generic feasibility study for a new manitoba biodiesel

Generic Feasibility Study for a New Manitoba Biodiesel Business

For

Economic Development Initiatives Branch,

Manitoba Department of Agriculture, Food and Rural Initiatives

by

Kelwin Management Consulting

December 22, 2006

Box 40, Niverville, Manitoba, R0A 1E0 Phone: 204-388-5340 or Phone: 204-261-0379

Fax: 204-275-5302; E-mail: [email protected] or E-mail: [email protected]

mailto:[email protected]


Manitoba Biodiesel - Generic Feasibility Study December 22, 2006

Kelwin Management Consulting Page 1

Notice to Reader

The purpose of this Generic Manitoba Biodiesel Plant Feasibility Study is to provide some information to assist proponents of new biodiesel manufacturing businesses in Manitoba to conduct preliminary planning for a new biodiesel business. Use for any other purpose is not authorized. Because this document must address the common needs of the typical situations throughout Manitoba, it does not fully address the specific situation for any one location or any one specific new biodiesel business. Therefore it is not to be considered a final feasibility study and definitely does not include all the details and documentation needed for a business plan.

Every proponent of a new biodiesel business is advised to prepare their own specific information for their unique situation and not to accept any information in this document.

The estimated budget numbers that are included in this Generic Feasibility Study are for example purposes only. They must be revised by every proponent of a biodiesel business with their own specific information which they develop for their specific business. The assumptions noted in this document will need to be changed to match each specific situation. Because every new biodiesel businesses will face its own specific set of costs and revenues, every new biodiesel business must develop their own specific budget numbers and not use the ones included in this document.

The owners and management of any new biodiesel business using any information in this document are responsible for their representations to funding sources and other interested parties about their plans. These users are responsible for disclosure of significant information that might affect the ultimate realization of the projected results. There will usually be differences between the forecasted and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material.

This report was prepared for the Economic Development Initiatives Branch, Manitoba Department of Agriculture, Food and Rural Initiatives. Neither Kelwin Management Consulting, nor any of their employees makes any warranty, expressed or implied, or assumes any legal liability or responsibility for the accuracy, completeness or usefulness of any information in this document. Nor is it represented that its use would not infringe privately owned rights. Reference herein to any specific commercial product, process, or service by trade name, trademark, manufacturer, or otherwise does not constitute or imply its endorsement, recommendation or favouring by Kelwin Management Consulting.



Table of Contents Definitions ...................................................................................................................................................................6

Conversions ..................................................................................................................................................................7

Executive Summary.....................................................................................................................................................8

1.0 Introduction............................................................................................................................................18

2.0 Terms of Reference ................................................................................................................................18

3.0 Need For Feasibility Study ....................................................................................................................19

4.0 Steps in Developing a New Biodiesel Business.....................................................................................20

5.0 Definition of Biodiesel............................................................................................................................21

6.0 Biodiesel Industry Overview .................................................................................................................22

6.1 Global Overview........................................................................................................................22 6.2 The EU ......................................................................................................................................23 6.3 The US.......................................................................................................................................26 6.4 Regional Competitors ...............................................................................................................33 6.5 Canada ......................................................................................................................................34 6.6 Manitoba ...................................................................................................................................35

7.0 Forces Driving Industry Development .................................................................................................36

8.0 Challenges to Industry Development ...................................................................................................39

9.0 Biodiesel Properties & Benefits of Use .................................................................................................41

9.1 Biodiesel Properties (Benefits) ................................................................................................41 9.2 Biodiesel Properties (Drawbacks) ............................................................................................43

10.0 Provincial and Federal Biodiesel Policy (Incentives) ..........................................................................48

10.1 Manitoba Biodiesel Policies .....................................................................................................48 10.2 Federal Government Policies ...................................................................................................49 10.3 Other Jurisdiction’s Policies ....................................................................................................50

11.0 Feedstock Supply ...................................................................................................................................51



11.1 International Feedstock Overview ...........................................................................................51 11.2 Manitoba Feedstock Overview .................................................................................................55 11.3 Feedstock Oil Volumes .............................................................................................................60 11.4 Feedstock Oil Prices .................................................................................................................65 11.5 Feedstock Quality Characteristics............................................................................................68

12.0 Crushing .................................................................................................................................................69

12.1 Canola Crushing Processing Technology................................................................................69 12.2 Oilseed Crush Plants in Western Canada ................................................................................72 12.3 Crush Plant Margins – Past and Future..................................................................................72 12.4 Canola Crush Plant Products...................................................................................................74 12.5 Competitive Analysis of the Crushing Business ......................................................................77

13.0 Biodiesel Fuel Quality Standards .........................................................................................................78

14.0 Blending ..................................................................................................................................................87

15.0 Distribution.............................................................................................................................................90

16.0 Biodiesel Markets...................................................................................................................................93

16.1 Uses for Biodiesel .....................................................................................................................93 16.2 Quality – A Marketing Factor ..................................................................................................93 16.3 Global, EU & US - Biodiesel Market .......................................................................................93 16.4 Canadian - Biodiesel Market....................................................................................................95 16.5 Manitoba - Biodiesel Market ....................................................................................................97 16.6 Biodiesel Prices .......................................................................................................................100 16.7 Biodiesel Price Outlook ..........................................................................................................101

17.0 Glycerine Markets ...............................................................................................................................102

18.0 Meal Markets .......................................................................................................................................106

19.0 Site Location & Regulatory/Environmental Issues...........................................................................110

19.1 Site Requirements ...................................................................................................................110 19.2 Regulatory and Environmental Licenses ...............................................................................112

20.0 Biodiesel Production Process ..............................................................................................................114

20.1 Processing Technology ...........................................................................................................114 20.2 Plant Logistics.........................................................................................................................117



20.3 Process Technology Stage of Development............................................................................117 20.4 Technology Issues Regarding Biodiesel’s Characteristics ....................................................117 20.5 Safe Handling of Methanol and Chemicals...........................................................................118 20.6 New Biodiesel Manufacturing Technologies.........................................................................119

21.0 Plant Contracting Strategies ...............................................................................................................121

22.0 Process Technology and Equipment Suppliers .................................................................................122

22.1 Criteria For Selecting Suppliers.............................................................................................122 22.2 Biodiesel Process Technology/Plant Suppliers ......................................................................122 22.3 Equipment Suppliers...............................................................................................................126

23.0 Human Resource Requirement...........................................................................................................128

24.0 Future Competition .............................................................................................................................130

24.1 Incentives Available................................................................................................................130 24.2 Economies of Scale – Lower Costs.........................................................................................130 24.3 Cost of feedstock relative to other competitive biodiesel plants.............................................132 24.4 Smaller Plant Competitive Factors ........................................................................................132

25.0 Strategic Risk and Mitigation Strategies ...........................................................................................133

25.1 Lower Than Projected Biodiesel Prices .................................................................................133 25.2 Higher Than Projected Feedstock Prices ..............................................................................133 25.3 Feedstock Supply Shortages ...................................................................................................134 25.4 Government Incentive Reductions .........................................................................................135 25.5 Project Risks............................................................................................................................135 25.6 Management ...........................................................................................................................135 25.7 Other Risks..............................................................................................................................135

26.0 Financial Analysis ................................................................................................................................137

26.1 Capital Costs ...........................................................................................................................137 26.2 Accrual Basis Financial Information ....................................................................................142 26.3 Clarity of Assumptions............................................................................................................142 26.4 Proforma Estimated Income Statements................................................................................142 26.5 Proforma Estimated Balance Sheets......................................................................................143 26.6 Proforma Estimated Sources and Uses of Funds Statement.................................................144 26.7 Proforma Statement of Cashflows..........................................................................................144 26.8 Worksheets and Supporting Detail.........................................................................................144



26.9 Breakeven, ROI & Ratio Analysis..........................................................................................144 26.10 Summary .................................................................................................................................144

27.0 Sensitivity Analysis ..............................................................................................................................144

28.0 Financing the New Biodiesel Business................................................................................................146

29.0 Strategic Alliances................................................................................................................................149

30.0 Business Concept & Structure ............................................................................................................150

31.0 Determination of Feasibility and Summary.......................................................................................151

32.0 How to Retain Professional Advisors .................................................................................................152

33.0 Appendices............................................................................................................................................153

Appendix 1 – Financial Information......................................................................................................................154

Appendix 2 – USA - Biodiesel Plant List - November 2006 .................................................................................155

Appendix 3 – Canada - Biodiesel Plant List – November 2006............................................................................156

Appendix 4 – Quality Focussed CRFA Press Release ..........................................................................................157

Appendix 5 – European Union Policies and Programs ........................................................................................158

Appendix 6 – References and Information Sources..............................................................................................159



Definitions ASTM: American Society of Testing and Materials

Biodiesel: Biodiesel is a fuel comprised of mono-alkyl esters of long chain fatty acids derived from vegetable oils or animal fats, designated B100, meeting the requirements of ASTM D6751 (or EU quality standards in the EU), and produced using an accepted industry-wide quality assurance program. BQ-9000 quality assurance program is becoming the widely accepted quality assurance program.

Cetane Number: a measure of the ignition quality of diesel fuel based on ignition delay in an engine. The higher the cetane number, the shorter the ignition delay and the better the ignition quality.

Cloud Point: the temperature at which a sample of a fuel just shows a cloud or haze of wax (or in the case of biodiesel, methyl ester) crystals when it is cooled under standard test conditions, as defined in ASTM D2500.

Densities or Specific Gravity: Specific gravity is the term used to describe the relative mass versus water of the same volume. The specific gravity for biodiesel and No. 1 and No. 2 diesel are shown below.

Fuel Specific Gravity Biodiesel 0.88

No. 2 Diesel 0.85 No. 1 Diesel 0.80

Fatty Acid: any of the saturated or unsaturated monocarboxylic acids that occur naturally in the form of triglycerides (or mono or diglycerides) or as free fatty acids in fats and fatty oils.

Flash Point: the lowest temperature at which vapours from a fuel will ignite on application of a small flame under standard test conditions.

FFA: free fatty acid

Free Fatty Acids: any saturated or unsaturated monocarboxylic acids that occur naturally fats, oils or greases but are not attached to glycerol backbones. These can lead to high acid fuels and require special processes technology to convert into biodiesel.

MMly: million litres per year

MM: million US gallons per year

Mtpa: metric tonnes per annum

Oxidative Stability: the ability of a fuel to resist oxidation during storage or use.

Particulate Matter (PM): the solid or semi-solid compounds of unburned fuel that are emitted from engines.

Polyunsaturated Fatty Acids: fatty acids with more than one double bond.

Pour Point: the lowest temperature at which a fuel will just flow when tested under standard conditions as defined in ASTM D97.

Proponent: any community economic development group or private group/business that are investigating or starting a new biodiesel business in Manitoba



Rack Price: Refers to the wholesaling of diesel or gasoline products. Unqualified, the term refers to the wholesaling of products from a bulk plant or terminal location, such as the Esso and Shell tank farms near Winnipeg. Qualified as "at the gate rack," the term refers to the wholesale purchase of diesel or gasoline products at the refinery.

Specific Gravity: the ratio of the density of a substance to the density of water.

Transesterification: A class of organic chemical reactions that refers to the esterification of a fatty acid by an alcohol. The reaction is catalyzed by a strong acid or a strong base. Transesterification is an equilibrium reaction. The equilibrium is shifted to form esters by using a high excess of the alcohol.

Viscosity: a measure of the resistance to flow of a liquid.

Conversions

Biodiesel Unit Conversions = The chart below provides a simple way to convert biodiesel from different units. In the U.S., biodiesel is typically expressed in gallons, while in Europe and other parts of the world, biodiesel is expressed in tons and/or cubic meters. In Canada biodiesel volumes are typically expressed in litres or millions of litres. For a biodiesel with a density of 880 kg/m3 (the mid-point of the European EN14214 specification) the table below illustrates equivalent quantities of biodiesel expressed in terms of both mass and volume. As an example, 1,000 metric tonnes of biodiesel equals 1,136 cubic metres, equals 1,136,000 litres, equals 300,000 US gallons.

Biodiesel Unit Conversions

Metric Tons m3 US Liquid Gallons(in millions)

1,000 1,136 0.30 880 1,000 0.26

3,333 3,788 1.00 Source: IFQC Biofuels, 2006.



Executive Summary This Generic Feasibility Study for a new Manitoba biodiesel business is designed to assist proponents of new biodiesel businesses in Manitoba to more efficiently conduct their own feasibility studies of their specific plans for a new biodiesel business in their specific locations.

CAUTION: Users of this document must prepare their own analysis for their own feasibility study. The blind acceptance of the information, and especially the conclusions, contained in this document will likely cause proponents of new biodiesel businesses to make less than optimal decisions, and may directly lead to failure of the new business because of a lack of sufficient understanding of the specific and unique circumstances for each individual new biodiesel business. A number of the sections in this document would not normally be included in a feasibility study. These sections (e.g. Sections 3, 4, 28, 29, 30 and 32) are included in this generic feasibility study to provide the reader with advice on how to complete their own feasibility study. The title headings for sections 28, 29 and 30 would be included in a typical feasibility study, but the information would be specific to the proposed business, not the general advice and information that is included in this document.

As proponents of a new biodiesel business prepare their own feasibility study, the information must be specifically related to the unique biodiesel business being studied, not the generic information that is included in this document. For example, the section on feedstocks must study the feedstocks in the area surrounding the location for the particular new biodiesel plant being studied, not just the overall Manitoba situation.

There is a very high level of detail provided in a number of sections of this document. There is also extensive information on the global biodiesel industry, including the public policies and programs that are driving the rapid development of biodiesel in many countries. This level of detail is greater than would typically be included in a feasibility study. It is provided to give the users of this document an understanding of these issues and forces at work, all of which are directly or indirectly relevant to making business decisions about new biodiesel businesses in Manitoba. In many instances this level of detailed understanding of the factors driving the industry will be needed by the proponents as they progress to completing business plans.

Summary of the Most Relevant Sections of this Document

The next few pages provide a summary of the key sections of this document. To shorten this executive summary, only the most relevant sections have been summarized:

6.0 Biodiesel Industry Overview

6.1 Global Overview: The biodiesel industry is developing rapidly in many countries of the world.

6.2 The EU: The EU is the largest producer and by far the largest consumer of biodiesel in the world. The EU has the most highly developed industry in terms of experience with process technology, large plants and economies of scale (up to 570 MMly plant size), infrastructure and logistics efficiency, and knowledgeable consumers. Total EU production in early 2006 was at an annual rate of 3,636 MMly of biodiesel. The production capacity is expected to grow by between 1,136 and 2,273 MMly during the next year1.

1 Raffaello Garofalo, Secretary General, European Biodiesel Board, Brussels, presentation to the Biodiesel conference in Calgary July 18, 2006



6.3 The US: The industry production (284 MMly) was very small until mid 2005. Since then it has been growing extremely rapidly. As at November 28, 2006 the capacity of the currently operating biodiesel plants, plus those under construction as expansions or new plants, create a production capacity of about 6,500 MMly. An additional 2,000 to 3,000 MMly of proposed plant capacity may also occur. Thus, by 2008 biodiesel production capacity may be as much as 8,500 to 9,500 MMly. There is concern in the industry about the rapid increase in capacity leading to over capacity and oversupply relative to short term marketing capacity. This comparison to the size of the market is analyzed in a later section.

6.4 Regional Competitors: The key regional competitors for a new biodiesel business in Manitoba will be within one day’s truck drive of the Manitoba plant’s target markets. The only existing competitors are soyoil based plants in the US. The cold flow property advantages of canola based biodiesel should create a competitive advantage versus these competitors.

In the future, the competition will be intense.

Manitoba-based biodiesel plants may include Prairie Gold, at Dugald, with its proposed 114 MMly plant, which may in time include an integrated canola crushing plant. Border Chemical is progressing with its 30 MMly plant on the east side of Winnipeg. A number of small plants have also been publicly proposed, and others are anticipated to become known, or develop in the future within Manitoba.

Competition from biodiesel businesses outside Manitoba will include ADM’s 322 MMly plant at Velva, ND and Dakota Gold’s 114 MMly plant at Minot, ND. Both will use canola as their feedstock.

It is expected that ADM will be a very serious competitor for Manitoba-based biodiesel plants, given the large size of its proposed biodiesel plant which will be integrated with its existing canola crushing plant providing significant economies of scale. ADM’s experience and focus on biofuels, and the fact that it has chosen canola as its feedstock fit well with its stated intentions of targeting northern markets including Manitoba where the cold flow advantages of canola based biodiesel are the most valued. US-based biodiesel businesses currently have significant competitive advantages versus Manitoba-based biodiesel business as noted in the section 10 which details government policies.

Canadian competitors will also likely include Canadian Bioenergy Corporation which has announced a study of a 114 MMly biodiesel plant on property adjacent to the Fort Saskatchewan Bunge canola crushing plant, in a strategic alliance with Bunge.

6.5 Canada: There are currently only two commercial scale biodiesel plants in Canada. Rothsay-Laurenco has a 35 MMly plant based on rendered fats, oils and greases. Most of the production is exported to the US. Biox has a recently constructed 60 MMly plant at Hamilton. A number of small, medium and large scale plants are proposed.

6.6 Manitoba: Only very small pre-commercial plants currently exist. A number of biodiesel plants are proposed.

7.0 Forces Driving Industry Development: Addressing climate change concerns and supporting agriculture producers and rural communities are the primary motivators around the world including Canada. Only in the US is energy security is also a significant force.

8.0 Challenges to Industry Development: There are a number of challenges listed in this section that are still to be completely overcome for the full development of the biodiesel industry. These include: cost of production versus petrodiesel, cold flow properties, stability in storage, quality



assurance, testing infrastructure, US incentives, distribution, warranties, and acceptance by the trucking industry. Canada has not yet progressed as far on a number of these as many other countries around the world.

9.0 Biodiesel Properties & Benefits of Use

9.1 Biodiesel Properties (Benefits): Biodiesel has a number of inherent lubricity and emission reducing benefits that give it an advantage over petrodiesel. Canola oil based biodiesel has both lubricity and cold flow property advantages over biodiesel from other feedstocks, even including soyoil. There are indications that the quality problems that occurred in the US during the winter of 2005-06 rarely, if ever occur with canola/rapeseed based biodiesel. In the EU, with predominantly rapeseed based biodiesel, the US type quality problems rarely occur.

9.2 Biodiesel Properties (Drawbacks): These include: cold flow properties, cold weather transporting, nitrogen oxide (NOx) emissions, lower energy content, reduced stability and biodiesel’s cleaning effect compared to petrodiesel.

10.0 Provincial and Federal Biodiesel Policy (Incentives)

10.1 Manitoba Biodiesel Policies: The Province of Manitoba has undertaken a number of initiatives to develop the biodiesel industry. A program funded by the Government of Canada through Natural Resources Canada and delivered by the Province of Manitoba was introduced to assist with biodiesel plant construction costs, infrastructure development (testing and blending) and a number of other initiatives as part of a 10 Point Plan developed by the Manitoba Biodiesel Advisory Council. An 11.5 cent/litre tax relief incentive (available at the retail level of the supply chain) is in effect for any biodiesel manufactured and sold in Manitoba. Combined with the federal incentive, Manitoba manufactured and sold biodiesel receives an incentive totalling 15.5 cents/litre. Because these incentives are provided as tax relief at the retail level, only fuel sold to users that pay the provincial and or federal taxes receive the incentives. Thus, biodiesel sold to the agriculture sector only receives the 4 cents/litre federal incentive.

10.2 Federal Government Policies: The federal government provides tax relief at the retail level of 4 cents/litre. A federal government program, Biodiesel Opportunities for Producers Initiative (BOPI) is currently underway to assist producer (farmer) owned biodiesel plants to plan for the development of the business. In Manitoba it is administered by the Manitoba Rural Adaptation Council (MRAC). The federal government has been in discussion with the provincial and territory governments to develop a national biofuels (including biodiesel) program. Canola organizations have been very effective in lobbying for a national mandate to force the oil companies that control the distribution channels to allow access to consumers, incentives to match the US level, and other assistance to aid farmers to participate in the biodiesel manufacturing businesses. As at early December 2006, an announcement of the national policies and incentives was being awaited.

10.3 Other Jurisdictions’ Policies: The US federal government provides the equivalent of 30 – 31 cents/litre2 incentive for biodiesel manufactured from virgin vegetable oil feedstock and 50% of that for biodiesel manufactured from recycled/rendered feedstock. The US incentive is paid at the blender level of the supply chain, so all diesel fuel users receive the incentive, including for heating oil use. A rapidly growing number of other countries also provide significant incentives, especially in the EU.

2 At a currency exchange rate of US$ 0.88 / Cdn$1.00



11.0 Feedstock Supply

11.1 International Feedstock Overview: The analysis indicates that it is likely that the EU will not be able to expand their rapeseed production sufficiently to supply the feedstock oil to meet future biodiesel targets. Thus, they will have to import feedstock oil. They have based their industry (biodiesel quality standards, production technology etc. on rapeseed feedstocks), and will be resistant to reduce the quality standards to accommodate blends without a majority rapeseed or canola based feedstock oil. The sourcing of sufficient feedstock oil is the most significant strategic challenge faced by most biodiesel manufacturers in the EU. Several are taking steps to lock in long term supplies, even going as far as buying land suited to rapeseed/canola production in non-EU countries.

In the US, there does not appear to be sufficient soybean oil for the expanded US biodiesel industry. Due to this, a number of the new biodiesel plants are locating where they will be able to import non-US feedstocks, such as palm oil. For example, the largest new US plant under construction is Imperium Renewables at Grays Harbour, Washington, USA, with a planned capacity of 378 MMly3. The second largest plant under construction is ADM’s 322MMly plant at Velva, North Dakota, that will utilize canola oil from ADM’s adjacent canola crush plant.

Several US plants are proposing to use winter canola varieties that will be agronomically suited to areas further south than where summer canola can be grown. These developments are progressing, but likely will not occur for several years.

The research only identified seven existing US biodiesel plants that are integrated (or located adjacent) with crush facilities, either by a strategic alliance (e.g. Renewable Energy Group biodiesel plant next to a Bunge soy crusher) or common ownership (e.g. ADM at Velva, ND). All these plants are large, with the smallest being 114 MMly. A number of proposed biodiesel plants will be strategic alliances, such as the proposal by Canadian Bioenergy and Bunge at Fort Saskatchewan for a 114 MMly plant.

11.2 Manitoba Feedstock Overview: While new Manitoba biodiesel businesses will face some challenges to access sufficient supplies of feedstock oil, the situation is much better than for the EU or US. Because western Canada exports large volumes of canola, or canola oil and meal products each year, the feedstock for the biodiesel industry are priced on an export basis, (at the prices in distant markets less handling and freight costs). Thus, feedstock costs are much lower in western Canada than for an EU biodiesel plant or for US plants in the future when they have to import feedstocks. For example, the ADM plant at Velva, ND will import most of the canola supply from Canada.

There are a variety of ways that new Manitoba biodiesel plants can develop competitive advantage in accessing their feedstocks, as noted in this section.

This section also provides information on historic canola production in the various crop districts of Manitoba and in Saskatchewan crop districts adjacent to Manitoba.

11.3 Feedstock Oil Volumes: information on the oil volumes available from the canola identified in the section above. It also provides information on a variety of other (non-canola) feedstocks that could be used to manufacture biodiesel. Information on North Dakota is also included.

3 100 MMg/y (US)



11.4 Feedstock Prices: This section provides information on the prices for a variety of feedstocks. The Manitoba 10 year average (crop year) canola oil prices are estimated to be in the range $643/t., or about 64 cents/kg of canola oil, FOB a “average” Manitoba crush plant. The 10 year annual average canola oil price ranges from approximately $443/t. up to $769/t, FOB Manitoba.

