has been increased with stops at 6% and then 7% in July and November 2014, and legislation was signed into law on March 23, 2016 to increase the mandate to 10% percent by 2019. The latest legislation also spurs a feasibility study to increase the blend rate to 15%. In terms of trade, Brazil has zero imports and virtually no exports. There is a 14% flat import tax. At the 7% blend rate, bio-refineries are collectively operating at about 52% of capacity based on the latest available FAS data. 2016 production and consumption are expected to be about 1.1 billion gallons.
About the Author: Susan Olson is the Managing Director of Ag & Biofuels for Genscape and leads the company’s efforts to provide better market transparency and efficiency to the agriculture and biofuels commodities markets. The business also provides industry-leading RIN quality assurance (QAP) services. Susan is also the company’s liaison to strategic partner, Lee Enterprises Consulting, the world’s largest bioenergy and biofuels consulting group. Prior to her work at Genscape, Susan worked for Honeywell on fuel controls for the F135 Joint Strike Fighter, and prior to that, with the Office of Naval Research to resolve acoustic transmissions from submarines. She holds two patents and enjoys engaging in new research and development challenges with her team at Genscape to create new sources of market information.