Market Report

July 2015 update

Back in April the Portland report took a look at Canada’s Tar Sands and explored how low oil prices were having such a profound effect on this key Canadian industry. But with prices continuing to stay low, the tar sands industry is by no means the only sector currently feeling the “pain” of low oil prices, whilst of course at the same time, consumers continue to enjoy significant savings as a result of the very same situation.

The most obvious sector currently being hit by low prices is the oil services/offshore support industry and in Aberdeen where the UK’s industry is based, forecasts for job losses range from 15,000 to 25,000 over the next 5 years as producers scale down their operations. Such is the importance of the oil industry to the UK and specifically Scotland, that there has been no shortage of media interest in this situation but there is also another much smaller – but no less vibrant – sector of the industry that is bracing itself for hard times ahead; biofuels.

Biofuels are a lot more expensive than normal refined products and that situation has got a lot worse, since oil prices plummeted at the end of 2014. This time last year FAME biodiesel (Fatty Acid Methyl Ester – this is the main biodiesel grade) was trading at around $1,000 per tonne (about 52.50 pence per litre), whilst diesel hovered around the $900/45ppl mark – a difference of $100/7ppl. But fast forward 12 months and we see that price differential rising to $230 per tonne/13ppl, having hit a massive $360 per tonne/20ppl differential in January. Such a large differential basically means that without subsidy, biofuels sellers currently have a pretty major headache.

Hold on a minute I hear you say. Surely minimum levels of usage have been set for biofuels across Europe, which means that biofuel has to be used whatever the price? Well that is indeed true, with the level set in the UK at 4.75%, Germany 6.25%, France 7% and so on. On the surface it therefore seems we have a solution to the problem, but as ever in the oil industry, things aren’t ever that simple once you scratch below the surface.

Firstly, like all businesses, biofuel producers want to sell as much product as possible rather than just selling a mandated minimum volume. And with many engine manufacturers now accepting much higher blends of biofuel, there should be an opportunity to sell more volume. In fact with an average mandated biofuel volume of 5% and most engine warranties remaining valid using up to a 10% blend, there is mathematically speaking the chance of selling twice as much volume as the regulated minimum. But this can only happen when the price is right and biofuel prices at the moment are most definitely not right! Surely only the worst buyer in the world would voluntarily purchase extra product that costs 10-20ppl more than standard diesel and is fundamentally of a lower quality….

as ever in the oil industry, things aren’t ever that simple once you scratch below the surface

Of even more significance than the above is the way that fuel sellers are allowed to meet the obligated minimum biofuel usage. On the one hand, they can sell all of their fuel at the required 5% level, ie, 5 litres of biodiesel must be blended with every 95 litres of diesel sold. But they also have the option of supplementing the biodiesel with bio certificates (Renewable Transport Fuel Obligations = RTFOs) in lieu of the actual product. In theory these certificates should be more expensive than the biodiesel itself, meaning that there is an incentive to blend the full amount of volume and not buy the certificates. But with such a massive price differential between standard diesel and biodiesel currently in existence, fuel suppliers are more than happy to sell fewer bio litres and simply top things up with readily available RTFOs. In theory, as this trend continues and demand for RTFO certificates goes up, so will their price. At this point we should see fuel suppliers going back to selling fully blended biodiesel, but such has been the rapidity of the price drop on standard oil products, that this does not look like happening any time soon. In simple terms, the less dynamic RTFO market is struggling to keep up with the much more volatile oil market and this comes down to the same thing for the biofuel producers – less volume!

That the low oil price generates more winners than losers is beyond doubt – but for the relatively nascent biofuels industry, low prices are indeed bad news. It’s also bad news for their suppliers. What for example, is the immediate outlook for Europe’s rape seed growers whose annual 20m tonne harvest predominantly goes into the biofuels industry (about 60%)? And all of this in an industry whose operations have been under massive scrutiny from day 1; should land be used for “growing” fuel rather than food? How many acres of rain-forest have given way to palm oil plantations for the supply of biodiesel? Are some of the energy intensive bioethanol processes (eg, from corn) really any greener than simply getting crude out the ground and refining the stuff in the normal way? Now to cap it all, the survivors of this battered industry face the prospect of selling an uncompetitive product for nobody knows how long. It’s certainly a very tough environment for them, so next time you meet someone in the biofuels sector, perhaps you should buy them a pint and for pity’s sake, don’t make any jokes about the beer being of a 95%/5% beer to head ratio…