The Manitoba farm gate annual average canola seed price, for this 10 year period ranged from $400/tonne ($9.07/bu.) to $237/tonne ($5.37/bu.) and averaged $316.25/tonne ($7.17/bu.). More research is required to develop a precise freight number for any specific location in Manitoba.

12.0 Crushing

12.1 Canola Crushing Processing Technology: Processing technologies are reviewed. A small plant using “heated double press” technology, without “solvent extraction”, will extract approximately 6.5% less oil relative to a crush plant using solvent extraction. This creates a serious economic disadvantage (estimated at $25 to $35 reduced crush margin per tonne of seed). Given that “normal” crush margins are estimated to be in the $45/tonne range (for a “solvent” plant), this is a loss of most of the margin on which a crush plant must run its operations. A “cold press” technology, where the canola seed is not heated, would have even lower yields. The term “cold press” is often incorrectly used to describe a “heated double press” extraction plant.

12.2 Oilseed Crush Plants in Western Canada: A list of the existing plants and the announced expansions in the crush industry is provided. A very dramatic increase in crush capacity is to be built in the next two years. There are questions regarding whether there will be sufficient canola production to supply all this new crush capacity. Increased farm gate canola prices are anticipated. Increased canola oil production is expected due to new varieties with higher yields and higher oil percentages in the seed, more acres in traditional canola areas and an expansion of acreage in non-traditional canola areas.

12.3 Crush Plant Margins – Past and Future: Over the years 2004, 2005 and 2006 the canola crush margins were historically very high due to more canola seed being available to crush plants than there was capacity to crush. With the dramatic expansion (90% increase) in crush capacity anticipated within approximately two years, it is expected that the crush margins will return to historic levels of $35 to $45 /tonne of canola seed crushed.

12.5 Competitive Analysis of the Crushing Business: A review is provided that shows the size of new/expanding crush plants (typically in the range of 840,000 tonnes to 1.0 million tonnes/year). An analysis is provided of the economies of scale issues, in particular solvent extraction technology. The review identifies factors that create economies of scale and competitive advantages. Other factors can be used by a business to create competitive advantage. Instead of using economies of scale, community led biodiesel projects may have to create competitive advantages by:

• Creating unique business models such as tolling, new generation co-operatives, or other business advantages

• Developing niche premium market opportunities that make it difficult for competitors to serve the same customers, or

• Sourcing a lower cost feedstock than competitors.

13.0 Biodiesel Fuel Quality Standards: Quality standards have become a very important factor in marketing biodiesel, due to the past and on-going quality problems in the US industry. The EU has the most stringent quality standards. For Manitoba biodiesel businesses, the relevant standards are



the ASTM D6751 product specifications (currently being revised to tighten the specifications) and BQ9000 certification of quality assurance practises and procedures in the entire biodiesel supply chain, from manufacturing plant to transportation, storage and handling, to final retailer. Warranties and testing information is provided.

14.0 Blending: The various blending systems are described.

15.0 Distribution: The distribution system for petrodiesel is described, including the strategic implications for why the current lack of distribution of biodiesel occurs and where future delivery points for biodiesel are likely to be established. A number of Canadian and US biodiesel marketers are identified.

16.0 Biodiesel Markets

16.1 Uses for Biodiesel: A number of uses exist, beyond just use as a biofuel.

16.2 Market Quality Concerns: Quality is a major marketing characteristic, and is thus a very important factor in the planning of the new business.

16.3 - 16.5 Biodiesel Markets:

United States of America – Biodiesel Market:

When all US diesel fuel is included (all motor fuel plus non-motor fuel such as heating fuel, etc.) and the 2006 volumes are estimated, the total is in the range of 235,000 MMly.

Thus, a B2 blend creates a theoretical total demand for biodiesel of 4,700 MMly and a B5 blend market size of 11,750 MMly. This is the potential US market size only if all diesel distributors and retailers handle biodiesel and 2% and 5% blends are achieved in all diesel fuels.

The nearly 8,500 to 9,500 MMly of biodiesel production capacity in 2008 (calculated in section 6.3) will require an average blend of 3.6% to 4% in all diesel fuel use in the US. If this penetration of the market is not achieved, the biodiesel plants will not be able to run at capacity. This plant capacity may not produce that volume of biodiesel. Actual production may be less than this estimate due to fewer proposed plants being built, shortages of feedstock for some plants causing them to reduce production, etc.

The US National Biodiesel Board forecasts biodiesel demand to exceed 3,785 MMly by 20104 and 7,570 MMly by 2020.

Based on the above information, the outlook for biodiesel demand - supply balance in the US market is a cause for concern. As recently as July 2006, it was expected that customers would be available5 for all the biodiesel that would be produced, even by the rapidly expanding and newly constructed biodiesel plants. However, the extremely rapid growth in production capacity (operating or under construction) that has occurred by November 28, plus the capacity of the proposed plants, will create a production capacity that may exceed the market demand in the shorter term. Also, the infrastructure and logistics capacity will need to expand as well.

4 Forecast by the Energy Information Administration of the US Department of Energy, in Food Business News, November 14, 2006, p. 10 5 Mr. Lelond Tong, a widely recognized biodiesel consultant with Marc-IV Consulting and Mr. Larry Sullivan with Delta-T Corporation, a highly regarded ethanol and biofuels technology supplier, are quoted in “Crushing Questions” Biodiesel Magazine, July 2006, p. 47.



If biodiesel plants are not able to operate at capacity due to lack of market demand or a lack of infrastructure and logistics capacity, plant managers will cut prices to increase their share of the available sales. This could lead to price discounts for biodiesel relative to rack prices for petrodiesel, as early as 2008. US plants will also seek to expand markets geographically, exporting to Canada, especially for those plants located close to the Canadian border.

Further up to date research is needed by each biodiesel plant proponent on this issue before deciding whether to proceed.

Canada and Manitoba – Biodiesel Markets:

In Canada, if a RFS national mandate is established for diesel motor fuels (not including heating fuels) the following volumes of biodiesel will be required.

Table 1: Manitoba Market by Sector – 2006

Fuel Sector Litres (million)Diesel Fuel (Clear) Trucking, transit, commercial & retail 689.4 Diesel Fuel (Dyed) Agriculture, off-road 277.5 Heating Oil Commercial, residential 20.2 Total 987.1

This excludes the jet fuel, bunker fuel and locomotive markets due to technical or price issues. This results in a potential 2006 estimated Manitoba market size of:

19.7 million litres at B2


Typically a new biodiesel plant should not expect to achieve 100% market share of the regional markets they target. A reasonable percentage market share varies widely depending upon competition.

Some knowledgeable industry participants have estimated that until a national RFS mandate is established, the Canadian market may remain as low as 8 MMly.

16.6 Biodiesel Prices: Biodiesel is expected to typically be priced at a similar level to the rack/wholesale price of petrodiesel plus the incentives. In times of relatively short supply biodiesel prices may rise to premiums over diesel, while in times of relative oversupply biodiesel may sell at a discount to diesel. Diesel prices vary widely. Rack prices for diesel for a variety of historical periods are shown in this section. The wholesale prices of diesel in Winnipeg during the period from January 1 to the end of November, 2006, have varied from a high of 76.0 cents/litre to a low of 54.4 cents/litre. Thus, the biodiesel prices at those times could have been estimated to have been those prices plus the government incentives.

16.7 Biodiesel Price Outlook: A wide range of future crude oil prices are predicted, from US$50/barrel to US$70/barrel, for the West Texas Intermediate (WTI) index price.

17.0 Glycerine Markets: The biodiesel industry growth has increased glycerine supplies to such an extent that prices for crude glycerine have fallen to extremely low levels, with some EU biodiesel manufacturers offering the crude glycerine for free. Given the current low prices, and given that glycerine has significant potential value in a variety of products, there is considerable research underway into new uses. Some new biodiesel plants are using glycerine, together with wood waste biomass, to fire the plant boilers and eliminate (or at least reduce) natural gas costs.



18.0 Meal Markets: If a biodiesel plant decides to include an integrated canola crush plant, then canola meal is the most significant by-product. Currently most canola meal produced in western Canada is exported to the US or offshore. Given that these existing markets are already distant and are large, it is not expected that it will be difficult to market meal. Nor is it expected that increases in supply that would be produced by a few biodiesel plants with integrated crushing operations will increase the supply into this large market sufficiently to reduce the price. However, given the global impact of biodiesel increasing the supply of canola/rapeseed meal, and ethanol increasing the supply of high protein distillers grains, it is expected that protein meal prices will generally fall relative to other commodities.

19.0 Site Location & Regulatory/Environmental Issues

19.1 Site Requirements: A number of criteria and requirements for a biodiesel site are noted.

19.2 Regulatory and Environmental Licenses: Information on the process for identifying and obtaining these licenses is provided.

20.0 Biodiesel Production Process

20.1-20.6 Processing Technology, Logistics & Issues: Information on all these topics is provided. While it is widely known that the processing technology can be purchased that will produce good quality biodiesel, there are still a number of challenges to ensure that the processes will perform as expected and safety can be assured. Several key technology issues are identified.

21.0 Plant Contracting Strategies: A number of different strategic approaches exist for dealing with the issues related to engineering, procuring, construction and management of plant construction. Information is provided regarding the whole range of issues related to getting a biodiesel plant successfully built within the budget and having a plant that meets the performance assumptions included in the financial projections. The contracting of these services will not occur until later, during the business planning process, but making the decisions about the strategy to be used is needed at an early stage.

22.0 Process Technology and Equipment Suppliers

22.1 Criteria for Selecting Suppliers: A number of criteria for selecting technology suppliers and contractors, apart from technical aspects and costs, are provided.

22.2 Biodiesel Process Technology/Plant Suppliers: A number of suppliers are identified, along with typical services they provide. Sources of information are also included.

23.0 Human Resource Requirement: Numbers of staff, positions and salaries for typical biodiesel refineries and for typical integrated biodiesel and crush plants are shown.

24.0 Future Competition: This section identifies the key sources of competitive advantage including: Incentives Available, Economies of Scale /Lower Costs, Cost of feedstock relative to other competitive biodiesel plants, and Smaller Plant competitive advantages. The competition can be lessened/eliminated, and a smaller volume plant can better compete with larger ones that have the advantage of economies of scale, if a small biodiesel plant is able to:

1. Serve a niche market with premium prices, that other larger existing and future competitors cannot serve, or

2. Source low cost feedstock that other larger existing and future competitors cannot access;

3. Create unique business models such as tolling, new generation co-operatives, or other business advantages.



25.0 Strategic Risk and Mitigation Strategies: The following strategic risks are identified, along with mitigation strategies that can be used to manage these key risks: lower than projected biodiesel prices, higher than projected feedstock prices, feedstock supply shortages, government incentive reductions, project risks, management and other risks.

26.0 Financial Analysis: 26.1 to 26.8 provide information on Capital Costs, Accrual Basis Financial Information; Clarity of Assumptions; Proforma Estimated Income Statements; Proforma Estimated Balance Sheets; Proforma Estimated Sources and Uses of Funds Statement; Breakeven, ROI & Ratio Analysis; and a Summary. It shows that economies of scale are a significant competitive factor that creates challenges for smaller plants, incentives at US levels are needed for profitability (and to be able to obtain financing), and a number of other aspects for four different plant sizes.

27.0 Sensitivity Analysis: Analysis of the impact of higher and lower biodiesel prices and canola feedstock prices is provided, along with the impact of delays in plant commissioning.

28.0 Financing the New Biodiesel Business: Information is provided to assist in planning how to successfully obtain the equity and debt financing for the new biodiesel business, along with insights about the potential terms that will be offered by some types of lenders.

29.0 Strategic Alliances: Tips on how to plan for successful strategic alliances are provided.

30.0 Business Concept & Structure: Information is provided on this topic.

31.0 Determination of Feasibility and Summary: Some conclusions that can be generically applied are provided, such as conclusions about possible short term markets if the federal government national incentives programs are delayed or unsatisfactory, about competitive positions for smaller plants from the economies of scale analysis, and other factors. Advice is provided regarding what this section of the typical feasibility study of a unique specific new biodiesel business should include.

This report notes that concerns exist regarding the rate of expansion of US biodiesel production capacity and the market’s ability to accept the rapidly growing volumes in the future.

Financial information in Appendix 1 shows that if conservative assumptions for future biodiesel prices are used, only the larger plants with economies of scale are profitable and only if the incentives are at the US levels. At higher biodiesel prices, such as have existed in the past year, biodiesel plants are more profitable.

The levels of government incentives are the largest factor affecting profitability. Incentive levels are known in advance of building a biodiesel plant, so they are not expected to be a significant factor in unexpected future variability.

The variability in the price of biodiesel is identified as the biggest impact on a biodiesel plant’s future profits, followed by variability in the price of canola raw material (seed or oil).

Quality assurance programs to ensure that all biodiesel production meets ASTM standards is a requirement that appears to need to be emphasized more than has occurred in the past by a number of biodiesel plants. Proponents are encouraged to address this issue carefully, as surveys in 2006 indicate that up to 1/3rd of US biodiesel plants are not consistently achieving this standard. It appears that in addition to improved cold flow properties and lubricity characteristics, canola based biodiesel may also have other benefits, because in the EU (which predominantly uses rapeseed oil) there are virtually no reports of quality problems with biodiesel. More research is still underway regarding all the quality issues identified in the US.

The competitive position for biodiesel plants with economies of scale should be favourable in the longer term, due to Manitoba growing more canola than is used domestically in the province. Thus, whether it is canola seed, or canola oil (raw material for biodiesel production) and meal, it will



always be priced at the level that allows it to be exported into distant US and offshore markets. Also, compared to other locations in the US that will face shortages of feedstock, a Manitoba biodiesel plant should not face similar shortages. (However, this does not mean the biodiesel plant may not face price pressures to obtain its feedstock.)

A Manitoba biodiesel plant can obtain its raw material at export basis prices, which on average in the longer term, allow the export of biodiesel at prices that will be competitive with other locations that have to import feedstock vegetable oils and/or biodiesel. E.g. Ontario, some US regions.

While the Canadian national policies do not provide mandates to create a national market, or incentives sufficient to match US competitors (at the time this was written), it is expected that federal government announcements will address these policy areas in late 2006 or early 2007. Whether they will match the US levels is yet to be identified. If they do not, Manitoba biodiesel businesses are expected to find it attractive to market all biodiesel to the US where they can receive the higher incentives. Trade issues are not expected to be a problem for this liquid fuel, which is similar to exports of petroleum liquid fuels, for which Canada is the leading supplier to the US.

32.0 How to Retain Professional Advisors: Tips on how to obtain professional assistance from experienced engineers, environmental specialists, lawyers, consultants, etc.

33.0 Appendices: A number of appendices are provided, including the example financial proformas.



1.0 Introduction The Economic Development Initiatives Branch, Manitoba Department of Agriculture, Food and Rural Initiatives commissioned the completion of this Generic Manitoba Biodiesel Plant Feasibility Study to provide communities and entrepreneurs with a baseline of information to assist in assessing the opportunity for biodiesel production in Manitoba.

This Study can provide some of the generic information that is of use to all proponents of new Manitoba biodiesel plants and can identify questions that proponents should address as they do the work on their own specific feasibility study.

The biodiesel industry does not yet exist as an industry in Canada. It is in its infancy. Therefore, in an attempt to project how the biodiesel industry will develop in Manitoba and Canada, there are a number of sections in this generic feasibility that describe what the biodiesel industry has become in the EU and the US, where the industry is more developed than in Canada. Only by identifying what the characteristics of the biodiesel industry are likely to become in Canada (as opposed to the situation today) can a new biodiesel business hope to create a competitive advantage that will be sustained when the Canadian industry develops.

While there are many challenges in this new industry, the biodiesel industry is expected to receive support in Canada, as it has in most countries around the world. Therefore it is likely that the industry will develop rapidly in the near future.

2.0 Terms of Reference The purposes for preparing this Generic Manitoba Biodiesel Plant Feasibility Study are to provide the Economic Development Initiatives Branch, Manitoba Department of Agriculture, Food and Rural Initiatives with the information needed to assist communities and biodiesel plant proponents in efficiently studying the feasibility of establishing a sustainable new biodiesel business in their area of Manitoba.

The Generic Manitoba Biodiesel Plant Feasibility Study will assist by providing generic information on many of the topics that are covered by a feasibility study and by providing direction on topics that can only be covered by the specific proponents of a new biodiesel business.



3.0 Need For Feasibility Study A feasibility study should be prepared as one step in the overall process of developing the new business.

A feasibility study is prepared to:

• Reduce risk by determining whether the business has the potential to be feasible/profitable before spending larger amounts of time and money

• Speed the process of getting the new business started, and

• Make the proponents of the business more confident as they take the next steps and invest more significant time and money into the further development of the business and into the preparation of the business plan.

A feasibility study addresses the question, “Does this new proposed business appear likely to be feasible and profitable over the short and longer term?” All aspects of the planned business are researched and analyzed, and then decisions are made by the proponents. However, while all aspects are addressed, the level of detail and documentation is far less than for a business plan. Therefore, the costs in time and money are minimized until such time as it is decided that the planned business appears feasible.

The process of preparing a feasibility study involves researching, identifying opportunities and challenges, and making business decisions about how deal with these opportunities and challenges. All opportunities and challenges are focussed on the primary issue of how to create a competitive advantage for the new biodiesel business. If this new business does not have a clearly defined competitive advantage it may not survive in the medium to longer term.

The greatest value in preparing a feasibility study does not come from the final conclusion but from making the decisions to create a competitive advantage. The proponents of a new biodiesel business should ensure that their feasibility study team includes people with relevant experience in identifying ways to create a competitive advantage for the new business.

Once the feasibility study answers this question, the next stage in the development of the business is the preparation of the business plan.

A business plan addresses the question, “Exactly how are we going to develop and operate this business?” The preparation of the business plan is not a single step of writing the document. It is a process of obtaining and analyzing information, and then making business management decisions about how the business will develop and operate.

The first version of the business plan is a preliminary version which assembles together all of the information known at that point in time. Assembling all information in one document allows the business managers to coordinate all information needed for optimal decisions (e.g. production and marketing issues). Thus, the assembly of the business plan allows decisions to be made about the best way to develop the other aspects of the business that have not yet been decided and documented.

The final version of the business plan must have sufficient details, and documentation6 of those details, to confirm to a lender during their due diligence process, that the business has an acceptable level of risk to justify the loan terms being proposed. This level of detail and documentation is far beyond what is found in a feasibility study.

6 E.g. customer purchase contracts



4.0 Steps in Developing a New Biodiesel Business The development of community based new businesses and private sector initiated new businesses have a typical set of steps or stages that they proceed through. Not all occur in the same order for every new business, but the following outlines the key steps through which most progress:

• Concept

• Steering committee

• Preliminary information gathering and analysis

• Initial community consultation to determine potential interest from a customer, investment and community basis;

• Champion(s) become active

• Feasibility Study and assessment

• Business Plan

• Market development

• Raising equity and identifying sources of financing;

• Regulatory approval;

• Engineering;

• Project management and procurement;

• Construction;

• Commissioning and operations commence

At each of these steps/stages there are specific activities that need to be undertaken and results to be achieved. Often professional assistance in the form of lawyers, accountants and consultants are needed to progress through the steps.

Two key issues to be addressed early and constantly throughout the above steps are:

1. Managing and mitigating risk. This means investing only the appropriate modest level of time and money until the preliminary steps have been completed and there is information showing that the key risks can be managed and the key challenges can be overcome, and

2. How will the new business be financed? Obtaining financing is always a major challenge. As noted in the section titled “Managing Project Risk and Making the New Business Financeable” structuring the business and the management of the construction project have a major impact on the ability to obtain financing.



5.0 Definition of Biodiesel The technical definition of biodiesel is a fuel comprised of mono-alkyl esters of long chain fatty acids derived from vegetable oils or animal fats, designated B100, meeting the requirements of ASTM D6751 (or EU quality standard EN14214), and produced using an accepted industry-wide quality assurance program. BQ-9000 quality assurance program is becoming the widely accepted quality assurance program.

The term biodiesel also means a renewable diesel replacement fuel that can be used to replace or in combination with petroleum based diesel fuel in compression-ignition engines, and which is manufactured from the renewable, non-petroleum-based sources such as:

• Virgin vegetable oils such as soy, mustard, canola, rapeseed and palm oils;

• Animal fats such as poultry offal, tallow, and fish oils; and

• Used cooking oils and trap grease from restaurants.

Renewable diesel is not necessarily biodiesel (an ester) if it is produced in a refinery through hydrotreating.

Note:

Any natural (vegetable or animal based) oil product that has not been manufactured to meet the ASTM D6751 specifications is not biodiesel. It is just a natural oil product being used to replace petroleum based diesel fuel. No warranties cover such a product. It is not renewable diesel that may be produced by hydrotreating virgin oils to produce a hydrocarbon (alkanes).



6.0 Biodiesel Industry Overview

6.1 Global Overview Biodiesel production and use is rapidly increasing around the world. A large number of countries have instituted public policy initiatives to encourage biodiesel production and use, and have done so generally through a combination of fiscal incentives and mandates or voluntary targets.

A large number of countries have implemented public policy to provide incentives for the development of the biodiesel industry. The view below displays how biodiesel is being adopted around the world.

Table 6-1: Global Use of Biodiesel

The table below shows that even China is developing its biodiesel industry.

Table 6-2: China Biodiesel Capacity Forecast 2005-2010 (millions of metric tonnes)

Source: November 2006, Biodiesel Magazine



Thus, China is targeting to produce 682 MMly of biodiesel in 2007, rising to 1,250 MMly in 2008 and 1,704 MMly in 2010.

6.2 The EU The EU is the largest producer of biodiesel in the world. They have a higher percentage of passenger vehicles that use diesel as fuel, due to the high European fuel costs (both gasoline and diesel) and thus have a greater incentive for reducing these costs. This increases the percentage of diesel that is used relative to gasoline, creating an increased incentive for the petroleum refiners to want to extend their diesel supplies, relative to gasoline.

Biodiesel use also achieves the goals of reducing emissions in densely populated regions and supporting agricultural producers. A primary incentive is to reach the Kyoto targets for green house gas (GHG) reduction. Biodiesel production is also closely linked to the agricultural policies and regulated land use with which farmers must comply to qualify for the EU farm subsidies. Rapeseed oil is the predominant feedstock used in the EU for biodiesel production.

The policy framework for the development of a biofuels market in the European Union (EU) is Directive 2003/30/EC on the promotion of the use of biofuels or other renewable fuels for transport. This Directive sets a voluntary target of 2% biofuels consumption (by energy content) in 2005 rising by 0.75% per year, increasing to a target of 5.75% (also by energy content) in 2010, and includes both ethanol and biodiesel. The EU is proposing targets of 8 percent by 2015, increasing to 25 percent by 2030.

As shown in the following table, the volume of biodiesel produced in the EU has grown dramatically and continues to do so. A few countries are the world’s largest producers and consumers of biodiesel. Germany is by far the largest, followed by France, Italy and other EU member countries. More recently mandates have been implemented by additional countries, including Austria. It still continues to be the case that the EU has variation between the 25 member countries in terms of meeting its 2% consumption target by 2005, even though on average it did achieve the target.



Table 6-3: EU Biodiesel Production 1993 – 2005 (2005 = 2,954 MMly)

In 2005 the EU industry was operating at capacity, with very rapid expansion underway. Total production in early 2006 was at an annual rate of 3,636 million litres (3.2 million tonnes) of biodiesel. The production capacity is expected to grow by between 1,136 and 2,273 million litres during the next year (i.e. this volume of new or expanded plants will be built in the EU between July 2006 and July 20077). This is very large compared to the historic US production volumes and especially compared to the 500 MMly target Canada has for 2010.

EU Rapeseed Feedstock Demand

The EU 2% biofuels target for 2005 was achieved. It required 2,954 MMly of biodiesel to meet that target. This volume of biodiesel required 2.6 million tonnes of vegetable oil feedstock, which is mostly rapeseed oil. At a 40% yield of oil, this required 6.5 million tonnes of rapeseed.

Based on the above volumes used to achieve 2% biofuel, it is estimated that to achieve the 2010 target of 5.75%, will require at least 8,493 MMly of biodiesel; 7.47 million tonnes of rapeseed oil; and 18.7 million tonnes of rapeseed being crushed.

The current EU rapeseed production is 14 million tonnes and that is projected to grow to 18 million tonnes a year by 2009 or 2010 because of the strong prices and market demand.

7 Raffaello Garofalo, Secretary General, European Biodiesel Board, Brussels, presentation to the Biodiesel conference in Calgary July 18, 2006



Others have estimated that by 2010 the demand for biodiesel will require up to 13,000 MMly8, which will require correspondingly larger amounts (nearly 50% more) of rapeseed and canola oil, and which will be correspondingly more challenging to source.

In the EU-25 about 80%9 to 85%10 of the biodiesel is produced from rapeseed oil. The remaining feedstocks consist of palm, soybean and sunflower oils together with a limited quantity of waste cooking oils and tallow. This is as a result of the current EN14214 biodiesel specification which effectively limits the amount of soybean, palm and sunflower oil feedstocks that can be utilized as a blend with rapeseed oil due to the amount of unsaturated fatty acids contained in these oils and the resultant iodine value.

Though rapeseed oil is the current feedstock of choice for the EU biodiesel industry, the resulting competition with the food sector and indeed other traditional applications for the oil, has driven up the price. This, together with the desire of the EU Commission to take a “balanced approach” to biofuel imports expressed in its Biomass Action Plan, is likely to result in a significant increase in the use of alternate feedstocks in coming years. This will be facilitated by the EU seeking to modify EN14214 (as also indicated in the Biomass Action Plan) to allow the incorporation of higher quantities of alternate feedstocks. It has been stated that in the future commercial biodiesel would ideally be 70 percent rapeseed11 in the EU.

Future shortages of vegetable oil feedstocks are already a significant issue for the EU biodiesel industry. The EU has been increasing imports of Canadian canola oil with approximately 200,000 tonnes (t) in 2005-06. Other raw material feedstocks for biodiesel present some challenges, as noted above.

It is estimated that the EU will require 18.7 million tonnes of rapeseed in 2010 (calculated above) if biodiesel was manufactured from 100% EU rapeseed oil, but only 13 million tonnes if it made from 70% rapeseed (or canola) feedstock. However, the EU biodiesel market must compete with the food market for its primary feedstock. It is estimated that the EU food market will require 7 million tonnes of rapeseed by 2010. Thus, it appears that the EU will require 20 million tonnes (13 million tonnes for biodiesel and 7 million tonnes for food) but will only produce 18 million tonnes of rapeseed in 2010. As a result, the EU will need to import at least 2 million tonnes of rapeseed or canola to meet its needs by 2010. Thus, many in the world vegetable oil industry see the future prices of vegetable oils being driven significantly by the EU import demands for rapeseed and canola oil for biodiesel production.

EU Member State Programs

A variety of public policy incentive programs are used to develop the biodiesel industry in the EU-25 member states. A brief summary of member state biodiesel incentive programs is provided in Appendix 5.

An emerging theme in the EU is concerned with the cost of maintaining fiscal incentives to support biofuels. This has resulted in certain countries such as Austria, France, Slovenia, Hungary, Germany and UK introducing mandates that require a given percentage of transport fuels to be substituted with biofuels, thus shifting some of the costs from the public treasury to the consumers. Sweden and the Netherlands are considering similar schemes as well. 8 Mr. Werner Koerbitz, Chairman of the Austrian Biofuel Institute, in “Fuelling the Future, Final Report on the Biodiesel Industry in Saskatchewan”, The Saskatchewan Biodiesel Development Task Force, June 2006. 9 Agriculture and Agri-Food Canada, Bi-weekly Bulletin 2006-10-27 | Volume 19 Number 15 | ISSN 1207-621X | AAFC No. 2081/E 10 Quote by Mr. Fediol, President, European Vegetable Oil Producers and Processors Federation 11 Bernard Nicol, on behalf of European Biodiesel Board, May 10, 2006, at Seville, Spain Conference, Reuters



Average EU Biodiesel Plant Capacity

While biodiesel production in the EU began with small-scale facilities producing less than 10,000 tonnes per year (mtpa), the expansion in the market and the involvement of multinational organizations (some with backward integration into oilseed crushing) has resulted in new plant size increasing significantly, first through 100,000 mtpa and now to 250,000 mtpa and beyond.

The average capacity of existing European biodiesel plants in 2005 was 38 million litres annually.12 This includes many of the older and smaller plants. Biodiesel plants now being built generally have a production capacity between 114 MMly and 227 MMly (100,000 and 200,000 tonnes/yr). Much larger plants are becoming common, with the ADM-Conneman Group building a 570 MMly biodiesel plant.

New energy policies being developed by the EU are expected to continue to drive the industry for at least the next ten years. The trend of building larger plants will continue, with some of the small older plants being the first to close when capacity is able to satisfy the growing demand, and competitive pressures then increase.

6.3 The US The US has produced relatively little biodiesel compared to the EU. Until 2004 there were modest incentives for biodiesel production, with legislation that encouraged the modest development of the biodiesel industry by requiring government vehicle fleets to use biofuels, including biodiesel.

In October 2004, Congress passed a biodiesel tax incentive, structured as a federal excise tax credit, as part of the American Jobs Creation Act (JOBS Act) of 2004. The incentives at the federal level are US$1.00 per US gallon (CDN$0.31/l) of biodiesel manufactured from virgin vegetable oils and US$0.50 per US gallon for biodiesel manufactured from recycled fats, oils and greases. The tax incentive is taken at the blender level, generally meaning petroleum distributors.

The tax incentive lowered the cost of biodiesel bringing it closer in line to the cost of diesel. According to Department of Energy, this did not have a dramatic impact until towards the end of 2005 as biodiesel prices for low-level blends were reported to be about the same as for regular diesel, and B20 blends were about 10 cents more per gallon than regular diesel13. B99/B100 blends (essentially pure biodiesel) were reported to cost about 59 cents per gallon more than regular diesel fuel. The rising oil prices thus were what was needed to make the incentives sufficient to create a strong demand for biodiesel in the US. (To make this point more clearly, just the JOBS Act incentives of 2004 were not, by themselves, sufficient to create a significant market demand for biodiesel in the US.

The graphic below further illustrates the point. It shows the relationship between the price of soy biodiesel and petrodiesel in the U.S. Gulf region. Note that biodiesel prices were actually cheaper than petrodiesel in the last two months of 2005, due in part to Hurricanes Katrina and Rita, which devastated the region and caused petrodiesel supply shortages for several months.

12 European Biodiesel Board website: http://www.ebb-eu.org/biodiesel.php 13 See U.S. Department of Energy, Alternative Fuel Price Report, last version September 2005.



Figure 6-4. Estimated Soybean Oil Biodiesel (SBO) Prices v. Low Sulphur Diesel Prices in the US Gulf Coast Region

Source: World Energy, 2006

Since mid/late 2005 biodiesel production has increased rapidly in existing plants and there has been a dramatic increase in production capacity with expanding and new plants.

Congress enacted the EPACT 2005 (‘Energy Bill’) in August 2005, and included a number of added provisions meant to spur the production and use of biodiesel14. In particular, EPACT 2005 provisions include biodiesel as part of the applicable volume in the renewable fuels standard (RFS), though the share allocated to biodiesel and other details are to be determined by EPA through the rulemaking process to implement the RFS. EPACT 2005 also extended the biodiesel tax credit to 2008 from 2006

The RFS will require a specific amount of renewable fuel, the “applicable volume” to be used in the nationwide gasoline and diesel pool. The volume would increase each year, as shown in the graph below:

14 See U.S. House of Representatives, Committee on Energy & Commerce, Energy Policy Act of 2005, available at http://energycommerce.house.gov/108/energy_pdfs_2.htm

http://energycommerce.house.gov/108/energy_pdfs_2.htm



Figure 6-5. US Motor Fuel RFS Targets, in Billion Gallons/Year

Source: Graph from the IFQC Biofuels Center, citing EPACT 2005.

The US policy incentives for biodiesel are a major factor that has competitive, market and other implications for any biodiesel plant being built in Manitoba, whether it will export or not. It is important to monitor the developments in the US state programs to maintain an understanding of the policy environment in which competitors in the US are operating.

The volume of biodiesel production in the US in 2004 was 94.6 MMly15 and 284 MMly16 in 2005. In 2005, the US production level was only 24% (284 / 1,164) of US plant capacity, at yearend. This extremely low capacity utilization rate shows that many plants had been built in the US without the conditions being in place to allow them to operate profitably (until the Energy Act was passed in August 2005).

As of spring 2006, the Canadian and American biodiesel production capacity was 1,512 MMly17 with an additional 1,216 MMly18 of new biodiesel plants under construction and another 200 MMly19 coming on line as a result of current plant expansions. This would create, when construction is complete, a total production capacity of 3,106 MMly 20 21.

15 25 million US gallons 16 75 million US gallons 17 Equals 400.1 Million US gal./yr (MMgy) 18 Equals 321.6 Million US gal./yr (MMgy) 19 Equals 53 Million US gal./yr (MMgy) 20 Equals 821.7 Million US gal./yr (MMgy) 21 As of October, 2005 the Canadian and American biodiesel production capacity was 316.6 million US gallons/year (MMgy) with additional 282 MMgy under construction and another 35.5MMgy coming on line as a result of current plant expansions for a total production capacity of 635 MMgy.



These expanded and new plants would nearly double existing production capacity in one year. And, compared to the actual production for 2005 the expanded capacity will be nearly 11 times as large (3,106 / 284).

Table 6-6: Canadian U.S. and Biodiesel Capacity (as of March 2006)22

Canada U.S. Annual Capacity (million litres/yr)

Total current producers 2 47 Total (1,512 MMly)23

Canada (39 MMly) Total plants undergoing expansion 0 7 Current capacity (200 MMly)24

Future capacity (378 MMly) Total new plants under construction 1 26 Total (1,216 MMly)25

Canada (15 MMly) Total plants - when construction complete 3 80 Total (3,106 MMly)26

Note: Only plants with at least a 1 million US gallon/year (3.8 MMly) annual production capacity, which were either producing biodiesel, expanding capacity or slated to be under construction by March 27, 2006, were included in this table. Capacities represent maximum annual production limits.

The above information can be compared to the following table to see the rapid rate of expansion in the US biodiesel industry during the March to November 2006 period.

Table 6-7: Canadian U.S. and Biodiesel Capacity (as of November 28, 2006)27

Canada U.S. Annual Capacity (MMly)

Total current producers 4 85 Total (2,581 MMly) Canada (52 MMly)

Total plants undergoing expansion28 n.a. n.a. n.a.

Total new plants under construction/expansion 1 39 Total (3,911 MMly)

Canada (4 MMly) Total plants - when construction complete 4 +/-115 Total (6,492 MMly)

Note: Only plants with at least a 1 million US gallon/year (3.8 MMly) annual production capacity, which were either producing biodiesel, expanding capacity or slated to be under construction as at November 28, 2006, were included in this table. Capacities represent maximum annual production limits.

22 Spring 2006 Biodiesel Plant Map, Biodiesel Magazine 23 400.1 MMgy 24 53 MMgy 25 321.6 MMgy 26 821.7 MMgy 27 www.biodieselmagazine.com/plant-list.jsp?view=construction&country=USA 28 No separate information on expansions versus new plants was available. Under construction may include both categories.

http://www.biodieselmagazine.com/plant-list.jsp?view=construction&country=USA



The above table shows that by November 28, 2006, the biodiesel plants currently in production, plus those undergoing expansion and the new plants under construction, will have a production capacity of nearly 6,500 MMly when construction is complete in 2007.

This is such a dramatic expansion that it is causing some to question whether the logistics systems and market place growth can keep pace with the production increases. With a total of nearly 6,500 MMly of production capacity in place by mid 2007, this is a very large volume of biodiesel. If all these plants were to run at capacity, they will produce more than a 20 times the 2005 production.

In addition to the total capacity noted above for the currently operating and plants under construction/expansion, there are also many new plants being planned. A survey of proposed biodiesel plants in Canada and the US from June 200629 shows intentions for rapid growth in production capacity. As at June 2006 the proposed plant list included credible30 proposals for a total of 65 would-be plants. These proposed plants represented 5,530 MMly of added capacity. Some of these are now under construction and are included in the November 28 total noted in the table above.

Although there have been a large number of biodiesel plants proposed, it is not possible to accurately estimate how many of them will successfully raise financing, be constructed and start production. However, with the 6,500 MMly of production capacity that will occur when current construction is completed, any additional plants will provide even larger volumes. If 2,000 MMly or 3,000 MMly of additional capacity is built, it could lead to production capacity of 8,500 to 9,500 MMly in late 2007 or 2008. This is compared to the potential US market size later in this document and appropriate concerns are identified.

The size of the US market is addressed later in this report. Demand is expected to grow significantly, overcoming these shorter term problems.

In addition to the US concerns regarding over supply to the market, there are also significant concerns being expressed that the price of soy oil in the US may be driven significantly higher, due to shortages of supply. The meal from the crushing of soybeans generates most of the product value, thus crush plants are not expected to crush to supply the oil demand, when meal is what drives the decisions on what volumes of beans to crush. (This is very different than for canola, where the oil value is dominant, and oil demand drives the crush industry.)

A map of the existing biodiesel plants, the plants under expansion and new plants under construction, is available, as updated twice yearly, from Biodiesel Magazine for a fee of US$19.95 plus shipping. It can be ordered at www.biodieselmagazine.com.

US Biofuel (Including Biodiesel) Targets 2000 - 2030

At a mid 2006 national review and update of US biofuels and bioenergy progress and targets, it was noted that much progress had been made toward the biofuels goals established in 2002. The goals by year are shown below.

29 June issue of Biodiesel Magazine, pages 36 to 56. 30 From a much longer list the authors researched the proposed plants and narrowed to less than 50% of the total that were considered sufficiently credible to be included in the published list.

http://www.biodieselmagazine.com/



Table 6-8: US Biofuel Goals

The litre equivalents for the biofuels targets (predominantly biodiesel and ethanol) total are:

• 2010 = 30.3 billion litres/year (This will require 151 processing plants of 200 MMly each)



• 2030 = 193.0 billion litres/year (This will require 965 processing plants of 200MMly each)

It must be noted that the US has achieved the targets to date and appears to be on track to achieve the 2010 target. Thus, this rapidly developing industry must be recognized as likely to become a very large sector of the economy. The 2010 target means that the capacity of the ethanol and biodiesel plants that will be built by 2010 will be equal to all plant capacity that existed in 2005. And, that much more capacity will be needed again in the following 5 year period (2010 to 2015) to achieve the above targets. This is why many in the biodiesel industry do not see the expansion that is now underway as a short term development.

US Average Plant Size & Other Trends

To gain economies of scale in the labour force, transportation, blending and marketing, plants are becoming larger. Industry participants expect this very new US industry to evolve into a structure more similar to the better developed EU biodiesel industry.

The common size of biodiesel plants in the US, as of 2003, was 10 to 40 MMly, with a wide range both smaller and larger than this.

As at March 2006, the average US plant size was +/-30MMly for the plants operating at that time and 48 MMly for the new plants under construction.

A survey of proposed biodiesel plants in Canada and the US from June 200631 showed the size was increasing, perhaps showing a slight maturation of the industry. Last year’s (June 2005) proposed list featured 36 plants averaging 53 MMly. This year’s (2006) list features 65 plants averaging 85 MMly.

As at November 28, 2006, the average US plant size was 100 MMly for the new plants under construction (more than 3 times the size of the existing plants currently in production.). The plants under construction/expansion ranged in size from under 3 MMly to 378 MMly. There were 24 plants with a capacity of over 76 MMly and 18 plants with a capacity over 114 MMly. The new plants are rapidly growing in size.

31 June issue of Biodiesel Magazine, pages 36 to 56.



The June list of proposed plants also showed that, unlike a majority of US ethanol plants, biodiesel projects are less tied to agricultural regions of the country. Biodiesel projects are popping up in at least 29 states, with Iowa being the largest with six proposed projects totalling 1,060 MMly of production.

Increasingly, announcements for new plants have been in the range of 130 MMly, with some as large as 378 MMly, while a few plants as small as 10 MMly are still being announced. The ADM plant at Velva, ND, was announced at 189 MMly; then before construction began it was increased in size to 322 MMly capacity.

The largest new US plant under construction is Imperium Renewables at Grays Harbour, Washington, USA, with a planned capacity of 378 MMly32. It is adjacent to a port facility with an ocean barge unloading dock next to the biodiesel plant, so it can import any feedstock that is the most favourable. The stated intent is to expand the production of canola in the state so that the plant can use canola oil as the feedstock, at some time in the future.

Feedstock - Strategic Issue for US Biodiesel Industry

Feedstock issues are becoming a concern for the US biodiesel industry. Although most US biodiesel plants use soybean oil or multiple feedstocks, two new biodiesel processing plants, with an adjacent canola crushing facilities, are being built in Minot and Velva, North Dakota. These plants will utilize the state’s canola crop and source feedstock from Canada as well.

By July 2006, experts33 were projecting that there will not be sufficient soy oil for all the new US biodiesel plants under expansion and construction. At that time they saw the market for biodiesel being sufficiently large to have customers for all that is produced, but they also saw some transportation and logistics challenges due to the need for rapid expansion of rail tank car fleets, and expansion of the storage and blending infrastructure.

Most of the 47 biodiesel plants in production (as at spring 2006) in Canada and the US use soybean oil or multiple feedstocks for their production; as can be seen in the following table.

Table 6-9: Feedstocks for Biodiesel Production in North America34

Feedstock Current Producers Future Producers Soy Oil 60.0% 36.6% Canola 1.9% Multi-feedstock 27.2% 37.6% Soy oil/animal fat 1.4% 18.7% Animal fats 4.2% 4.0% Animal fat/yellow grease 2.2% Other 1.8% 1.2% Virgin Oils 1.2% Poultry grease/soy oil combo 1% Palm oil 1%

32 100 MMgy 33 As an example of this conclusion, both Mr. Lelond Tong, a widely recognized biodiesel consultant with Marc-IV Consulting and Mr. Larry Sullivan with Delta-T Corporation, a highly regarded ethanol and biofuels technology supplier, are quoted in “Crushing Questions” Biodiesel Magazine, July 2006, p. 47. 34 Spring 2006 Biodiesel Plant Map



6.4 Regional Competitors

Of special interest to Manitoba biodiesel producers, are other Canadian and nearby American biodiesel producers, especially those which have large plants creating economies of scale and those using canola as feedstocks. As can be seen in the following table, canola oil is used as a feedstock for the western Canadian biodiesel plant at Foam Lake. It is also to be used by nearly every proposed biodiesel plant. With the exception of the Montreal and Hamilton plants, all of the existing biodiesel plants as well as those being proposed, are very small. Even after the proposed expansion by Milligan at Foam Lake it will still not be a large plant.

The Minot and Velva, North Dakota biodiesel plants are much more of a competitive threat because of their size and the fact that they will both use canola as their feedstock. Given that Archer Daniels Midland Co. (ADM) is the owner of the Velva plant and the largest biodiesel producer in Germany; it is significant that it has selected a location and technology that will utilize canola. ADM will be able to transfer its EU expertise for producing biodiesel using rapeseed oil to its new plant in North Dakota. ADM is also building soy based biodiesel plant in Mexico (city), Missouri with a capacity of 114 MMly.

Table 6-10: Canadian, North Dakota and Minnesota Biodiesel plants35

Location Capacity (MMly) Feedstock Stated Completion Date

CANADA Montreal, PQ (Rothsay Biodiesel) 35 Animal by-products Operating Hamilton, ON (Biox Corp.) 61 Tallow Operating as of 2006 Foam Lake, SK (Milligan Bio-Tech Inc.) (new plant) (old plant built in 1997) 11 Canola Expansion in 2006

MINNESOTA36 Albert Lea/Glenville, MN, (Soymor Biodiesel)37 114 Soy August, 2005

Brewster, MN, (Minnesota Soybean Processors) 114 Soy (Integrated Crush Plant) August 2005

Redwood Falls, MN, (FUMPA Biofuels) 11 Soy oil, poultry fat Dec. 2004 Hallock, MN (Hallock Cooperative Grain Elevator Co. & Johnson Oil Co.) 11 to 76 Soybean oil & other virgin

vegetable oils Undeclared

Coates, MN (Fry Away Fuels) 4 Recycled grease/ sunflower, canola & mustard oils Groundbreaking undeclared

NORTH DAKOTA38 Minot, ND (Dakota Skies Biodiesel LLC) 114 Canola Late 2006 Velva, ND (ADM) 322 Canola April 2007 York, ND (All-American Biodiesel) 19 Soy & later Canola September 2006

35 Compiled from a variety of sources by the authors 36 More information available at www.soymor.com, www.mnsoy.com/ and www.northlandchoicebiodiesel.com/37 his is a cooperative of soybean farmers from southern Minnesota and northern Iowa and also has soybean crushing and other processing businesses. Plant built by REG, which also oversees the management. 38 More information is available at www.dakotaskiesbiodiesel.com and www.admworld.com.

http://www.soymor.com/

http://www.mnsoy.com/

http://www.northlandchoicebiodiesel.com/

http://www.dakotaskiesbiodiesel.com/

http://www.admworld.com/



The Minot, North Dakota biodiesel processing plant was originally started by North Dakota Biodiesel Inc. (which was owned by an EU based company) but due to a failure of their EU financing source they dropped the project. Since November 2005 it has been led by Kinetic Group of New York City, with support from Farmers Union of North Dakota for not only the sourcing of feedstock but also with an adjacent canola crushing facility. This plant will be able to utilize one-third of the state’s canola crop or 355,000 acres of canola. The on-site oilseed crushing facility, which will be Magic City Oilseed Products LLC, will crush 250,000 tonnes of canola annually, resulting in 100,000 tonnes of canola oil. It will yield 114 MMly of biodiesel and 150,000 tonnes of canola meal per year. Combined with the ADM canola crushing and biodiesel plant at Velva, ND, the feedstock for these plants will exceed the total volume of canola typically grown in the state. With their proximity to Canada and its ample canola supply, these plants are expected to source adequate canola feedstocks by importing from Canada. It is also expected that the production of canola in ND will increase due to the proximity to these markets as well as the publicity surrounding the two biodiesel and canola crush plants.

The Minot plant will use a continuous flow design based on European rapeseed-to-biodiesel technology. A German construction company will be sourcing the equipment in the EU and overseeing construction.

Both of these ND plants are expected to sell significant volumes of biodiesel outside their state, with sales being targeted into Canada in competition with Manitoba biodiesel plants. The Minot plant has publicly stated that they will target the areas with cold weather, due to the improved cold flow properties of the canola based biodiesel compared to their soy based competition, and especially compared to recycled and rendered oil based biodiesel.

6.5 Canada The biodiesel industry in Canada is in its infancy, having only a few biodiesel plants in Canada and only very small production facilities in Manitoba and Saskatchewan. The Canadian federal government is proposing a national Renewable Fuel Standard be implemented by 2010 that includes a B2 mandate for biodiesel by 2012. As an incentive, the federal government has eliminated the 4-cent/litre federal excise tax on biodiesel. This now compares unfavourably with the US incentives of US$1.00/US gal. (Cdn$0.31/l) for biodiesel from agricultural crops, as well as RFS (renewable fuels standard) that creates a requirement for increasing volumes of biofuels (ethanol and biodiesel) in the US fuel supply.

Further national policy announcements for biofuels are expected during the winter 2006-07.

Primary feedstocks for Canada are canola, soybeans, tallow, yellow grease, fish oil.

Rothsay-Laurenco, a division of Maple Leaf Foods, recently expanded its biodiesel plant in Montreal to a capacity of 35 MMly. The total cost of the project was $14 million (Cdn) including the pilot plants and existing infrastructure. This plant uses food wastes such as animal fat and recycled cooking oil as its feedstock. Much of the plant’s biodiesel is exported to the U.S. (where they can obtain the CDN$0.31/litre federal US incentive), while the rest is distributed to surrounding Canadian markets.39 From 2002 to 2003, this company participated in a pilot project with the Montreal Transit System that successfully ran 155 of its vehicles on a biodiesel blend.

It has been announced that Advanced Biodiesel Group Ltd. will build a biodiesel plant for Calgary Biodiesel Centre at Irricana, AB, with an annual capacity of 22 million litres. This plant would use new

39 Biodiesel Magazine, January 2006 page 14 and industry participant interviews



vegetable oil, used cooking oil, and tallow as feedstock. Plant commissioning is planned for the first half of 200740.

Canadian Bioenergy Corporation has announced it will study building a 114 MMly biodiesel plant on property adjacent to the Fort Saskatchewan Bunge canola crush plant. More information is available at www.canadianbioenergy.com.

Another announcement involves a $400 million integrated biodiesel and ethanol refinery and would be the first complex of its kind in North America. This project is led by Dominion Energy Services LLC, a Florida-based group. This central Alberta facility will include a canola crushing plant, a biodiesel refinery, and an ethanol refinery, each capable of producing up to 374 million litres per year of product. Construction of the ethanol refinery is expected to begin in the first quarter of 2007 with commercial production to come on-line mid-2008. The crushing facility and biodiesel facility would follow thereafter.

Canadian Green Fuels has announced a 32 MMly biodiesel plant at Regina.

A small plant in the Maritimes produces biodiesel from fish oils for use as heating oil, not for transportation fuel.

Fleet Challenge B.C. is a program funded by the Government of Canada which works with partners to reduce tailpipe and greenhouse gas emissions from fleets. This program was launched on March 30, 2005 and will use up to 80 million litres of biodiesel blended fuel for municipal and commercial fleets.

There are very small biodiesel production operations in western Canada. At Foam Lake, Saskatchewan, Milligan Bio-Tech Inc. produces relatively small volumes of biodiesel that is mostly sold as a diesel fuel conditioner/additive in small containers. They have announced their expansion to commercial scale volumes.

6.6 Manitoba The policy developments have been previously described. The size of the Manitoba market is addressed in the later section on biodiesel markets. A number of biodiesel plants either exist or have been publicly identified as being planned. These announcements include biodiesel plants ranging in size from 2.0 MMly of initial production to 114 MMly, by a number of community groups and entrepreneurs.

There are announcements of early stage planning for small (5 – 10) MMly biodiesel plants across western Canada.41 As is the case with most new industries, due to the many challenges of starting a new business, many of the announcements typically do not proceed to the production stage.

40 Biodiesel Magazine, February 2006 41 Western Producer, July 6, 2006, page 15

http://www.canadianbioenergy.com/



7.0 Forces Driving Industry Development

In each country there are common as well as unique factors driving the development of the biodiesel industry. A common factor is the increasing desire by voters to see action taken to reduce the impact of climate change. Globally, most developed countries have not only signed the Kyoto Accord but are taking significant steps to reduce green house gas emissions.

In the EU, the driving forces include meeting the Kyoto Accord requirements, energy security (they import heavily from sources considered increasingly unreliable, especially Russia), replacing subsidies to farmers that have been reduced in other areas, and general rural economic development.

In the US, ethanol has received much more attention than biodiesel. The driving forces for the biodiesel industry include national energy security, supporting farm incomes and rural economic development. Agricultural producers have conducted an extensive and effective political lobbying campaign which led to significant political support for a series of legislative actions. The most important legislation was the biodiesel tax credit, enacted in 2004, which specified the current levels of financial incentives for biodiesel, and the 2005 Energy Act with its renewable fuel standard which created a national mandate for biofuels. The upcoming revisions to the US Farm Bill are said to be focussing on biofuels much more than in the past.

In Canada, the driving forces for biodiesel differ because the country is an increasing exporter of energy. The primary motivators are to reduce green house gases (GHGs), support farmers through expanding markets for oilseeds (especially canola in the west and soy in eastern Canada) and rural economic development. Throughout 2005 and 2006, the provincial canola growers’ organizations and the Canola Council of Canada conducted a sophisticated and effective lobbying campaign calling for policies to support biodiesel. These include incentives that match the US levels, a Renewable Fuel Standard (mandate requiring oil companies to distribute biodiesel) that will create a national market for biodiesel, and support for farmers to participate by being owners of at least a portion of the biodiesel manufacturing plants.

The biodiesel industry has a number of advantages which will support its ongoing development, including:

• The product characteristics of biodiesel have positive environmental impacts:

o Near zero sulphur levels in the fuel

o High cetane level

o High lubricity - is of increased importance with the introduction of ultra low sulphur diesel (ULSD) in 2006. The oil refineries are challenged to achieve the necessary diesel quality specifications while dramatically lowering the sulphur levels

o An ideal transitional technology. From an emissions perspective, biodiesel may be an ideal transitional technology as the diesel industry moves from the engines and vehicles of the past toward the finely tuned, high-tech and clean models of 2007 and beyond. The use of biodiesel will allow older fleets to reduce particulate matter (PM) and will contribute to improved air quality and reduced PM-linked health risks



o Reduced toxic exhaust emissions. Although biodiesel is commonly touted as having great carbon monoxide and hydrocarbon reductions compared to diesel, the base numbers of these emissions are already low. The greatest emissions benefit of biodiesel is the large reduction (percentage and actual) of carcinogenic PM emissions, or black soot42

o Reduced life cycle CO2 emissions by 80% because the sun’s energy allows the plants to take carbon from the atmosphere, and create the vegetable oil that is manufactured into biodiesel. This carbon is recycled when it is burned as fuel, and can then again be converted into vegetable oil in the next year of crop production

o Better for the environment and assists in meeting Federal Government political commitments. 31.5% of the greenhouse gas emissions in Manitoba come from the transportation sector43. Biodiesel is seen as a possible way to reduce those emissions

o Highly biodegradable with modest environmental impacts from spills

o Displaces petroleum diesel

o Non-toxic

• Biodiesel creates new markets and added value for farm products (vegetable oils)

• The industry recycles used oils and fats

• It creates added value for rendered products (yellow grease, animal fats)

• The initial analysis of the biodiesel industry has identified that it has lower barriers to entry than the ethanol industry because of lower capital costs. While economies of scale do exist for biodiesel plants, biodiesel plants do not have to be as large as ethanol plants to be competitive.

• The infrastructure requirements for a biodiesel plant are much more modest than for ethanol plants.

• It creates manufacturing jobs and other types of economic activity, especially in rural areas

• The warranty and trucking industry acceptance is growing, having already been well established in the EU, and rapidly growing in the US

• The Federal and Provincial policy incentives are developing in Manitoba and Canada

• There is growing positive ethanol experience, especially with the new plants being built across Canada

• There is public support, and

• The long term trend is for higher fuel prices

42 Biodiesel Magazine, Nov. 2005 43 Dave Chomiak, Manitoba’s minister of Energy, Science and Technology quoted in the article ‘Biodiesel seminar weighs potential in Manitoba’ in Biodiesel Magazine – April/May 2005 – at the Manitoba Biodiesel Seminar on Feb. 28, 2005 in Winnipeg).



A number of public policy groups have identified that support for biofuels in general and biodiesel in particular is justified because:

• It is a new technology. Most new technologies require an initial period of support to advance the development of the technology. It is widely accepted that as a new technology develops, the cost per unit (in this case per litre of biodiesel) decreases. This development takes a significant period when it is an industry (not just manufacturing but also all the logistics) that is developing. Thus public support for the development for an initial period of perhaps ten years is justified.

• Growing demand will lead to oil shortages in the future. To prepare for that time, the new technologies need a number of years, perhaps 10, to develop lower costs that come with advances in the learning curve and movement down the cost curve that typically occurs with all new technologies.



8.0 Challenges to Industry Development There are some challenges that have not been completely overcome. These include:

1. Price (cost of production, net of supports)

As with any new technology, the rate of adoption is dependent on the price and benefits of the product relative to the existing product. The supports and incentives to this new industry impact the net costs, and thus price. There have been many pieces of legislation in the US to encourage the construction of biodiesel plants and the acceptance of the product in the marketplace.

In Canada, the federal government exempts biodiesel from the 4 cent/l federal excise tax. The Manitoba Government provides the incentive of no longer collecting the 11.5 cents/l fuel tax on biodiesel and blends, in proportion to the level of biodiesel in the blend.

2 Cold flow properties

Cold flow characteristics have been an issue in the biodiesel industry during cold winter weather. Several alternative solutions have been developed to address this problem. Minnesota’s success with the use of biodiesel confirms that this challenging issue can be successfully managed. Given that Minnesota weather can be as cold as Manitoba’s, and that Minnesota has implemented a mandate for a minimum 2% biodiesel blend (B2), it has been shown that cold flow issues can be overcome in a commercial environment. However, Minnesota’s problems during January 2006 have created considerable concern amongst customers.

There were quality problems from a biodiesel plant and with the transportation and handling sector that did not place sufficient emphasis on meeting the quality standards. All commercial customers now take steps, such as new additional testing and the BQ9000 certification program (details in a later section) to ensure that the biodiesel they buy meets a high level of quality standards.

3. Oxidative stability

Proper storage, handling and transportation of the biodiesel are important for maintaining product quality.

4. Quality assurance

Quality systems that assure the biodiesel meets the ASTM D6751 standards have been lacking in some plants. This problem can impact negatively on a specific plant and the industry in general and as a result create challenges for plants in gaining and maintaining customer confidence.

5. Developing testing infrastructure

Testing of biodiesel is a complex and expensive procedure. A comprehensive set of tests to confirm that ASTM D6751 standards are met can cost up to $1,000 in US labs. As described in Section 9.3, a small volume biodiesel plant, producing 2 MMly, would incur costs of $0.165/l if it tested each day’s production. This is clearly not economically feasible. Small plants will employ techniques such as multi-day batching to reduce testing costs. The Province of Manitoba is considering the development of a testing facility that would facilitate local testing at a cost that is lower than currently available.

6. Higher incentives for US

In Canada, the federal government exempts biodiesel from the 4 cent/l federal excise tax and the province provides 11.5 cents/l for a total of 15.5 cents/l. It will be important for the future development of the biodiesel industry that Canadian policies create a level playing field and fair competition relative to those offered in the US, especially in terms of both the types and levels of incentives. The combination of the provincial and federal incentives in Manitoba does not yet match the Federal US incentives.



The US plants receive Cdn 31 cents/l. (US$1.00/US gal) as a blending credit (i.e. received when the first diesel is added, even if it is B99) and with an open border (both ways) the US plants can ship into Canada and Manitoba. Thus, they can receive their US incentive by blending to B99 and then can receive at least the Canadian federal government 4 cents/l retail level tax relief. While the Canadian biodiesel plants can ship into the US and receive the Cdn 31 cents/l. of US Federal Government incentive, they cannot then also receive any Canadian or provincial incentives. There is a vigorous lobby of the Canadian government by the provincial and national canola growers associations, as well the Canola Council of Canada, to design an incentive system that creates a level playing field (at least for the incentives) for Canadian and US biodiesel plants.

7. Changes to Distribution Systems

Oil companies are the distributors of diesel and related fuels. They do not wish to see any reduction in the volumes of their own product processed in their refineries, where significant margins are generated. Also, they have concerns regarding their liability for the product they market, including the proper blending of biodiesel with diesel. Investment in blending facilities, while avoiding/minimizing handling costs, are also required. Thus, there is resistance by the oil companies to distributing biodiesel blends.

Although there are significant benefits to developing the biodiesel industry, the oil companies do not profit from them. In this situation, the market place does not do a good job of associating costs and benefits and as a result public policy actions are required to mandate use of products (e.g. unleaded gasoline, low sulphur diesel, etc.)

In addition, developing the blending and testing infrastructure will take some financial investment and time before mainstream diesel distribution systems (oil companies’ tanks/logistics) in Canada will be well developed.

8. Acceptance by Engine Manufacturers (Warranties)

There has been an ongoing period of testing and development of the warranties by manufacturers regarding the use of biodiesel.

Warranty information continues to be updated as more knowledge is gained from continuing biodiesel experience, especially in the US and EU, where many manufacturers that sell in Canada are active.

Engine manufacturers and their international associations have confirmed that biodiesel that meets the relevant quality standards is satisfactory for use in blends up to B5. Many manufacturers also provide warranty coverage on blends up to B20. For example, in November 2006, Case IH became the latest equipment manufacturer to announce its support for B20 when it announced that customers can use B20 in most Case IH engines and B5 in all Case IH engines. New Holland, tractor and equipment manufacturer, previously announced B20 acceptance in its diesel offerings.

Other manufacturers have already made similar announcements, and those who have not yet done so are conducting research and are expected to make similar announcements in the future.

9. Acceptance by Trucking Industry

As one of the key markets for biodiesel, it is necessary for the trucking industry associations to support the use of biodiesel. The American Trucking Association changed its position from opposing the use of biodiesel to conditional support in 2006. The Manitoba Trucking Association is still seeking further information regarding biodiesel use before it is willing to indicate support.

A major concern, apart from warranties, is whether there will be any added costs to the trucking business. It is expected that with the growing experience in the US, and with national policies that encourage biodiesel industry development, that the conditions will occur for support to develop from the trucking sector.



9.0 Biodiesel Properties & Benefits of Use

9.1 Biodiesel Properties (Benefits) 44 • It is renewable. It is made from either agricultural or recycled resources.

• It is energy efficient. You get 3.2 units of fuel energy from biodiesel for every unit of fossil energy used to produce the fuel. That estimate includes the energy used in diesel farm equipment and transportation equipment (trucks, locomotives), fossil fuels used to produce fertilizers and pesticides, fossil fuels used to produce steam and electricity, and methanol used in the manufacturing process.

• It displaces petroleum derived diesel fuel.

• Biodiesel improves lubricity. Until 2006, petro-diesel fuel contained 500 ppm sulphur which added lubricity to the fuel. Engine manufacturers depend on lubricity to keep moving parts, especially fuel pumps, from wearing prematurely. However in 2006, all petro-diesel was mandated to contain less than 15 ppm sulphur; making it ultra low sulphur diesel fuel (ULSD). Because biodiesel improves lubricity, even low-level blends of biodiesel such as 1% or 2% can improve lubricity of diesel fuels and this may be particularly important for ULSD. Biodiesel typically contains less than 15 parts per million (ppm) sulphur (sometimes as low as zero).

• It can be used in most diesel equipment with no or only minor modifications.

• Its flashpoint is more than 80 degrees Celsius higher than regular diesel, making it safer to store, transport and use.

• It can reduce global warming gas emissions. When biodiesel displaces petroleum, it reduces global warming gas emissions such as carbon dioxide (CO2). When plants like canola grow they take CO2 from the air to make the stems, roots, leaves, and seeds. After the oil is extracted, it is converted into biodiesel and when burned produces CO2 and other emissions, which return to the atmosphere. This cycle does not add to the net CO2 concentration in the air because the next canola crop will reuse the CO2 in order to grow. When fossil fuels are burned, 100% of the CO2 released adds to the CO2 concentration levels in the air. Because fossil fuels are used to produce biodiesel, the recycling of CO2 with biodiesel is not 100%, but substituting biodiesel for petroleum diesel reduces life-cycle CO2 emissions by 78%. B20 reduces CO2 by 15.66%.

• It can reduce tailpipe emissions, including air toxics. Biodiesel reduces tailpipe particulate matter (PM), hydrocarbon (HC), and carbon monoxide (CO) emissions from most modern four-stroke combustion ignition (CI) engines. These benefits occur because the fuel (B100) contains 11% oxygen by weight. The presence of fuel oxygen allows the fuel to burn more completely, so fewer unburned fuel emissions result. This same phenomenon reduces air toxics, because the air toxics are associated with the unburned or partially burned HC and PM emissions. Testing has shown that PM, HC, and CO reductions are independent of the feedstock used to make biodiesel. The US EPA reviewed 80 biodiesel emission tests on CI engines and has concluded that the benefits are real and predictable over a wide range of biodiesel blends.

Biodiesel also contains 11% oxygen by weight, as well as a slightly higher cetane number, which provides for more complete combustion and a reduction in most emissions.

44 2004 Biodiesel Handling and Use Guidelines, U.S. Department of Energy Office of Scientific and Technical Information, Email: [email protected], ordering: http://www.ntis.gov/ordering.htm


http://www.ntis.gov/ordering.htm



• It can diminish human health impacts from petro-diesel. Some PM and HC emissions from diesel fuel combustion are toxic or are suspected of causing cancer and other life threatening illnesses. Using B100 can eliminate as much as 90% of these “air toxics.” B20 reduces air toxics by 20% to 40%. The effects of biodiesel on air toxics are supported by numerous studies, including the former Bureau of Mines Center for Diesel Research at the University of Minnesota. The Department of Energy (DOE) conducted similar research through the University of Idaho, Southwest Research Institute, and the Montana Department of Environmental Quality. The National Biodiesel Board conducted Tier I and Tier II Health Effects Studies which also support these claims.

The US Department of Labor’s Mining Safety Health Administration (MSHA) tested and approved the use of biodiesel in underground mining equipment where workers are exposed to high levels of diesel exhaust45. Switching to biodiesel blends is believed to reduce the risk of illness and life-threatening diseases in miners.

• It is non-toxic, sulphur free, biodegradable and suitable for sensitive environments. Pure biodiesel has low aquatic toxicity and is completely biodegradable in approximately 30 days46. Users in environmentally sensitive areas such as wetlands, marine environments, and national parks have already taken advantage of this property. On lakes, biodiesel’s biodegradability has considerable value. As a result, 100 percent biodiesel might be mandated for Canadian parks.

• It has a high cetane level, assisting with cold starting and smooth operations

• It can be easy to use if guidelines are followed

The biggest benefit to using biodiesel is that it is easy. In blends of B20 or less, it is literally a “drop in” technology. No new equipment and no equipment modifications are necessary. B20 can be stored in diesel fuel tanks and pumped with diesel equipment.

Biodiesel can be used in several different ways. 1% to 2% biodiesel can be used as a lubricity additive, which could be especially important for ultra low sulphur diesel fuels (ULSD, less than 15 ppm sulphur), which may have poor lubricating properties.

The biodiesel/petro-diesel fuel blend does not separate as long as the fuel is kept above its cloud point.

• Also, there are indications that canola (and rapeseed) based biodiesel has other quality advantages. The quality problems that are still occurring in a number of states and are being researched in the US to identify the causes (see section 13) do not occur with canola/rapeseed based biodiesel. E.g. in the EU with predominantly rapeseed based biodiesel, the US type quality problems rarely occur.

45 Schultz, Mark and David Atchison. 2003. Environmental Diesel Particulate Matter Investigation PS&HTC-DD-03-808. 46 Levelton Engineering Ltd. And S&T Consultants Inc., 2002. Assessment of Biodiesel and Ethanol Diesel Blends, Greenhouse Gas Emissions, Exhaust Emissions and Policy Issues. Report Prepared for Natural Resources Canada



9.2 Biodiesel Properties (Drawbacks) 1. Cold Flow Properties:

In response to Minnesota’s biodiesel quality problems, a Biodiesel Cold Weather Blending Study was conducted by the National Biodiesel Board and the Cold Flow Consortium of Minnesota during 2006. Because generic fuels without additives were used in this project, the actual temperatures of the fuels will need to be determined on an individual basis.

This research confirmed that biodiesel can be blended without problems if the diesel fuel temperature is 10 °C or higher above its cloud point. If biodiesel is blended with cold diesel fuel, the biodiesel should be warmer (up to 30 °C). Otherwise, saturated compounds in the biodiesel can crystallize and plug fuel filters and fuel lines. At cold temperatures, the diesel must be heated to sufficient temperatures before blending with the biodiesel, and the blend levels are typically kept to B2 or B5. Appropriate additives may also be added.

A drawback to biodiesel use is its less favourable cold flow properties compared to conventional diesel. The cold flow properties of biodiesel and conventional petro-diesel are extremely important. Unlike gasoline, petro-diesel and biodiesel can both start to freeze or gel as the temperature falls. If the fuel begins to gel, it can clog filters and even become thick enough that it cannot be pumped from the fuel tank to the engine.

There are three tests used to measure the cold flow properties of fuels for diesel engines: cloud point, cold filter plug point and pour point.

Table 9-4: Cold Flow Data for B100 from Various Feedstocks

2004 Biodiesel Handling and Use Guidelines, U.S. Department of Energy Office of Scientific and Technical

Information

The results of tests by different agencies identify slightly different results, as can be seen by comparing the table above and the 100% row in the table below.

The following table displays the cloud points that occur when B100 is blended with petrodiesel. It must be recognized that the pour points will also vary depending upon whether the petro diesel is a No. 1, No. 2, or a blend of the two. The more No. 2 diesel (winter diesel) in the blend, the lower the cloud point.



Table 9-5: Biodiesel Cloud Point Test Results for Various Blends and Feedstocks

Source: S&T2 Consultants in “Fuelling the Future, Final Report on the Biodiesel Industry in Saskatchewan”, The

Saskatchewan Biodiesel Development Task Force, June 2006.

The results of tests by different agencies identify slightly different results, as can be seen by comparing the table above and the 100% row in the table below.

The following table displays the pour points that occur when B100 is blended with petrodiesel. It must be recognized that the pour points will also vary depending upon whether the petrodiesel is a No. 1, No. 2, or a blend of the two. The more No. 2 diesel (winter diesel) in the blend, the lower the pour point.

Table 9-6: Biodiesel Pour Point Test Results for Various Blends and Feedstocks

Source: S&T2 Consultants in “Fuelling the Future, Final Report on the Biodiesel Industry in Saskatchewan”, The

Saskatchewan Biodiesel Development Task Force, June 2006.



B100 made from feedstock other than canola oil cannot be effectively managed with current cold flow additives47 like petro-diesel or rapeseed/canola oil based biodiesel. Oils (other than canola oil) and fats contain too high a level of saturated compounds for most additives to be effective. Cold flow additive effectiveness can also change dramatically depending on the exact type of biodiesel and the processing it has undergone. Cold flow additives have been used much more successfully with biodiesel blends. Contact the major additive manufacturers and work directly with them on this issue.

There are efforts underway to design new additives specific for US-based B100, and there are processes which serve to winterize biodiesel by removing some of the saturated compounds. At present the cost of these approaches makes them undesirable. As time goes on, and biodiesel volumes increase, more progress is expected in this area.

Blends of No. 1 and No. 2 diesel fuel are frequently used to meet customer cold flow specifications. Adjusting the blend of No. 1 diesel (which improves cold flow properties) in the diesel fuel alone or with additives can modify the cloud and pour point temperatures of B20.

This is exactly the way that conventional No. 2 petrodiesel (sometimes referred to as ‘summer’ diesel) is handled, and this is also the optimum way for users to purchase and use B20 and lower blends. As with No. 2 diesel fuel, if you are buying biodiesel blends in the summer and plan to use the fuel in the winter or drive to colder conditions, you should check with your supplier to make sure the cold flow properties of the fuel you are buying are acceptable for those climates.

No. 1 diesel fuel typically costs more than No. 2, so blenders may prefer to use additives depending upon their particular situation. Many cold flow additives are available for diesel fuel. Most reduce the size of crystals or inhibit crystal formation in some way. Most have a limited effectiveness on B100, but work with varying degrees of effectiveness with B20.

2. Cold Weather Transporting

B100 is challenging to ship in cold weather. In the winter, most B100 is shipped one of the following ways:

• Hot (or at least warm) in trucks for immediate delivery (130F to 80F)

• Hot (120F to 130F) in railcars for delivery within 5-8 days (arrives warm if only 1 week has passed since loading; or shorter if the temperatures are very cold)

• Frozen in railcars equipped with external steam coils (the fuel in the tank cars is melted at the final destination with steam),

• In a blend with winter diesel, kerosene, or other low cloud point fuel in either railcars or trucks.

Regardless of how the biodiesel arrives, it must be stored and handled using procedures that do not allow the temperature of B100 or blend to drop below its cloud point. The cloud point of the biodiesel, the biodiesel temperature, the ambient temperature, and the time the fuel is in transport are all factors that should be considered when transporting B100 to insure that the fuel does not freeze in transport.

3. Nitrogen Oxide (NOx) Emissions.

Biodiesel has been shown to increase nitrogen oxide (NOx) emissions in many engines. Biodiesel does not contain nitrogen so the increasing NOx phenomenon is not related to fuel nitrogen content. NOx is created in the engine as the nitrogen in the intake air reacts at the high in-cylinder combustion

47 2004 Biodiesel Handling and Use Guidelines, U.S. Department of Energy Office of Scientific and Technical Information



temperatures. As with petroleum based diesel fuel, the exact composition of the biodiesels can also influence NOx emissions. Data shows NOx variability between the various biodiesel meeting ASTM D6751 of around 15%, with soybean oil based biodiesel producing the highest NOx increase. This is similar to the variability observed for conventional diesel fuels spanning the range of the ASTM diesel fuel specifications (ASTM D975).

However, when biodiesel is used in boilers or home heating oil applications, NOx tends to decrease. The fuel is burned in very different ways in these dramatically different applications (open flame for boilers, enclosed cylinder with high pressure spray combustion for engines) and results in different effects.

4. Energy Content

The energy content of conventional diesel can vary48 up to 15% from supplier to supplier or from summer to winter. This variability in conventional diesel is due to changes in its composition, and these changes are determined by the refining and blending practices.

With biodiesel, or B100, the refining and blending methods have no significant effect on energy content. The reason B100 does not vary much is because the energy content of the fats and oils used to make biodiesel do not vary nearly as much as the components used to make diesel fuel. Therefore, B100 made from most of the common feedstocks will have the same impact on fuel economy, power, and torque.

Engine power and torque are very similar for biodiesel and petrodiesel, especially in the lower blends, such as B2. The performance of B100 may be slightly lower than the petrodiesel due to the lower energy content in biodiesel.

Because biodiesel contains oxygen, it has about an 8% lower energy content than petrodiesel by weight. However, the specific gravity of biodiesel is about 4% higher than petrodiesel, which compensates for some of the lower energy content.

The volumetric fuel economy is about 4% less for B100. With a B20 blend, the difference in mileage will be less than 1%49, and probably not noticeable.

5. Stability

This is a broad term, but really refers to two issues for fuels: long-term storage stability or aging; and stability at elevated temperatures and/or pressures as the fuel is recirculated through an engine’s fuel system. There are no ASTM specifications for the stability of either diesel or biodiesel.

In biodiesel, fuel aging and oxidation can lead to high acid numbers, high viscosity, and the formation of gums and sediments that clog filters. If the acid number, viscosity, or sediment measurements exceed the limits in ASTM D6751, the B100 is degraded to the point where it is out of specification and should not be used. ASTM D4625 stability test data suggests that most B20 can be stored for 8 to 12 months. The US National Biodiesel Board recommends that B20 be used within 6 months. This is comparable to the recommendations of petrodiesel suppliers, some of whom recommend petrodiesel be used within 3-4 months. Adding antioxidants and/or stability additives is recommended for storage over longer periods.

In some cases, deposits from the cleaning effect or solvency of biodiesel have been confused with gums and sediments that could form over time in storage as the fuel ages. While sediment can clog a filter in either case, care should be taken to identify the cause of the clogging.

48 2004 Biodiesel Handling and Use Guidelines, U.S. Department of Energy Office of Scientific and Technical Information, Email: [email protected], ordering: http://www.ntis.gov/ordering.htm49 “Fuelling the Future, Final Report on the Biodiesel Industry in Saskatchewan”, The Saskatchewan Biodiesel Development Task Force, June 2006.





Brass, bronze, copper, lead, tin, and zinc may accelerate the oxidation of diesel and biodiesel fuels and potentially create fuel insolubles (sediments) or gels and salts when reacted with some fuel components. Lead solders and zinc linings should be avoided, as should copper pipes, brass regulators, and copper fittings. The fuel or the fittings will tend to change color and insolubles may plug fuel filters. Affected equipment should be replaced with stainless steel, carbon steel, or aluminium.

6. Cleaning Effect.

B100, being comprised of methyl esters meeting ASTM D6751, has a tendency to dissolve the accumulated sediments in diesel storage and engine fuel tanks. These dissolved sediments can plug fuel filters. This cleaning effect is reduced for lower level blends of biodiesel such as B5. Although the risk is not high for B20, it is recommended that the tanks and fuel system should be cleaned before filling with biodiesel.

The level of ‘cleaning’ depends on the amount of sediment in the system (i.e. if the system is sediment free there should be no effect) as well as the blend level of biodiesel being used.



10.0 Provincial and Federal Biodiesel Policy (Incentives)

10.1 Manitoba Biodiesel Policies The Manitoba Biodiesel Advisory Council presented the “Biodiesel-Made in Manitoba” report to the Province of Manitoba in February 2005. The support program that the Manitoba Energy Development Initiative (EDI) officials announced at the November 1st 2005 meeting at the Fairmont Hotel in Winnipeg ($2 million) was made available during the 2006-2007 fiscal year. Approximately $1.5 million was available to assist with the capital costs of biodiesel plant construction, and the other $0.5 million was used to assist with blending infrastructure and quality assurance testing development.

It was stated in the application information for the BPP that the applicants must show financing was available and there must be documentation from the lender and equity sources confirming financing was available. Based on the consultants’ past experience, the confirmation of financing will typically be the most challenging criteria to meet within the application. This is because it is a challenging process to get a lender to approve a loan for a new business, especially in a new industry such as biodiesel. All aspects of the business must be fully documented, along with equity and other sources of financing satisfactory to the risk adverse lender. With the deadline for the BPP applications in September, and the announcements of the Federal government’s incentives and policies not occurring until later, it made it very challenging to finalize the business planning sufficiently to satisfy a lender.

In the March 6, 2006 budget, the provincial government provided 11.5 cents/litre of provincial tax relief. It is provided, on a proportional basis, for blends containing biodiesel. The provincial tax relief along with the Federal 4 cents/l. creates a 15.5 cents/l incentive to the marketers of biodiesel blends, for those customers who currently pay motive fuels tax (i.e. on road use).

The incentive if biodiesel blends sold to off-road users, e.g. agriculture, construction, logging, etc. is the 4.0 cents/l of federal excise tax reduction.

Unfortunately, this compares unfavourably with the US incentives of Cdn$0.31/l (US$1.00/US gal.) which is provided as a blender credit and is thus available for all diesel users (including off road and agriculture).

The province appointed a Manitoba Biodiesel Board to administer the BPP. A ten point development plan was announced, including not only the BPP (supporting construction costs) but also the development of testing and blending infrastructure, development of fleet use, etc.

The province has confirmed that the 11.5 cents/litre tax incentive for biodiesel is only available for biodiesel manufactured in Manitoba. Thus it is not available to competitors from outside Manitoba. The federal 4 cents/litre tax incentive is available to competitors from outside Manitoba who sell their biodiesel in Manitoba. This is similar to the system that is used for the Manitoba ethanol incentives. As noted in later sections and as assumed for the financial analysis of US competitor biodiesel plants shipping into Manitoba, the US biodiesel cannot access the 11.5 cents/l. incentive.



10.2 Federal Government Policies The Canadian federal government has stated a target of 500 MMly of biodiesel use by 2010. The federal government provides tax reduction for biodiesel blends proportional to the blend, so that it equates to 4 cents/l of biodiesel. Imported products can access this federal incentive. More recently a national B2 (2% biodiesel blend) Renewable Fuel Standard has been discussed.

Minister Chuck Strahl announced on July 17, 2006 in Calgary, an $11 million Biofuels Opportunities for Producers Fund to help farmers, rural communities and cooperatives to conduct planning for becoming involved in the biodiesel industry. This is being administered by the Manitoba Rural Adaptation Council (MRAC). See www.agr.gc.ca/acaaf/bopi-imbp/index_e.php or www.mrac.ca/index.cfm/fuseaction/pub.sub/pageID/1CE6AF3C-AA3A-88DD-75FC5225D6E2D7AA/index.cfm/ for more information on the BOPI.

The minister also stated that the Federal government is working aggressively to develop its proposals for a national biodiesel and biofuels program, which will be announced in the fall, and is optimistically hoped to become effective in the spring 2007 with the next budget.

The Alberta Canola Producers Commission, Saskatchewan Canola Development Commission, Manitoba Canola Growers Association, national organization and the Canola Council of Canada have been very effective in advocating for:

• Incentives which match the US levels (i.e. 31 cents/litre),

• Renewable fuel standard (RFS) like that in the US, with specific provisions for biodiesel that create a B2 national mandate for 2% biodiesel in all diesel fuel used in Canada,

• Incentives paid to biodiesel plants (not retail level incentives that are available to imported product from US competitors) and

• Support specifically to assist and encourage producers and rural communities to become owners of biodiesel plants. Extra incentives and dollar-for-dollar matching of equity investments by farmers have been recommended.

On December 20, 2006, the Federal Government announced its intention to introduce a national mandate for biofuels, incentives for production of biofuels, programs to support producers investing in biofuels plants, and support for R&D to develop technologies for the future.

The details of the regulations that will create the mandate and incentives for biodiesel production are not yet available. The general outline of the mandate calls for a 5% average renewable content in gasoline by 2010, and for biodiesel an initial 2% blend of biodiesel in diesel fuel and heating oil by 2012..

The announcement included a broad outline of the Capital Formation Assistance Program (CFAP):

• $200 million over 4 years in repayable contributions

• Supports the construction of new or expanded transportation biofuels production facilities that use agricultural feedstock

• Opportunity for primary producers and new co-operatives to diversify their economic base and invest in the production of biofuels

• Program contributions are based on annual biofuels production capacity and level of farmer contribution to project costs, and

• Program details are expected in spring 2007.

http://www.agr.gc.ca/acaaf/bopi-imbp/index_e.php

http://www.mrac.ca/index.cfm/fuseaction/pub.sub/pageID/1CE6AF3C-AA3A-88DD-75FC5225D6E2D7AA/index.cfm/

http://www.mrac.ca/index.cfm/fuseaction/pub.sub/pageID/1CE6AF3C-AA3A-88DD-75FC5225D6E2D7AA/index.cfm/



The Agricultural Bioproducts Innovation Program support cross sector research into bio-based products was also announced.

10.3 Other Jurisdiction’s Policies Other jurisdictions, particularly in the United States and the European Union, have established incentives to encourage the biodiesel industry development.

The US provides Cdn$0.31/l 50 incentive for biodiesel manufactured from agricultural crops, and Cdn$0.155/l. if the biodiesel is made from recycled oils and fats. They have also enacted the renewable fuel standard (RFS) which requires large increases in the use of biofuels (both ethanol and biodiesel) in coming years.

Currently, there is a controversy over the US federal excise tax credit being made available to imported biodiesel derived from palm oil, such as that originating in Malaysia and Africa. The IRS has interpreted that palm and fish oil should be included as agri-biodiesel feedstocks eligible for the full 1-cent-per-percentage point tax credit, as opposed to the half-cent tax credit. Earth First Americas imported a small amount of palm-based biodiesel in early November 2005 and says it wants to import as much as 100 million gallons by 2007. Biodiesel made from palm oil has a high cloud point, which severely limits its use in many parts of the country.51

Examples of some state programs include:

• In Minnesota, qualified projects may receive tax exemptions in particular areas under the Job Opportunity Building Zone (JOBZ) act. Minnesota has also adopted a B2 RFS which requires all diesel fuel sold in the state to contain 2% biodiesel. This was implemented in 2006 when in-state biodiesel production capacity reached a level sufficient to supply all the state’s requirements.52

• The state of Washington passed, on March 30, 2006, a biodiesel standard requiring an average of 2% biodiesel, with later increases to B5. State vehicles and ferries will run B20. The requirement goes into effect Nov. 30, 2008. About 75 MMly will be required at the initial levels.

• North Dakota offers a 10% tax credit on equipment for biodiesel producers and blenders. They also provide 3.97 cents (US) per litre excise reduction on B2 once in-state biodiesel production capacity reaches 30.3 MMly53.

• As of Feb. 1, 2006, following the lead of Minnesota, Kansas could be the next state to require that all diesel fuel sold throughout the state contain a blend of at least B2 from vegetable oils or animal fats. The bill would go into effect in Kansas on January 1, 2010. Other states are said to be currently examining the potential to implement mandates, like Minnesota.

50 US$1.00/US gal. 51 Biodiesel Magazine, January 2006 page 8 52 Biodiesel Magazine, April/May 2005 53 Biodiesel Magazine, April/May 2005



11.0 Feedstock Supply

11.1 International Feedstock Overview Whatever the feedstock chosen for a biodiesel plant, consistent quality and supply are of utmost importance. In addition, feedstock decisions must recognize the biodiesel characteristics required by the market (e.g. cold flow properties) and must be viewed with a long-term strategic competitive perspective in mind.

Consistent supply of feedstocks is the greatest strategic issue with respect to the rapidly growing biodiesel industry globally. Although rapeseed production is growing in the EU, the Europeans will face a shortage of rapeseed for their biodiesel industry. To help alleviate this shortfall, the European Commission has proposed to extend the energy crop premium to the eight member states which currently do not benefit from it. This crop premium is an incentive for farmers to produce crops for energy purposes. Currently in Europe, between 3 and 3.2 million acres of biofuel crops are being subsidized in 2006 at a rate of CAD$25.75/acre54.

Canada has begun to export canola seed and canola oil to the EU to help alleviate the supply shortfall of rapeseed due to biodiesel production. During the 2005/2006 crop year, Canada sold approximately 200,000 tonnes of canola oil and more that 1 million tonnes of canola seed to Europe for biodiesel production55. In addition, there have been some biodiesel shipments from Texas and Florida to the EU. However, this biodiesel is based on soy oil and is not favoured in the EU because it does not meet the EU technical quality standards and the cold flow properties afforded by rapeseed based biodiesel. Biodiesel manufactured from canola and rapeseed oils have good cold flow properties and high cetane values.

In the US, strategic concerns about the vegetable oil supply available for biodiesel production are becoming critical. The US biodiesel industry production capacity is growing rapidly. A concern is that if a nationwide B2 requirement is mandated, the industry would need 3.4 million tonnes of vegetable oil to meet that demand – out of an 8.5 million tonne crop56. However, since nearly 50% of the soybeans produced in the US are exported in the form of whole beans, meal or oil, some of the soy oil shortfall could be addressed by reduced exports. According to the USDA, the US is exporting 499,550 tonnes of soybean oil out of the country in 200657. As demand for biodiesel increases, the first area to draw on for more soybean oil supply would likely be the nearly half million tonnes being exported.

Although some of the future requirements for the biodiesel in the US will come from reducing their own exported stock, it is expected that soy oil prices will be driven up dramatically. Some industry experts estimate that soy oil prices could increase from the low to mid US$ 0.20/lb range to US$ 0.50/lb58 or Cdn$ 1.28/kg. This is why previously 68% of US biodiesel plants were based on soy oil, but for the plants under construction/expansion only 36.6%59 plan to use soy oil as the feedstock.

54 Diesel Digest (Canola Council of Canada), Volume 1, Issue 11, September 28, 2006. 55 Diesel Digest (Canola Council of Canada), Volume 1, Issue 7, July 27, 2006. 56 Biodiesel Magazine, August, 2006 – The ‘Peak’ Role of Biofuels 57 Biodiesel Magazine, July, 2006 58“But the industry is not going to take the entire carryout because prices would jump to 50 cents a pound.” From Biofuels Journal, (4th quarter 2005) Industry Leader, P. 16. 59 US & Canada, Biodiesel Plant Map, spring 2006



Historically, the value the markets put on soybeans was driven mostly by the demand of soybean meal, an important protein source for the livestock industry. Canola, on the other hand derives most of its value from its oil. This is due to the fact that soybeans yield a much lower percentage oil than canola (soybeans are approximately 18-20% oil on a dry matter basis60, less than one half the oil content of canola)61.

In addition to the expansion of biodiesel in the EU resulting in increased volumes of rapeseed meal moving into global livestock protein supplement markets, there is also increased protein meal supplies in the US. There is an aggressive expansion of ethanol plants in the US underway. The production of ethanol is much larger than the biodiesel volume.

With ethanol production growing, the price for corn will rise and result in farmers growing more corn and less soybeans. USDA baseline projections and studies by the Food and Agricultural Policy Research Institute and Promar International, indicate relatively flat or perhaps reduced domestic soybean acres planted in the next three to five years. The baseline projections also show increases in acres of corn being harvested, some at the expense of soybean acreage or other crops62.

The co-products of ethanol [distillers’ dried grains (DDGS)] and soybean crushing/biodiesel production (soymeal) compete in livestock feed markets. According to international markets specialist John Baize, who presented “the Outlook and Impact of Biodiesel on the Oilseeds Sector” to a late 2006 USDA Outlook Conference, for every ton of DDGS used in swine or poultry rations instead of corn, 2/5 of a ton of soymeal is also displaced. With the global as well as US increases in supply of protein meals, it is expected that the protein meal prices will tend to reduce, relative to other commodities. This will lower costs for livestock production, offsetting at least part of the increased costs for corn. If larger volumes of soybeans were crushed to get oil for the biodiesel industry, the US could become a major soymeal exporter. In addition, the aquaculture industry has seen tremendous growth of soymeal consumption. It only accounts for 3 to 4% now, but it provides the most opportunity for growth63. However, if the production of soybeans falls, then the volume of soymeal will not rise.

There are several other global factors which make it appear likely that protein meal prices will decrease relative to vegetable oils. As more ethanol is produced in the US, high protein distillers grains are growing rapidly in volume. In excess of five millions of tonnes of additional US corn based distillers grains will enter the world market each year by 2012. Likely another one or more million tonnes of corn and wheat based distillers grains will be added by the expanding ethanol industry in Canada. If the EU expands rapeseed production and achieves the increased biodiesel production that are planned, up to five or even ten million tonnes of additional rapeseed meal will be added to the world supply. If Canada expands canola production and crush capacity, one or two million additional tonnes of canola meal will be produced.

With the need for expanded production of ethanol and biodiesel from biofuel plants driving this new supply of high protein feed, it will pressure prices on all protein meal, but will most negatively impact soybeans, because much more of the soybean value is derived from meal than for canola or rapeseed. This will potentially reduce soybean prices relative to other oilseeds and therefore reduce soybean acres.

In the US, unless there is more feedstock (oil) produced, the soybean oil based US biodiesel plants will only operate at 66% (757 million litres oil equivalent carryout/ 1,148 million litres annual production capacity) capacity utilization based on feedstock availability. The unknown is how much animal fat in 60 www.wsu.edu/~gmhyde/433_web_pages/433Oil-web-pages/Soy/soybean1.html 61 Biodiesel Magazine, January 2006. page 50 62 Biodiesel Magazine, July, 2006 63 Biodiesel Magazine, September, 2006



rendered grease can be diverted from the feed market. The math shows there isn’t enough domestic feedstock for all the US plants being planned and there may be some plants that become uneconomical because they will not have sufficient supply of local oil, and will not be able to import oil at an acceptable cost because of their location. Feedstock supplies for the future have been recognized as the biodiesel industry’s biggest challenge,64 at least for soy in the US. To meet this challenge, imported feedstocks may have to be used in (at least some of) these biodiesel plants.

While it is not possible to predict all the implications of the rapidly growing biofuels industry, it is the case that strategic changes will occur as this industry develops. Currently it appears that many of these strategic changes should be favourable for making canola, and canola oil, even more competitive with soybean oil as a feedstock for manufacturing biodiesel.

While recent studies (e.g. George Morris Centre) have identified that canola oil is a higher priced feedstock than other vegetable oils, or rendered and recycled oils, discussions with a number of industry participants do not agree with the conclusions of the study. As confirmation of the significant role canola will play, and its preference by the most experienced industry players, it is noted that ADM (which operates biodiesel plants in the EU and has global experience) has decided to utilize canola as their feedstock, even though they will have to import canola from Canada to supplement that grown in North Dakota. North Dakota grows 93% of the canola in the US, according to the Northern Canola Growers Association65.

Another North Dakota biodiesel project, Dakota Skies Biodiesel LLC of Minot will also use canola oil as a feedstock. They are working with the German company, Uhde GmbH, which will serve as the project’s general contractor and will help the group choose a European process technology provider. Biodiesel made from canola oil can be made to meet the European biofuel specification – EN14214 – more viably than other feedstocks. Meeting EN14214 also opens up the possibility of exporting the biofuel66. In addition, biodiesel produced from canola and rapeseed has relatively excellent cold weather properties and fits well with the market demands for their target market.

Canola also has low iodine levels, which leads to better oxidative stability and less corrosive deposits. A cleaner-burning biodiesel will not cause as much engine wear as a higher iodine value might. A product with a good oxidative stability may also lend itself to a wider range of storage options, and it opens up the possibility of cashing in on markets for unblended biodiesel in agricultural, underground mining, forestry, and marine applications.

In the EU, biodiesel plant operators interviewed indicate that they will only use canola or rapeseed oil as the feedstock. However, they sometimes blend their canola/rapeseed based biodiesel with small amounts of soy or palm oil based biodiesel in the summer season but must take care to meet the quality specifications that are required in the EU.

As noted in the later section on “Crushing”, Canada appeared to have a structural surplus of canola, due to the limited crush capacity (i.e. historically very high crush margins). Crushing capacity is limited, relative to demand and canola supply. So, canola has been low priced relative to the oil and meal products, and crush plants have enjoyed historically high margins and profits.

There is a growing concern that the aggressive expansion of biodiesel plants in the US will outstrip the ability to source feedstock. Although there has been a market for biodiesel, the logistics will be a 64 Biofuels Journal (Fourth Quarter 2005) “Biodiesel: State of the Industry” Joie Jobe, the CEO of the National Biodiesel Board (NBB) was quoted. 65 Biodiesel Magazine, June 2006 – Making Magic Happen. 66 Biodiesel Magazine, June, 2006 – Making Magic Happen



profound problem in the future. Railcar shortage is already becoming a problem in moving product and obtaining feedstock67. Biodiesel plants located adjacent to crush facilities do hold an advantage in railcar availability and access. However, building a crush plant next to a biodiesel plant requires a strong focus on marketing meal.

Some market advisors stress that feedstock neutrality, or being closer to feedstocks and closer to the end-market, allows flexibility. ADM and Cargill are beginning to use their own soy oil in their own biodiesel facilities68. This will put additional pressure on stand-alone plants to survive in a more costly market.

The following is a list of biodiesel/oilseed crushing facilities located on the same site, either as strategic alliances of two businesses, or as an integrated business with common ownership.

Table 11-1: Integrated Crush Plants + Biodiesel Plants69, 70

Biodiesel plant + Crush facility Design/builder Capacity Feedstock

Expanding Facilities

Ag Processing Inc. - Sergeant Bluff, Iowa

Ag Processing Inc.

45 MMly to 114 MMly

soy oil

Operating Facilities

Cargill Inc. – Iowa Falls, Iowa Lurgi PSI 142 MMly soy oil

Minnesota Soybean Processors – Brewster, Minnesota

Crown Iron Works

114 MMly soy oil

Building new facilities

Archer Daniels Midland Co. – Velva, North Dakota

Archer Daniels Midland Co.

322 MMly canola oil

Louis Dreyfus Agricultural Industries LLC – Claypool, Indiana

Louis Dreyfus Commodities

303 MMly soy oil

Owensboro Grain Biodiesel – Owensboro, Kentucky

De Smet Ballestra 189 MMly soy oil

Dakota Skies LLC – Minot, North Dakota

Uhde GmbH 114 MMly canola oil

Dominion Energy Services, Alberta TBA 378 MMly canola oil

The Renewable Energy Group (REG) announced in late summer 2006 a strategic alliance with Bunge, to locate new REG biodiesel plants at sites adjacent to Bunge soy crush plants in order to gain efficiencies in logistics and gain an assured supply as a preferred customer due to the strategic alliance.

The potential Prairie Gold plant at Dugald, Manitoba is planning for a canola crush plant (250,000 tonnes/year of canola seed) and a 114 MMly biodiesel plant.

67 Biodiesel Magazine, July, 2006 68 Biodiesel Magazine, July 2006 69 Biodiesel Magazine, July 2006 70 Biodiesel Magazine, June, 2006 – Making Magic Happen



The potential Dominion Energy Services facility in Alberta includes an ethanol refinery, a canola crush facility and a biodiesel plant at one site. The production capacity of this facility is 378 MMly each of canola oil, ethanol, and biodiesel. The three plants will utilize one central utility system and be built to accommodate multiple feedstocks to provide economies of scale and maximum flexibility. Construction of the ethanol plant is expected to begin in the first quarter of 2007, with commercial production expected to begin in mid-2008. Construction of the crushing facility and biodiesel facility would follow shortly thereafter71.

11.2 Manitoba Feedstock Overview In Manitoba, the sources of feedstock for a biodiesel plant include yellow grease72, animal tallow73, soy oil74 and canola oil. These sources are listed in the order of lowest to highest price, and smallest to largest volume, with the volume of canola oil being by far the largest.

Some volume of off-grade canola and other oilseeds also exist. While in some cases these off-grade oilseeds can be used to extract low cost oils, the supply is less consistent, the volumes are generally small, the meal quality and value is negatively impacted, and biodiesel processing quality and costs can be affected. Thus, the commercial scale biodiesel businesses interviewed have not focussed on using off grades.

The yellow greases have the highest levels of free fatty acids and contain impurities which need to be removed during a pre-treatment stage prior to the normal biodiesel process. The animal fats have lower levels of free fatty acids than the yellow greases, but higher levels than vegetable oils. Biodiesel produced from yellow grease or animal fats is higher in cetane, but has poorer cold weather flow characteristics.

Although feedstock availability, particularly soybean oil in the US, may be a problem for some plants, it is not expected to be a near term problem for Manitoba. A large supply of canola is grown within Manitoba and eastern Saskatchewan and this is a competitive advantage for Manitoba biodiesel facilities, whether they were to include a canola crush plant or whether it had a strategic alliance with an oilseed crusher.

Also, there is a surplus of canola relative to local demand, so it is priced based on the distant markets less freight. This is true regardless of whether it is first crushed on the Prairies. If crushed, the resulting oil and meal are both commodities with sufficient volume that the vast majority is exported. Thus, even if the canola seed is crushed locally, the pricing is based on distant markets for the oil and meal products, less freight. Thus, the pricing of canola seed, or of canola oil, is expected to be competitive even if the biodiesel had to be shipped to more distant markets. (This is of course subject to all other competitive factors being equal.)

71 Alberta’s first large-scale biofuel refinery planned – CanWest News Service; Calgary Herald, November 14, 2006 72 Yellow grease refers to fats & oils that are used frying oils (and some others) and recovered for recycling. 73 In Manitoba these are largely pork-based (recovered from the slaughter of hogs). 74 Produced exclusively at Jordon Mills plant at Jordan, MB.



Off-Grade Canola

Some very small volume pilot scale biodiesel plants integrated with crush plants have produced biodiesel using off-grade feedstocks. Some have suggested that it is feasible to produce biodiesel from a feedstock blend of off-grade canola mixed with No. 1 and No.2 grade canola. The volumes of off-grades available are typically limited. The quality of the oil from off-grade seed must be satisfactory to produce a high quality biodiesel that meets the ASTM quality standards, and customers must be convinced that the biodiesel plant’s quality assurance and testing procedures will produce the necessary quality biodiesel. If the quality of the canola meal is inconsistent, all of the meal volume (not just the volume from the off grade canola) will be discounted in price (or rejected as not fit to purchase) for an extended period of time until customers are convinced that their specifications will be consistently met.

These quality assurance and cost issues, when using off grade canola in any significant percentage of the canola supply, will be viewed as risks by a lender unless the plant management/owners have previous experience in using off grade canola seed.

For these reasons, no commercial scale biodiesel plants are as yet based on using off-grade canola as a significant portion of their feedstock.

Canola Supply

Due to the strategic concerns about feedstock supply in the EU and the US, it is appropriate to examine the supply of canola, even if it is decided not to have an integrated crush plant and instead have an existing crush plant supply oil to the new biodiesel business. The Manitoba Agriculture 2003 and 2004 Yearbooks report harvested canola acres and production for all crop districts in Manitoba and are shown in the table below.

The Manitoba Agriculture 2003 and 2004 Yearbooks report that there were 2.15 million, 2.49 million and 2.55 million harvested canola acres in Manitoba in 2002, 2003, and 2004 respectively. The average for the years 2002 to 2004 was 2.40 million acres of canola harvested. The total Manitoba 2003 harvested acres for canola were 2.49 million acres. The average production during the years 2002 to 2004 was 1,658,600 tonnes.



Table 11-2: 2002, 2003, and 2004 Regional Canola Acreages and Production by Crop Districts75

Harvested Acres Production (tonnes)

Agricultural Regions

2002

(000)

2003

(000)

2004

(000)

Average 2002-04

(000)

2002

(000)

2003

(000)

2004

(000)

Average 2002-04

(000)

1 260 275 325 286.7 144.0 142.9 213.2 166.7

2 210 260 225 231.7 133.8 131.5 152.0 139.1

3 245 310 280 278.3 167.8 204.1 141.7 171.2

Southwest Region Subtotal

715 845 830 796.7 445.7 478.5 506.9 477.0

4 80 100 130 103.3 49.9 65.8 49.9 55.2

5 150 210 210 190.0 90.7 181.4 147.4 139.9

6 200 200 165 188.3 127.0 128.1 131.5 128.9

Northwest Region Subtotal

430 510 505 481.6 267.6 375.4 328.8 324.0

7 300 340 320 320.0 226.8 289.2 255.1 257.0

8 350 415 480 415.0 252.9 328.9 353.8 311.9

Central Region 650 755 800 735.0 479.7 618.0 608.9 568.9

9 150 150 145 148.3 97.5 120.2 100.9 106.2

10 15 15 30 20.0 7.9 12.5 22.7 14.4

Eastern Region 165 165 175 168.3 105.5 132.7 123.6 120.6

11 95 110 130 111.7 66.9 93.0 111.1 90.3

12 95 105 110 103.3 63.5 71.4 98.7 77.9

Interlake Region 190 215 240 215.0 130.4 164.4 209.8 168.2

Manitoba totals 2,150 2,490 2,550 2,396.6 1,428.8 1,769.0 1,778.1 1,658.6

A map showing the Crop Districts for the whole province follows:

75 Manitoba Agricultural Yearbook 2003, Manitoba Agriculture, Food and Rural Initiatives.

Manitoba Agricultural Yearbook 2004. Manitoba Agriculture, Food and Rural Initiatives



Canola production for each Crop District in Manitoba is shown for the years 1990 to 2006 in the following diagram.



Table 11-3: Manitoba Canola Acreage By Crop District



Manitoba production represented about 32.1%, 26.1%, and 23.0% of the total canola production in Canada for the years 2002, 2003, and 2004 respectively. The following table shows the canola production for each province and for all of Canada for the years from 1996 to 2005.

Table 11-4: Manitoba & Other Provinces Canola Production 2001 to 2005

Canadian Canola Production - updated December 14, 2005 (000 Tonnes)

Source: Field Crop Reporting Series - Statistics Canada

Year Ontario Manitoba Saskatchewan Alberta British

Columbia Total

Canada

1996 45.5 1,068.2 2,222.6 1,701.0 19.1 5,062.3

1997 54.4 1,496.9 2,698.9 2,109.2 22.7 6,393.1

1998 56.7 1,803.0 3,231.8 2,472.1 61.2 7,643.3

1999 54.4 1,707.8 3,975.7 2,971.0 62.4 8,798.3

2000 38.6 1,487.8 3,424.6 2,188.6 55.2 7,205.3

2001 31.3 1,134.0 2,154.6 1,655.6 34.0 5,017.1

2002 44.2 1,451.5 1,769.0 1,224.7 18.1 4,520.5

2003 40.8 1,769.0 2,676.2 2,222.6 38.6 6,771.2

2004 46.5 1,778.1 2,903.0 2,925.7 43.8 7,728.1

2005 24.9 1,261.0 4,633.4 3,651.4 63.5 9,660.2

11.3 Feedstock Oil Volumes The table below displays historical annual oilseed crop production and oil equivalents in Manitoba. Among the four oilseed crops listed, canola has the greatest volume available for oil production and subsequent processing to become biodiesel. Manitoba has increased its soybean acreage in the last decade. Manitoba’s annual soybean production is expected to be about 210,000 tonnes76.

76 Soybean Cost of Production. Manitoba Agriculture, Food and Rural Initiatives, 220,000 acres with an average yield of 35 bushels/acre.



Table 11-5: Manitoba Historical Vegetable Oil Production Potential77

Canola Flaxseed Mustard Soybeans

Total oilseed production

1.1 to 1.6 million tonnes

240,000 to 350,000 tonnes

2,300 to 9,000 tonnes

109,000 tonnes

Oil content 40-45% 45% 30% 20%

Oil production potential

511 to 795 million litres

123 to 180 million litres

0.78 to 3.1 million litres

25 million litres

Extracted in MB78 307 million litres Minimal Minimal 6 million litres

The table below summarizes the animal fat and yellow grease available for use in Manitoba. These are the total volumes estimated to be available for all uses, not just for biodiesel. Therefore, the volumes of biodiesel that could realistically be produced from each of these feedstocks will be significantly less than that shown, and much less for any one region of the province.

Table 11-6: Manitoba Animal Fat and Yellow Grease Production Summary79

Total Volume

Tallow 27.5 million litres

Yellow Grease 4.25 million litres

Total 31.75 million litres

At this time, the only significant biodiesel plant in Canada using animal fats as a feedstock is the Rothsay plant in Montreal, which has a production capacity of 35 MMly of biodiesel per year.

Given the above, if an integrated crush plant was built with the biodiesel plant, the feedstock would be canola seed. The oil equivalent volumes from the nearby canola sources are discussed below.

It is known that there are large volumes of canola grown in Manitoba. As shown in the following table, the average production of canola in Manitoba was 1,658,600 tonnes for the years 2002 to 2004. This production represents 801 million litres of potential canola oil production (and a similar volume of biodiesel).

77 Biodiesel: Made in Manitoba. A Report by the Biodiesel Advisory Council to the Government of Manitoba. Feb., 2005. 78 Historical volumes produced prior to 2004, which are much less than the potential shown in the row above. 79 Biodiesel: Made in Manitoba. A Report by the Biodiesel Advisory Council to the Government of Manitoba. Feb., 2005.



Table 11-7: Canola production in Manitoba, 2002 to 200480

Manitoba Agricultural Regions

Avg. Canola Prod’n 2002-04 (tonnes)

Avg. Canola Oil Prod’n (tonnes)

2002-04 81

Avg. Canola Oil Prod’n (million litres)

2002-200482

Southwest Region (Crop Districts 1, 2, 3)

477,000 202,725 230.4

Northwest Region (Crop Districts 4, 5, 6)

324,000 137,700 156.5

Central Region (Crop Districts 7, 8)

568,900 241,783 274.8

Eastern Region (Crop Districts 9, 10)

120,600 51,255 58.2

Interlake Region (Crop Districts 11, 12)

168,200 71,485 81.2

Manitoba Totals 1,658,600 704,905 801.0

Saskatchewan Canola Production

The following map details the various crop districts in Saskatchewan as described by Saskatchewan Food and Agriculture.

80 Manitoba Agriculture Yearbook 2003, MAFRI, page 30. 81 0.425 tonnes of oil from 1 tonne of canola 82 Conversion of 0.88kg./litre of oil so 1 tonne = 1,136.36 litres of canola oil



Map of Saskatchewan Food and Agriculture’s Crop Districts.

The following table lists Saskatchewan’s average canola production for the years from 2001 to 2005. As can be seen from the previous map of Saskatchewan’s crop districts, 1a, 1b, 5a, 5b, and 8a border Manitoba. For groups considering an integrated canola crushing/biodiesel plant in western Manitoba, sourcing at least some canola in Saskatchewan should be considered.



Table 11-8: Canola Average Acreage and Production in Saskatchewan - 2001 to 200583

Crop District Harvested Yield Production

Avg. Canola Oil Production

acres bu/acre tonnes tonnes million litres

1a 292,262 23.5 155,892 66254 75.3 1b 235,928 25.2 133,573 56769 64.5 2a 127,519 20.8 60,090 25538 29.0 2b 146,998 24.1 80,352 34150 38.8 3as 71,836 22.1 34,954 14855 16.9 3an 54,551 18.8 23,613 10035 11.4 3bs 25,992 18.6 11,540 4905 5.6 3bn 61,632 21.5 32,317 13735 15.6 4a 16,116 13.1 6,621 2814 3.2 4b 8,514 20.8 5,775 2454 2.8 5a 522,917 24.2 286,098 121591 138.2 5b 661,490 25.4 381,757 162247 184.4 6a 565,599 22.6 302,439 128537 146.1 6b 297,636 21.3 152,790 64936 73.8 7a 60,413 19.3 32,350 13749 15.6 7b 292,715 18.7 127,958 54382 61.8 8a 483,313 24.9 281,206 119513 135.8 8b 518,733 21.4 266,805 113392 128.9 9a 513,875 20.1 249,137 105883 120.3 9b 387,892 21.0 200,768 85326 97.0

Saskatchewan 5,348,000 22.7 2,827,240 1201577 1365.4

North Dakota Canola Production

An average of 700,000 metric tonnes was grown annually in the US for the 5 year period from 2001 to 200584. It is estimated that about 90% of this volume was grown in North Dakota. The Northern Canola Grower’s Association estimates that 95% of the North Dakota (ND) canola crop is shipped to either the Bunge crush plant at Altona or to the ADM crush plant at Velva, ND. They also estimated that 15% to 25% of the canola crushed at Velva is imported from Canada. Once the Dakota Skies plant at Minot, ND also begins to crush canola, the Velva plant will have to depend more on imports. The Northern Canola Grower’s Association anticipates significant increases in acres as the market opportunities improve.

While there are large volumes of canola being produced in both Manitoba and Saskatchewan, as described in the section of this report on “Crushing” there will be competition for the canola from oilseed crush plants selling their oil products into the human food markets.

83 http://www.agr.gov.sk.ca/apps/agriculture_statistics/HBV5_Crop1.asp 84 USDA-ERS, from BBI Biofuels Canada, “Biodiesel Study for Canola Council of Canada”, July 10, 2006

http://www.agr.gov.sk.ca/apps/agriculture_statistics/HBV5_Crop1.asp



11.4 Feedstock Oil Prices As displayed in the following table, the prices of feedstock oils vary widely over time, whether it is canola or other feedstocks.

Table 11-9: Historic Oil Prices85

0102030405060708090

100

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

US

Cen

ts/k

ilogr

am

Canola Soyoil Linseed Sunflower Corn

Table 11-10: Manitoba Animal Fat & Yellow Grease Market Price and FFA Content86

Total Volume Market Price Free Fatty Acid Content

Tallow 27.5 million litres $0.48/kg 7% max.

Yellow Grease 4.25 million litres $0.47/kg 15% max.

Total 31.75 million litres

The table above shows the volumes of animal fat and yellow grease that existed in the Manitoba market, their average prices in 2003 and the free fatty acid content of each type of feedstock. The animal fat is identified as tallow since that is the product sold by Rothsay. It is composed primarily of pork lard from 85 Evaluation of Critical Parameters for Establishing Biodiesel Production in Manitoba by (S&T)2 Consultants and Kelly Associates. December 2003 86 Evaluation of Critical Parameters for Establishing Biodiesel Production in Manitoba by (S&T)2 Consultants and Kelly Associates. December 2003



the Manitoba hog slaughter plants. If 100% of the animal fat and yellow grease were diverted to the biodiesel market, there would be enough feedstock for 31.75 million litres of biodiesel. This is an unlikely scenario and in reality probably no more than 15 million litres could be produced from this resource, even if considerable efforts were made for collection.87

If a crush plant was to be integrated into the biodiesel plant, the relevant feedstock prices are the canola seed costs, FOB the plant in Manitoba. Historic prices for canola seed, FOB In-store Vancouver, are shown in the following table.

Table 11-11: Historic Canola Seed Prices

CANOLA SEED AVERAGE PRICES - updated October 5, 2006 CDN. $/TONNE - BASIS IN STORE PACIFIC COAST, #1 CANADA

Source: Cereals & Oilseeds Review - Statistics Canada

YEAR JAN FEB MAR APR MAY JUN JUL

CROPYEAR

Ending July AUG SEP OCT NOV DEC

CALENDAR YEAR

1983 316.41 299.41 303.40 314.14 317.64 303.67 317.71 307.03 368.64 422.39 413.42 400.01 393.96 347.57

1984 418.55 398.99 426.20 457.36 607.99 632.50 525.26 455.44 401.59 379.95 393.64 400.69 380.64 451.95

1985 381.66 387.69 385.37 398.63 393.49 375.23 353.93 386.04 330.11 335.24 313.57 314.19 321.75 357.57

1986 321.27 304.17 295.17 283.29 282.19 267.80 252.73 301.79 234.96 239.20 246.01 252.73 244.59 268.68

1987 242.60 227.73 219.03 221.65 243.97 256.27 247.85 239.72 235.68 243.24 257.53 266.94 281.15 245.30

1988 302.56 303.16 294.22 305.27 336.31 413.98 395.28 302.94 381.19 379.83 336.68 333.82 344.35 343.89

1989 317.88 321.73 333.29 331.44 334.85 306.10 300.49 335.14 289.40 297.10 293.79 303.10 302.54 310.98

1990 300.01 301.60 311.00 318.47 322.24 303.89 300.99 303.68 299.43 292.74 295.22 290.08 290.01 302.14

1991 285.01 280.35 291.29 298.66 294.28 277.26 258.12 287.70 269.42 274.95 270.34 262.86 261.65 277.02

1992 261.65 264.15 282.70 276.90 288.08 279.35 280.05 272.68 282.46 321.09 302.08 326.67 331.43 291.38

1993 343.33 329.48 328.83 324.97 305.85 306.23 331.31 319.48 322.85 311.29 311.86 331.44 366.93 326.20

1994 408.15 412.90 422.23 454.90 481.44 484.95 387.77 391.39 382.54 380.90 379.89 401.38 432.79 419.15

1995 431.37 440.41 456.13 425.82 403.81 414.31 426.49 414.65 405.94 405.90 413.29 416.07 423.77 421.94

1996 424.07 422.60 417.55 443.94 473.04 470.47 470.79 432.29 453.77 453.54 444.01 432.30 439.54 445.47

1997 441.96 441.80 458.22 449.64 446.89 428.47 395.58 440.48 400.68 390.84 398.81 419.12 410.21 423.52

1998 416.52 429.12 434.68 441.44 450.56 443.11 404.86 420.00 348.30 391.60 400.40 386.55 416.83 413.66

1999 402.74 369.19 363.67 362.16 353.21 356.53 317.94 372.43 306.35 302.94 302.68 297.76 287.62 335.23

2000 286.09 277.92 280.97 287.34 284.67 274.12 265.32 287.82 262.24 269.18 265.20 267.69 259.61 273.36

2001 280.22 285.14 302.04 299.60 310.04 320.79 357.17 289.91 368.32 351.01 336.04 361.92 357.51 327.48

2002 357.77 353.72 354.55 341.73 345.84 358.98 409.10 358.04 439.90 444.30 449.70 474.60 450.52 398.39

2003 429.39 410.84 383.44 397.63 380.01 365.77 358.60 415.39 356.02 357.03 376.72 378.66 373.36 380.62

2004 381.70 413.50 437.50 432.43 398.33 407.47 374.07 390.57 364.87 342.03 311.67 303.37 291.17 371.51

2005 283.13 294.60 300.97 304.97 311.13 310.33 311.20 310.79 291.23 275.60 265.37 263.60 251.93 288.67

2006 261.57 264.67 275.17 280.74 296.26 291.56 307.10 277.10

The average price of canola seed, FOB Vancouver, for the last 10 crop years (1997 to 2006) was $356.25/tonne. If an average basis to Manitoba locations was $40/tonne, then the Manitoba farm gate annual average price, for this 10 year period would have ranged from $400/tonne ($9.07/bu.) to $237/tonne ($5.37/bu.) and averaged $316.25/tonne ($7.17/bu.).

87Evaluation of Critical Parameters for Establishing Biodiesel Production in Manitoba by (S&T)2 Consultants and Kelly Associates. December 2003



When comparing the table above and the one below, it is worth noting that the year with the lowest canola seed prices (crop year ending 2006) is not the year with the lowest canola oil prices. This is due to the expanded crush margins in the latest year which reduced seed prices relative to oil prices.

If the canola oil feedstock is to be purchased for the biodiesel plant, the relevant prices for feedstock are for canola oil. Historic prices for canola oil, FOB Vancouver, are shown in the following table.

Table 11-12: Historic Canola Oil Prices

CANOLA OIL AVERAGE PRICES - updated October 5, 2006 CDN. $/TONNE - CRUDE DEGUMMED OIL, F.O.B. VANCOUVER*

* Note: April 1983 - July 2000 F.O.B. PLANTS; August 2000 to Present F.O.B. Vancouver Source: Cereals & Oilseeds Review - Statistics Canada

YEAR JAN FEB MAR APR MAY JUN JUL CROP AUG SEP OCT NOV DEC CALENDAR

YEAR YEAR

1983 477.96 487.44 496.47 501.77 543.87 656.75 720.02 762.13 714.70

1984 690.92 726.64 728.40 770.07 906.75 1,017.21 1,007.50 770.41 907.19 868.61 824.96 828.49 809.09 840.49

1985 783.96 787.92 823.86 894.41 879.63 874.78 842.16 843.76 769.40 685.63 651.68 639.11 638.89 772.62

1986 622.14 587.97 562.39 537.70 525.80 522.27 502.65 603.80 491.40 456.57 422.18 405.20 401.24 503.13

1987 389.77 393.52 408.95 387.57 399.03 393.30 403.66 412.70 394.62 397.27 407.19 416.23 438.71 402.48

1988 470.68 466.05 473.55 478.84 516.98 593.48 576.28 469.16 585.98 590.61 591.71 579.89 577.60 541.80

1989 542.55 512.13 539.91 530.21 537.92 531.01 496.25 551.31 488.54 498.68 489.86 503.31 509.04 514.95

1990 519.40 533.95 552.91 581.35 589.29 591.93 578.93 536.43 568.57 572.31 547.40 532.85 569.89 561.56

1991 541.01 546.53 552.03 552.92 552.92 543.66 550.05 552.51 548.73 545.86 537.71 524.26 524.48 543.35

1992 531.18 522.34 526.66 530.28 544.54 549.44 533.96 534.95 523.59 527.47 537.55 564.31 597.55 540.74

1993 612.03 620.39 613.55 606.37 595.94 613.58 595.94 584.02 527.31 634.32 635.47 691.22 769.12 626.27

1994 797.37 807.25 811.84 839.19 822.33 806.79 756.92 741.59 738.70 760.63 652.26 908.44 939.44 803.43

1995 906.51 887.94 876.83 858.90 819.02 840.38 868.53 838.13 845.94 802.81 784.85 782.96 742.64 834.78

1996 734.02 726.46 739.09 781.66 786.79 768.06 752.07 770.61 739.41 739.41 723.56 724.94 737.19 746.06

1997 739.14 731.19 716.59 737.35 720.25 693.99 691.56 724.55 700.19 717.93 777.32 812.62 800.89 736.59

1998 801.55 830.51 866.15 909.56 893.69 879.91 840.36 819.22 815.05 846.91 842.85 858.85 845.85 852.60

1999 791.73 729.26 699.51 695.37 665.12 646.68 644.77 756.83 519.23 628.92 586.94 593.52 548.76 645.82

2000 554.34 536.67 578.90 589.60 542.85 526.34 494.6 558.39 503.80 503.98 451.83 453.43 451.86 515.68

2001 435.75 448.50 501.00 504.22 501.06 552.68 612.61 493.39 627.18 587.87 577.50 599.24 626.40 547.83

2002 647.50 629.63 641.58 608.13 621.90 665.49 764.74 633.10 797.82 880.49 915.79 990.76 946.06 759.16

2003 832.52 761.71 752.88 732.85 728.24 676.72 741.06 813.08 705.85 749.54 821.33 785.04 806.12 757.82

2004 803.79 887.96 903.80 881.34 819.50 805.86 763.85 811.17 779.92 756.19 703.49 661.22 653.94 785.07

2005 636.85 643.50 714.57 689.00 704.48 688.84 660.22 691.02 651.43 652.26 636.38 586.71 554.08 651.53

2006 615.43 616.34 638.05 612.08 655.65 654.54 695.10 630.67



The average price of canola oil, FOB Vancouver, for the last 10 crop years (1997 to 2006) has been $693.14/tonne. The freight and handling costs to back off these prices to be FOB a crush plant in Manitoba have increased over time. With estimates of the 10 year average in the range of $50/t88 (these vary and more research is required) the historic (past 10 years) canola oil price appears to range from approximately $443/t. up to $769/t, FOB Manitoba. The 10 year average (for crop years) is estimated (as noted above, more research is required to develop a precise freight number) to be in the range $643/t., or about 64 cents/kg of canola oil, FOB a “average” Manitoba crush plant.

The vast majority of the costs (70% to 80%) for manufacturing biodiesel are feedstock costs. Feedstock prices, whether canola seed, canola oil, or other sources, are impacted by supply and demand factors as well as by other general macro economic forces.

For a feasibility study of a proposed biodiesel business, identifying sources of competitive advantage are very important. When analyzing feedstock costs, the key question is how does the cost, FOB the biodiesel plant, compare to the key competitors.

11.5 Feedstock Quality Characteristics What makes each feedstock different from the others is that they are made of different proportions of saturated, monounsaturated, and polyunsaturated fatty acids, as shown in the figure below. A “perfect” biodiesel89 would be made only from monounsaturated fatty acids.

Figure 11-13: Composition of Various Fats and Oils

The figure displays the advantage that canola provides as a feedstock, with its high level of monounsaturated fatty acids; better than all but safflower and olive oil.

88 Source: Canola crush plant managers interviewed. 89 2004 Biodiesel Handling and Use Guidelines, U.S. Department of Energy Office of Scientific and Technical Information, Email: [email protected], ordering: http://www.ntis.gov/ordering.htm





12.0 Crushing

12.1 Canola Crushing Processing Technology The following diagram displays the basic steps in the typical canola crushing plant.

Figure 12-1: Canola Oil Extraction Process

Source: Canola Council of Canada

Solvent Extraction Processing Technology:

A summary of the standard processing technology used in canola crush plants in Canada is provided at www.canola-council.org/oil_tech.html under the “Canola Seed and Oil Processing” title.

Canola is graded, cleaned, and then prepared for oil extraction by heating to 30-40oC. Moisture may be adjusted. It is then flaked, typically with two roller mills. The flaked seed is then heated to 75-100oC in cookers. This ‘cooked’ or ‘conditioned’ seed is then passed into screw-presses or expellers. The expellers reduce the oil content of the resulting ‘press cake’ from 40-42% (8% moisture basis) in the seed to 16-20% oil content in the press cake. Fines are separated from this oil which has not yet been exposed to solvents. In some plants the press cake is mechanically extruded to improve the solvent extraction processes and increase the solvent extraction throughput capacity.

http://www.canola-council.org/oil_tech.html



In the solvent extraction processes (typically in a separate building from the initial preparation and pressing) hexane is used to strip additional oil from the press cake. The solvent-saturated meal is conveyed to a desolventizer. The hexane is recovered. Moisture is reduced to 8-11%. The desolventizing requires closely controlled temperatures and time. The meal is then cooled, ground and/or pelleted. The hexane and canola oil is processed to recover the hexane. If a plant is operating properly only 2-3 litres of hexane is lost per tonne of canola seed processed.

The crude oil is then degummed to reduce the approximately 500 ppm of phosphorus extracted along with the oil. Degumming is achieved by either ‘water degumming’ or ‘phosphoric acid degumming’. The separated phosphoratides are added back to the meal, raising the oil content of meal to about 2-3%.

The oil at this stage has not yet been refined. It is this unrefined degummed oil that would be used by a biodiesel plant.

The research with the canola crushing industry representatives indicates that the average yield of canola oil from canola seed is 40%.

For food grade and most other applications, the oil is refined. This consists of bleaching and deodorizing, and perhaps dewaxing. The refining processes are also described in more detail at www.canola-council.org/oil_tech.html.

Non-solvent Extraction Technology:

In a canola crushing plant that does not use hexane solvent extraction, the canola seed is processed in a similar manner to that described for the solvent extraction plant, up the expeller which mechanically removes oil.

In a non-solvent plant, increased pressures are used in expellers to increase the oil extraction. And, typically two sets of expellers are used. This extracts a larger portion of the oil mechanically, but still leaves significant unrecovered oil in the meal.

Inefficiencies of Non-solvent Extraction Plants

Participants in the crush industry indicate that the oil yield from canola seed using non-solvent extraction is about 33.5% - 34.0% while solvent extraction would achieve a 40% yield. This 6.5% loss of the oil into the meal creates a serious economic cost because there is no premium available for oil from a non-solvent plant. This is because solvent crush plants first crush and extract oil without solvent, so if there was any premium for non-solvent extracted oil, they would sell into the premium market and drive the premium down. Typically, it is smaller canola crushing plants that are considering using a non-solvent extraction technology.

Using 10 year historic average prices, the 6.5% lower oil yield is valued at an average of approximately $660/t of oil. Based on recent prices, the meal is valued in the range of $115 /t. Both prices are estimated to be FOB Manitoba. Thus, when this 6.5% lower oil yield is sold as meal (instead of as oil), it is at a loss of approximately $545 /t. ($660 less $115) when sold at meal prices instead of oil prices. For each tonne of canola seed processed, this 6.5% is 65 kg. At the $545 /t. lower value it represents a lost value of $35.42 per tonne of canola seed.

A non-solvent plant will have some lower operating costs, e.g. not operating the solvent extraction. But industry participants note that a non-solvent plant presses the seed with greater pressure and two presses instead of one, thus increasing the operating costs a bit closer to the solvent extraction plant costs. No reliable estimate for the extra costs of operating a solvent extraction crush plant versus a non-solvent crush plant could be obtained. Industry experts suggest that it is under $10/tonne. Therefore the $35.42 of





lost oil value is partially offset by lower operating costs, resulting in perhaps a net $25.42 reduction in crush margin.

With average historical crush margins in the range of $40/t to $50/t, the $25.42/t of reduced margin for a non-solvent plant is between 50% and 64% of the total crush margin. This is a huge competitive disadvantage for canola oil crushing plants that do not use solvent extraction.

Although premiums are not generally available for high oil meal from a non-solvent extraction plant, it is possible in some special cases. But, even if this is possible, the oil is valued against other sources of fats/oils for livestock feed ingredients. Many of these are quite low value. Thus, it is likely that if a premium is obtained on the meal, it would not be sufficient to offset more than a modest portion of the lost crush margin due to the reduced oil yield. Unless a very consistent supply of consistent quality high oil meal is marketed to selected target customers that can benefit from this unusual commodity and arrangement, no premium price will be obtained and the lost value will be as calculated above. If a premium meal market is found, the lost margin, due to the reduced oil yield, will be improved. Nevertheless, the lost margin will still create a significant competitive disadvantage.

Refining

The typical oil refining processes are shown in the following diagram.

Figure 12-2: Crude Degummed Canola Oil Refining Process

The industrial canola oil that a biodiesel plant would use a feedstock would not be refined. It would be crude degummed canola oil.



12.2 Oilseed Crush Plants in Western Canada

As at August 2006 there were nine oilseed crush plants in western Canada.

Table 12-1: Oilseed Crush Plants in Western Canada

Plant Capacity90 (Canola Input)

Company Location Crop t/day t/yr ADM Lloydminster, AB canola 2,000 660,000

Associated Proteins Ste. Agathe, MB canola 1,000 330,000

Bunge Canada Altona, MB canola/flax 1,100 363,000

Bunge Canada Nipawin, SK canola 1,000 330,000

Bunge Canada Fort Saskatchewan, AB canola 700 231,000

Bunge Canada Harrowby, MB canola 1,400 462,000

Cargill Ltd. Clavet, SK canola 2,400 792,000

Canbra Foods Ltd. /JRI Lethbridge, AB canola 1,120 369,600

Jordan Mills Jordan, MB Soybeans 200 66,000

Sourced from AAFC, Bi-Weekly Bulletin, Volume 19, Number 9, June 22, 2006 The total capacity of the canola crush plants, in the crop year ended July 31, 2006, was about 3.4 million tonnes of crop processed.

All canola crushing plants utilize solvent extraction except for Associated Proteins.

12.3 Crush Plant Margins – Past and Future During 2005 and 2006, Canada had a structural surplus of canola production beyond what was being exported and what could be crushed even with the canola crush plants operating at capacity. Crush margins have been at historically attractive levels. Therefore, a biodiesel plant with its own crushing plant may have been an effective way for the biodiesel business to buy canola and reap the benefits of the favourable crush margins during this time period. As canola crushing capacity expands, the future crush margins are expected to be less favourable.

Announced expansions and new canola crush plants which will draw on Western Canadian canola and will come on stream in the next 2 years include:

90 All estimates of annual capacity are based on only 330 days/yr. of plant operation, rather than the industry target of 350, to allow for unscheduled downtime and more realistically reflect the industry experience for actual production volumes. All numbers are stated in terms of canola seed input into the crush plant.



Expansions:

• ADM – announced 500 t/day (165,000 t/yr91) expansion at Lloydminster, SK

• Bunge – announced 500 t/day (165,000 t/yr92) expansion at Nipawin, SK

• Cargill - announced 800 t/day (264,000 t/yr) expansion at Clavet, SK

• Associated Proteins - expanding from 500 to 1,000 tonnes/day, (165,000 t/yr) at Ste. Agathe, MB

• ADM has historically crushed canola at Velva, ND, but with its new 322 million litre biodiesel plant next to the crush plant, it is expected that it will crush some more canola than in the past.

New Plants:

• JRI – announced 2,400 t/day (792,000 t/yr) new crush plant in Yorkton, SK

• Louis Dreyfus - announced 2,500 t/day (825,000 t/yr) new plant at Yorkton, SK

• Dakota Skies Biodiesel – building biodiesel plant with integrated canola crush plant that will utilize 250,000 t/yr. of canola at Minot, N.D. (Financing issues have delayed the progress on this plant.)

It is not expected that all announced capacity increases will occur, at least not on the announced schedule. If all expansions and new plants were to proceed, this would be an increase in crush capacity of over 2.5 million tonnes/year of canola. Even with only part of this expansion occurring, it indicates that the canola crush plants will be bidding aggressively; both because of the new capacity they need to fill, and because of the addition of new players (if one considers JRI’s new plant to make them a major player in the eastern Prairies rather than having just the Canbra plant at Lethbridge).

These developments cause the consultants to conclude that the period of high crush margins, which have existed previously, will tend to be lower in the future when the construction of the new/expanded plants is completed, in 2007/08, or later.

The following table displays an estimate of canola crush margins for the past 16 years. It does not show the precise crush margin achieved by any one company or plant, as it uses a derived price for the crush plant products, rather than the actual prices for canola oil and meal achieved FOB any particular plant. It does show the general level of the crush margins, and is especially useful for comparisons over time. As shown by the light blue line at the bottom of the chart, the canola crush margin has been historically high for the past 2 years, and while it dropped below $50/t. briefly, it has averaged nearly $100/t. for the period.

91 All estimates of annual capacity are based on only 330 days/yr. of plant operation, rather than the industry target of 350, to allow for unscheduled downtime and more realistically reflect the industry experience for actual production volumes. All numbers are stated in terms of canola seed input into the crush plant. 92 All estimates of annual capacity are based on only 330 days/yr. of plant operation, rather than the industry target of 350, to allow for unscheduled downtime and more realistically reflect the industry experience for actual production volumes. All numbers are stated in terms of canola seed input into the crush plant.



Table 12-2: Canola Crush Margins – August 1990 to July 6, 2006

Long time industry participants indicate the longer term average margin has been closer to the $40 to $45/t. level.

From the above information it appears reasonable to expect that the future (when the new/expanded crush plant construction is complete) crush margins will be closer to the historical average than has occurred in the past 2 years. This crush margin analysis has a significant bearing on the later analysis of whether a small crush plant integrated with the biodiesel plant will be economic in the future.

12.4 Canola Crush Plant Products Almost all plants produce fully refined food quality canola oil and commodity canola meal. Some plants, such as Associated Proteins and Bunge Canada’s plant at Fort Saskatchewan, AB do not have any refining capacity and sell crude degummed canola oil. Associated Proteins sells a high oil canola meal due to not having solvent extraction processing capability.

The refined oil has been bleached and deodorized and is estimated to sell for several cents/kg more than the crude degummed oil.

Canola crush plant oil products are marketed predominantly into the food industry.

The most important export market for canola oil and meal is the United States, while the most important raw seed export destinations are Japan and Mexico.



Canola oil's market share has grown in the US, from zero to between seven and eight per cent over the past 10 years. The United States is a regular market for more than 60 per cent of the canola meal produced in Canada.

In Japan, more than 50 per cent of the vegetable oil consumed is produced from canola seed.

Mexico is also a steady and growing customer, which depends on canola to meet 25 per cent of its consumers needs. Meanwhile, consumption of canola meal in Mexico has increased from five per cent just five years ago to over 10 per cent today. During this growth in market penetration, canola meal has displaced corn gluten, fishmeal and soybean meal.

China is an intermittent customer, but, with its growth, has become an important focus of the industry’s market development work.

The export markets for canola oil and meal are shown in the following tables.

Table 12-3: Canola OIL Export Markets

Canadian Canola Oil Exports Crop Year - August 1st to July 31st

Source: Cereals & Oilseeds Review - Statistics Canada (000 Tonnes)

1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05South Korea 5.2 39.9 107.4 47.5 17.5 65.4 32.9 - 12.6 23.59Europe - - - 1.0 - - - - 0.5 0.43Japan 3.7 24.3 32.8 8.6 2.1 3.6 9.3 2.5 4.9 41.40Pakistan - - - - - - - - 2.0 0.70India 8.5 5.6 14.6 20.0 24.0 - 6.9 8.1 0.5 -Hong Kong 70.4 120.0 181.2 125.7 58.1 130.5 4.5 1.9 5.0 15.54China 41.3 62.1 71.1 63.0 17.5 17.2 7.2 20.3 114.1 180.40U.S.A. 390.0 424.4 418.9 409.6 456.1 540.5 506.4 446.0 536.3 522.20Others 30.5 18.8 55.9 103.0 52.8 67.8 14.8 35.1 43.2 111.06TOTAL 549.6 695.1 881.9 778.4 628.1 825.0 582.0 514.1 719.1 895.31

Table 12-4: Canola MEAL Export Markets

Canadian Canola Meal Exports Crop Year - August 1st to July 31st


1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05Europe 52.5 40.8 20.0 25.5 39.1 - - - 31.3 41.4Japan 111.1 120.6 26.3 23.8 1.0 16.0 0.3 1.5 - 4.9Pakistan - - - - - - - - - -Indonesia 37.2 - 11.1 - - - - - - -Taiwan 5.8 4.8 0.8 10.7 19.4 5.2 1.0 2.1 35.9 18.5South Korea 76.9 34.9 49.8 56.2 - - - - - -U.S.A. 874.3 849.3 1,223.0 1,134.5 1,077.0 1,113.8 791.9 826.6 1,485.1 1,328.4Others 56.9 36.9 88.0 8.1 3.0 0.3 5.9 0.2 18.1 20.7TOTAL 1,214.7 1,087.3 1,419.0 1,259.0 1,139.0 1,135.1 799.4 830.4 1,570.4 1,413.9



It is expected that canola oil use will continue to increase over time, in the human food market, for three key reasons:

1. Food processors and food service industries around the globe are adopting high stability character-trait canola oil for its functional and health qualities. The current anti-trans fats trend has spurred companies to switch to the more healthful canola oil. These new high stability low lin oils do not require hydrogenation.

2. Increased use of canola oil generally in the US due to the health claim that has been approved on October 6, 2006. Canola oil is high in healthy unsaturated fats (93%), free of cholesterol and trans fat, and the lowest in saturated fat (7%) of any common edible oil.

3. Due to growing concern about the impacts of trans fat consumption on cholesterol levels, the food processing and convenience food services sectors in North America are seeking alternatives to partial hydrogenation. Fortunately, due to the pioneering plant breeding efforts of two major players in the canola industry, there is a new canola option – high-oleic canola oil that is naturally stable that meets functionality and shelf-life needs without partial hydrogenation.

To date the canola varieties that produce the highly stable oils have lower yields for farmers, so there is a reluctance to grow these varieties unless there is a premium price offered for the canola seed. Thus, these varieties, to date, do not appear to have a competitive advantage relative to varieties with higher yields that do not produce the heat stable oil.

When addressing the topic of growing demand from the human food market, it is necessary to note that there will be increases in production of canola, both in Canada and the US, due to several factors, including:

1. Research programs aimed at increasing yields (tonnes/acre)

2. Research to increase oil yield (above the 40% yield currently being averaged by crush plants, with some new varieties expected in the 44% oil range, and some indications that 50% may be achievable in the not too distant future)

3. Increased acres in the traditional canola growing areas due to expected higher prices from the combined pressures of lower crush margins (increasing farm gate prices) and higher vegetable oil prices in the global marketplace due to the increased demand from biodiesel)

4. Increased acres in non-traditional growing areas in the US, for both spring seeded varieties (which are like those grown in Canada) and from winter varieties that researchers are developing for more southerly areas of the US

Based on consideration of all these factors, it appears reasonable to anticipate strong demand in the marketplace as well as significant increases in the total canola supply from Canada and the US.

The markets for canola meal production are described in the later section on meal markets.

The purchase terms for customers buying canola oil vary significantly. In some cases, longer term commitments are made to take specified volumes with longer term pricing agreements. In most cases there are seasonal or yearly agreements, as well as spot purchasing. The Canola Council of Canada publishes historical canola oil pricing information as shown in the previous section. Many of the pricing agreements are partially based on soy oil traded on the Chicago Board of Trade (CBOT) and or canola seed prices on the Winnipeg Commodity Exchange. This allows the customer to use these futures markets to hedge their canola oil costs, at least to some extent.



The specific terms that each biodiesel plant customer will arrange with a canola crush plant will vary. Longer term arrangements will only be possible if the canola crush plant is very confident in the financial and managerial strength of the new biodiesel business.

In the EU and the US a number of biodiesel businesses have formed strategic alliances with a crush business in order to get an assured supply and to purchase oil at a lower cost than if they had built their own small canola crush plant. It appears that this is an increasing trend for the most efficient biodiesel businesses.

12.5 Competitive Analysis of the Crushing Business If a modest or small size crush plant is built along side a biodiesel business, the small crush plant will lack economies of scale relative to the large competitive crushing plants. The definition of what size is small can best be seen by examining the previous table with the list of existing canola crush plants and the previous listing of the canola crush plants to be expanded and new plants to be built.

A key negative impact from lack of economies of scale is that a small crush plant is not likely to be able to justify the installation of solvent extraction. As noted in the earlier section, if a canola oil crush plant does not utilize solvent extraction, it faces the competitive disadvantage from losing a large portion of the total crush margin. A lack of economies of scale also increases labour costs per tonne of oil and meal produced.

If the recent high crush margins, in the range of $100/t, and more, were going to last for an extended period, the inefficiencies noted above might be more than overcome by the high crush margins. But, with the expansion in crush capacity that is planned, the crush margins are expected to become competitive and tight.

If some of these economies of scale disadvantages can be overcome by integrating with a biodiesel refinery, and sharing management, overhead and other costs, then it may be possible to build a smaller canola crush plant that is competitive. Also, an integrated crush plant and biodiesel refinery benefit from being able to better assure future access to feedstock supplies, perhaps by having canola producers become owners/investors in the new business. This may allow a smaller canola crush plant to be feasible.

Integrated crush plants and biodiesel refineries need to confirm that they have a future feedstock supply, and that they also confirm markets and prices for their products; in order to minimize production costs and mitigate potential declining operating profits resulting from rising feedstock costs.

The individual circumstance will vary and each proponent of a new biodiesel business in Manitoba must conduct their own detailed analysis.



13.0 Biodiesel Fuel Quality Standards In the US and Canada, the ASTM specification for biodiesel is ASTM D 6751. It is known that biodiesel plants can be built to operate efficiently and produce biodiesel of consistent high quality, if good quality assurance practises are implemented. Canola oil will produce biodiesel with the most competitive characteristics in two key areas: lubricity and cold flow properties. The quality of biodiesel is a concern for the US and Canadian industry. Biodiesel is not yet fully accepted by all segments of the petroleum sector and diesel fuel users. Because of this, meeting the ASTM D6751 standards is also important for marketing reasons.

ASTM Standards

The most important aspects of biodiesel production to ensure trouble free operation in diesel engines are:

• Complete reaction

• Removal of glycerine

• Removal of catalyst

• Removal of alcohol

• Absence of Free Fatty Acids

These parameters are all specified through the biodiesel standard, ASTM D 6751.

Specifications for biodiesel have been implemented in several countries around the world, most notably in the US, through the American Society of Testing and Materials (ASTM), and in Europe through the European Committee for Standardization (CEN). The relevant committees of these groups that oversee fuel specification development, including standards for biodiesel, are comprised of automobile and engine manufacturers, refining companies, biofuel producers, government entities and other fuel users who agree by consensus on specifications to help ensure good quality fuels for safe and satisfactory operation of vehicles and engines.

The ASTM specification defines biodiesel as a fuel comprised of mono-alkyl esters of long-chain fatty acids derived from vegetable oils or animal fats. Raw vegetable oils and animal fats that have not been processed do not meet biodiesel specifications. According to the National Renewable Energy Laboratory (NREL), raw or unrefined vegetable oils and greases used in combustion ignition (CI) engines at levels as low as 10% can cause problems including long-term engine deposits, ring sticking, lube oil gelling, which can reduce the engine’s useful life93. These problems generally stem from these oils’ greater thickness, or viscosity, compared to that of typical diesel fuels for which the engines were designed. These problems are avoided through the refinement of these oils in the biodiesel production process. Moreover, the ASTM specification is for biodiesel as a blendstock for blending into petro-diesel, and is not meant to be a specification for B100 as a stand-alone fuel. Note that ASTM standards are not laws in and of themselves; however, many states adopt ASTM standards and transpose them into law. As it pertains to the biodiesel specification, only a few have done so at this time, such as Minnesota.

ASTM International has changed its specifications of the standard from time to time, such as a new standard for biodiesel that will help ensure that biodiesel blends of up to 20 percent will be compatible with future diesel exhaust emissions technology. The new standard, D 6751-06a, adds new limits on calcium and magnesium, which can be introduced during the biodiesel manufacturing process.

93 National Renewable Energy Laboratory, 2006 Biodiesel Handling & Use Guidelines, DOE/GO-102006-2288 (Mar. 2006)



The new changes address the potential of small levels of calcium and magnesium to accumulate on particulate traps. Previous changes to limit sodium and potassium, used as catalysts in the biodiesel manufacturing process, passed earlier in 2006. Particulate traps are needed to meet EPA 2007 emissions standards, which reduce particulate matter by more than 90% from new diesel engines.

Although the changed specification covers pure biodiesel, the majority of original equipment manufacturers (OEMs) view the adoption of an ASTM blended fuel specification as a key component for full, universal acceptance of B20.

A copy of the ASTM D6751 specifications can be obtained for a fee from the ASTM web site at www.astm.org. The first D6751 was approved in December 2001 and is being regularly updated. As at late 2006 a proposed set of changes are being discussed to reduce potential contaminants. These changes are likely to be accepted shortly.

BQ9000 Certification

In addition to the ASTM product specifications, the National Biodiesel Board of the US and the Canadian Renewable Fuels Association in Canada have adopted the National Biodiesel Accreditation Program. It is a cooperative and voluntary program for the accreditation of producers and marketers of biodiesel fuel called BQ-9000. The program is a unique combination of the ASTM standard for biodiesel, ASTM D 6751, and a quality systems program that includes storage, sampling, testing, blending, shipping, distribution, and fuel management practices. BQ-9000 is open to any biodiesel manufacturer, marketer or distributor of biodiesel and biodiesel blends in the United States and Canada. Independent auditors assist businesses to establish the quality assurance processes in all areas before they can become certified.

BQ-9000 certifies companies have a competent quality system and tests their biodiesel product on an ongoing basis to assure conformance with ASTM (American Society of Testing and Materials) D 6751. It then allows the company to promote that they are a “Certified Marketer” of the BQ-9000 program of the NBAC. Biodiesel producers and marketers recognize the market advantage of being BQ-9000 certified.

BQ-9000 is North America’s biodiesel quality assurance program. Detailed information is available at www.bq-9000.org/ and from the Canadian Renewable Fuels Association at www.greenfuels.org/.

BQ-9000 helps companies improve their fuel testing procedures and reduces the chance of producing or distributing out-of-spec fuel. The program is a unique combination of the ASTM standard for biodiesel, ASTM D-6751; and quality control system that includes storage, sampling, testing, blending, shipping, distribution, and fuel management practices.

As at December 1, 2006 there were three BQ-9000 certified biodiesel marketers and 14 accredited biodiesel producers. They accounted for more than 40 percent94 of the biodiesel production capacity in the US and Canada.

European EN 14214

In Europe, EN 14214 establishes specifications for fatty acid methyl esters for diesel engines. In contrast to ASTM D 6751, B100 that meets this standard can be used unblended in a diesel engine (if the engine has been adapted to operate on B100) or blended with diesel fuel to produce a blend in accordance with EN 590, the European diesel fuel specification. Blends up to 5% of Fatty Acid Methyl Ester (FAME) are allowed in diesel fuel defined by EN 590, which allows for B5 blends to be considered as standard diesel 94 Biodiesel Bulletin, Dec. 4, 2006, National Biodiesel Board

http://www.astm.org/

http://www.bq-9000.org/

http://www.greenfuels.org/



fuel requiring no special markings at the pump. EN 14214, is more restrictive and applies only to mono-alkyl esters made with methanol, fatty acid methyl esters (FAME). The minimum ester content is specified at 96.5%. The addition of components that are not fatty acid methyl esters – other than additives – is not allowed.

Reports of biodiesel not meeting specifications in Europe, or “off-spec” biodiesel, are a rare occurrence. However, past surveys of B100 fuel quality by vehicle equipment manufacturers such as Bosch have highlighted relatively high instances of biodiesel being out of specification on oxidation stability and/or CFPP. As a result of such findings, a group of manufacturers and distributors of biodiesel in Germany and Austria have formed the “Arbeitsgemeinschaft Qualitätsmanagement Biodiesel e. V.” (AGQM) (Working group for Biodiesel Quality Assurance).

Compliance with the mandatory standard and additional voluntary quality criteria and requirements are ensured by an extensive quality management system extending from the raw material to the tank of the biodiesel customer. Of approximately 17,000 filling stations, some 1,700 sell biodiesel and of these, over 1,300 stations have adopted the AGQM quality assurance system under a brand license contract. The owners of these filling stations have pledged to comply with the standards and requirements of the AGQM. This also includes a mutual pledge that only biodiesel based on rapeseed oil methyl ester will be offered for sale at public filling stations. This is due to the fact that several vehicle manufacturers only approve rapeseed methyl ester (RME) for use in their vehicles. The pumps of the participating filling stations are marked with a special symbol showing a yellow drop in a green “Q”.

The table below shows diesel and biodiesel specifications for both the U.S. and EU.



Table 13-1: Quality Specifications for Diesel and Biodiesel in the U.S. and EU95

95 See Hannu Jääskeläinen, Biodiesel Fuel Standards, featured on DieselNet and citing ASTM and CEN standards.



Table 13-1 (cont’d): Quality Specifications for Diesel and Biodiesel in the U.S. and EU (Cont’d)

Source: DieselNet, citing ASTM and CEN standards.

The table below explains the purpose and importance of the ASTM specifications in D 6751.



Table 13-2: ASTM Specifications and Their Importance

Source: NREL, Biodiesel Handling & Use Guidelines, 2006.

Other countries have adopted biodiesel specifications also and include Canada, Brazil and Australia.



Minnesota Quality Issues

The state of Minnesota was the first in the US to require diesel fuels sold in the state to be blended with biodiesel at 2% by volume. The state had quality problems during the winter of 2005-06.

As a result of this problem, the National Biodiesel Board (NBB) and the Minnesota Biodiesel Council (MBC) presented an action plan in January 2006 to the Minnesota Department of Commerce (MDC), the state authority charged with enforcing the B2 program, to increase quality control. The measures proposed include:

• Requiring all biodiesel producers to become accredited under the voluntary BQ-9000 quality

• Requiring a certificate of analysis for each batch of biodiesel fuel produced;

• Developing additional tests to confirm cold weather compatibility of the biodiesel and blends, such as the one referred to as the “cold-soak filter test”. In this test a biodiesel sample is chilled for 16 hours, warmed to room temperature and timed while being filtered. It is a fairly accurate indicator of fuel that would have unacceptable cold flow properties; and

• Requiring stronger enforcement procedures from the MDC, including suspensions and fines for producers that sell off-spec fuel.

Additional measures that were also identified as having the potential to prevent further cold flow problems include96.

a) Use of additives. Additives are blended in doses far less than 1% by mass mainly due to cost, in order to improve cold flow performance.

b) Chill biodiesel, remove solid and gelled saturated fractions – leaving unsaturated fractions behind. Cold flow characteristics of biodiesel can be improved by removing solids from a chilled volume of the fuel – dry fractionation (winterization). This is done be cooling it down, filtering it, and discarding the solid material. The solids are the saturated esters and the remaining liquid is mainly unsaturated esters. Thus, this technique changes the fatty acid profile and makes the combustion properties worse by lowering the cetane number.

c) Choice of alcohol. A producer’s choice of alcohol for the reaction process during production can also affect the resulting esters’ cold flow characteristics. Structures of the fatty compounds that make up biodiesel can be altered during the production process by using alcohols other than methanol to branch the fatty acid esters. Replacing methanol with isopropyl or ethanol would be beneficial in terms of cold flow.

d) Choice of feedstock. Choices in feedstock & conversion process alcohols have consequential effects on the resulting biodiesel’s cold flowability. Soybean oil, canola oil and mustard oil typically have 15 to 20% saturated esters by mass. Tallow may have 40 to 45% saturated esters (palmitic or steric), which are very high melting point-type esters. Feedstock is the main variable when looking at cold flow properties of biodiesel. Canola oil has been confirmed by the industry as having the best cold flow properties compared to soy, palm and other feedstocks.

e) Heated storage and use – e.g., park buses and trucks inside.

f) Biodiesel must be kept at 10 degrees above its cloud point upon blending with diesel fuel for a successful blend.

96 Biodiesel Magazine, October 2005.



g) In Minnesota, Magellan’s terminals (a significant biodiesel distributor/blender) are either heated or insulated – the B100 tanks are kept at 60 degrees. Proportional or injection blending is the only recommended blending practice in freezing temperatures. The sequential, or splash, blending of warm biodiesel with colder diesel fuel can cause thermal shock, or severe and instant crystallization of the biodiesel. Additives are also blended at the terminal.

Manufacturers Warranties

Many manufacturers have now gained considerable experience with biodiesel in the EU and the US. For instance, all vehicles in Minnesota utilize biodiesel blends without warranty problems. A regularly updated list of original equipment manufacturers (OEMs) and their positional statements is available on the US National Biodiesel Board Web page at http://www.biodiesel.org/.

In view of the high level of interest in biodiesel blend fuels, auto and engine manufacturers will continue to investigate how to achieve appropriate quality for biodiesel-containing fuels in the marketplace.

In the US, the position of most automakers is that biodiesel blends up to 5% (and in some cases up to 20%) is acceptable as long as it meets D 6751. The American Trucking Association has also approved B5. Many are concerned about blends higher than 5% because of quality and stability and want a B20 ASTM standard. Of course, manufacturers do warrant their products against defects associated with materials and workmanship and the use of biodiesel in and of itself does not void the warranty – this is prohibited by a federal law known as the Magnuson-Moss Warranty Act.

The table below summarizes the position statements and recommendations on biodiesel usage. Table 13-3: OEM Positions and Recommendations on Biodiesel Usage

Source: IFQC Biofuels Center

For a source of ongoing updated information on warranties, see the NBB, Fact Sheet: Standards & Warranties, available at http://biodiesel.org/resources/fuelfactsheets/standards_and_warranties.shtm. It provides current information on the major engine and vehicle/equipment manufacturers in the world, and notes that, “With biodiesel that meets the D-6751 specification, there have been over 45 million miles of successful, problem-free, real-world operation with B20 blends in a wide variety of engines, climates, and applications”.

http://www.biodiesel.org/

http://biodiesel.org/resources/fuelfactsheets/standards_and_warranties.shtm



Biodiesel Testing

A variety of tests are required to provide assurance of biodiesel fuel quality. An example of the tests is available at www.biodieseltesting.com/tests.php. This company provides a package of tests in their “Biodiesel Fuel Quality Assurance Standard as per ASTM D6751”, which are designed to evaluate if the biodiesel conforms to ASTM D6751. The package includes 15 separate tests including: Total Acid Number, Free and Total Glycerine, Distillation Temperature, Cetane Number, Cloud Point, Flash Point - Pensky Martens, Sulphur by UVF, Phosphorous, Sodium – Potassium, Calcium – Magnesium, Bottoms Sediment & Water, Sulphated Ash, Carbon Residue, and Copper Strip Corrosion Rating. A total of 28 separate quality assurance tests are offered.

Testing biodiesel is expensive, with a single package of tests to confirm that the quality meets ASTM D6751 costing up to $1,000 in US labs. For a small volume biodiesel plant, producing 2 MMly, (or 6,060 l/day if operating 330 days/yr) a daily test would cost $0.165/l, which is clearly not realistic. Small plants will need to accumulate batches several days’ production and then test that larger volume in the batch, to reduce testing costs.

The Saskatchewan Research Council (SRC) officially opened its Biofuels Test Centre in Regina in September, 2006. The SRC test centre is a fully-qualified and accredited facility which will offer fast and reliable tests to the biofuels industry on a fee-for-service basis97.

The Province of Manitoba has been considering the establishment of a testing capability within the Province that will provide full and reduced specification testing as well as blended fuel testing at a lower projected cost than current market rates.

97 Canola Council’s Diesel Digest, Vol. 1, Issue 11, September 28, 2006.

http://www.biodieseltesting.com/tests.php



14.0 Blending The chemical nature of biodiesel allows it to be blended98 with any kind of distillate, or diesel fuel. This includes light fuels such as jet fuel, kerosene, No.1 diesel, or military fuels (JP8, JP5), as well as normal diesel fuel like No. 2 diesel for diesel engines or gas turbines, and heating oil for boilers or home heating. Once biodiesel is blended thoroughly with diesel fuel, it stays together as one fuel and does not separate over time (assuming the fuel is maintained at temperatures above its cloud point).

Blending of biodiesel can occur via three primary means:

1. B100 splash blended with diesel fuel by the end user.

2. Blended (via a variety of means) by a jobber or distribution company and offered for sale as a finished blend, usually B2 to B20.

3. Blended at a petroleum terminal or rack by a pipeline or terminal company and offered as a finished blend. This product is sold directly to customers or to a petroleum jobber or distribution company for further sale to customers.

Splash Blending. Splash blending is an operation where the biodiesel and diesel fuel are loaded into a vessel separately with relatively little mixing occurring as the fuels are placed in the vessel. The vessel is usually an individual vehicle fuel tank or a fuel delivery truck, although in come cases it could be a drum or a tote. Once the fuels are in the vessel, driving down the road is regarded as sufficient agitation to allow the biodiesel and diesel fuel to become thoroughly mixed. Usually this approach is successful, but on occasion difficulties in mixing can be encountered if the biodiesel is loaded into the vessel first under very cold temperature conditions.

In-Tank Blending. In-tank blending is where the biodiesel and diesel fuel are loaded separately, or, in some cases at the same time through different incoming sources, but at a high enough fill rate that the fuels are sufficiently mixed without the need for additional mixing, recirculation, or agitation. In some cases this is similar to splash blending but without the need to drive up and down the road. In other cases, the tank may need to be recirculated or further mixed in order to get the two fuels thoroughly blended. Since biodiesel and diesel fuel mix easily and completely, in tank blending is sufficient to get a homogeneous blend in many cases, depending on the exact means of adding the fuel, the tank geometry, etc.

In-Line Blending. In-line blending is where the biodiesel is added to a stream of diesel fuel as it travels through a pipe or hose in such a way that the biodiesel and diesel fuel become thoroughly mixed by the turbulent movement through the pipe—or by the mixing that occurs once the fuel is loaded into its receiving vessel. The biodiesel is added slowly and continuously into the moving stream of diesel fuel via a smaller line inserted or ‘Y’ in a larger pipe, or the biodiesel can be added in small slug or pulsed quantities spread evenly throughout the time the petrodiesel is being loaded. This is similar to the way most additives are blended into diesel fuel today and is most commonly used at pipeline terminals and racks. In some cases, distributors who carry B100 and petrodiesel in separate compartments and blend the two as they are loading into a customer’s tank also use this method.

In general, blending biodiesel is not difficult if the following facts are kept in mind:

• The more mixing the better

• Biodiesel is slightly heavier than diesel fuel.

98 Source: 2004 Biodiesel Handling and Use Guidelines, U.S. Department of Energy, Office of Scientific and Technical Information http://www.ntis.gov/ordering.htm




Biodiesel has a specific gravity of 0.88 compared to No. 2 diesel at 0.85 and No. 1 diesel at 0.80. So if the biodiesel is put in an empty tank and then diesel fuel is poured slowly on top, it may not blend properly, if at all. Since the biodiesel is heavier, it may stay in the bottom of the tank in a layer of mostly biodiesel. Most pumps draw from the bottom of a fuel tank, and if not properly mixed this bottom layer can contain high concentrations of biodiesel. The problems generally manifest themselves in cold months, as the high concentration biodiesel fuel starts to freeze, plugging filters and forming a gel layer at the bottom of above ground tanks.

There are two simple tests that can be performed to see if a tank has been thoroughly mixed.

1. A top, middle, and bottom sample of the tank (see ASTM D405712 for the proper way to take a representative sample of a tank) can be taken and analyzed for the percent biodiesel using infra-red spectroscopy or by measuring the specific gravity or density. See the National Biodiesel Board at www.biodiesel.org for further details.

2. Put the samples from the three layers in a freezer with a thermometer and check every 5 minutes until the fuel in one of the samples begins to crystallize. Record that temperature. Then, check every couple of minutes or so until all three samples show crystallization. Compare the crystallization temperatures on all three samples. They should be within 5-6°F (3°C). If not, the fuel will require agitation to mix thoroughly.

Regardless of the blend technology, manufacturers and others need to answer the following questions to figure out their blending strategy:

• How is the B100 being shipped, particularly in the winter months (B100, B50, B20 or lower blends such as B2)? Can your customer handle all or just some of those options? Are summer deliveries different, and if so, how? How does that affect your blending and storage system?

• What products are your customers making, B20 or B5 or B2 or what level of blend?

• How much tankage do you have or can you afford? How much space is needed to serve customer requirements if there are seasonal variations in volume for each customer? E.g. fuel dealers for farmers with large seasonal variation versus highway trucking companies with quite consistent volume requirements? Or, only sell to biodiesel marketers/distributors that take all the volume producer year round, and undertake the work of finding customers to offset the seasonal variation?

• How much do you want to spend on equipment, heat, pumping, labour, training, problem solving versus finding a direct customer such as a biodiesel marketer or distributor that performs all those functions with the final customers?

• What other requirements do your customers have? Customers will test to determine whether or not the specified quality specifications are being delivered. As a biodiesel manufacturer can your quality assurance program meet that standard time after time, even with personnel turnover and other operational challenges?

Cold weather blending is a concern in climates where the diesel fuel temperature falls below the cloud point of the B100 being blended. The first thing to keep in mind is that there should not be a problem if the diesel fuel temperature is above the cloud point of the final blend. If crystals do form during blending, they should go back into solution so long as the temperature of the blended fuel is above the cloud point of the blend. This process can be assisted by blending equipment that agitates the two fuels during blending. That agitation helps disperse the fuels and crystals more uniformly and can provide some energy to help the crystals dissolve.

It is best to blend biodiesel with diesel, at lower level blends like B2 or B5, rather than to store B100. B100 does not store as long as blends and there are always cold weather factors to consider.




A sample of biodiesel should be taken and retained from every batch produced and from every shipment. For customers, it is always a good idea to retain a sample (one gallon) of the petrodiesel and the B100 before blending the fuels (see BQ-9000 procedures). Once the customers have run through the current batch of fuel with no problems, the samples can be disposed of by mixing them into the new batch of fuel. If any problems arise, these samples will help determine whether they were caused by the fuel or by something else.

Some distributors in northern climates have followed a protocol of filtering biodiesel blends before final delivery to customer (retail outlets or businesses/farms) tanks. This is thought to prevent clogging of the refuelling pump filter caused by crystallized saturated fatty acid methyl esters that can form if the petroleum diesel is too cold during blending.



15.0 Distribution Existing Diesel Fuel Distribution System in Manitoba

To understand the Manitoba market potential for biodiesel, it is necessary to understand the distribution system for diesel fuel in Manitoba. All diesel fuel distributed in Manitoba moves by one of three routes:

1. By pipeline from Alberta to the two tank farms (Esso and Shell) on the east and north-east side of Winnipeg. From there it moves by tanker truck to all customers in Manitoba and NW Ontario. This is the dominant source for all companies that retail fuel in Manitoba and NW Ontario.

2. Enbridge pipeline terminal at Gretna which serves only Esso bulk distributors in south and eastern Manitoba as well as US customers, and

3. For the Federated Coop Ltd (FCL), retail outlets on the west side of the province (as far east as Brandon and Ste. Rose du Lac) the diesel moves directly by tanker truck from the FCL refinery in Regina.

Bulk fuel distributors move their fuel, in their own trucks or via contract haulers such as Paul’s Hauling or Trimac, from the tank farms to their retail outlets or to customers’ storage tanks. All the major oil companies have distributors for all regions of Manitoba. Typically these are franchise operations with an on-site owner as the general manager. These franchise operations do not have the ability to decide to handle any new product, unless the major oil company approves it. Thus, the franchise distributors for the major oil companies will not be allowed to handle biodiesel without oil company approval.

This distribution system is very efficient and low cost. However, it means that unless Esso, Shell and/or FCL decide to become a direct customer for biodiesel, no biodiesel will be sold through any retail or bulk outlets in Manitoba. The only potential for biodiesel distribution in Manitoba is if independent distributors/retailers are persuaded to do their own blending of B100 biodiesel into diesel which they buy from Esso or Shell.

Research with several industry people has confirmed that the oil co's are not going to become customers in the near future, unless there is a legislated mandate. This due to two business reasons:

1. The oil co’s make a significant portion of their profits from their refining margins and do not wish to lose volume by purchasing someone else’s biodiesel; which reduces the volume of their diesel being processed through their refinery.

2. They have challenges in meeting the requirements to refine the new ultra low sulphur diesel (ULSD) being introduced in 2006, and have concerns about how biodiesel will interact with the new ULSD diesel, including the cold flow properties of this new ULSD product.

The biofuels industry experience with ethanol, in a number of countries around the world, has shown that a government legislated mandate is typically required before the oil companies begin to distribute biofuels.

Distribution Prior to a National RFS

Therefore, until there is a Renewable Fuel Standard (RFS) with a mandate that requires biodiesel to be blended into the existing diesel fuel distribution system, the potential volumes that can be distributed are modest.

Until there is an RFS mandate, the following distribution options are all that exist:

• Sales of small volumes of B100 biodiesel to customers who will undertake their own blending. Some of these types of customers include parks, school buses, Dept. of National Defence, maritime operators, government departments that have been directed to use biofuels, environmentally



motivated corporations such as trucking companies and others participating in the BC Fleet Challenge. Manitoba Hydro is a good example of a corporation with motivation to undertake fleet pilot projects. However, while this is a good preliminary marketing activity to create awareness in the marketplace, the volumes that can be sold to such customers are limited. Most customers are not willing to make the investment in B100 storage and blending facilities, preferring instead to purchase a blended product.

• Some groups have considered getting into the fuel distribution business. This would involve the biodiesel manufacturer buying petrodiesel from Esso or Shell, establishing the storage for B100 and petrodiesel, investing in the blending and testing infrastructure, and then distributing the B2 or B5 or B20 blend to customers. However, analysis of the distribution business shows that the existing distribution system, which delivers diesel from the Esso and Shell tank farms to customers (farmers, contractors, truckers, school bussing, DND, parks, etc) storage tanks, operate on a very narrow margin of only a few cents/litre. The extra costs incurred by a biodiesel blended fuel distributor might double their costs compared to the existing diesel distribution businesses. Also, these existing businesses would not give up their customers easily. And, if they began to lose any significant volume they would likely get support from their suppliers, Esso and Shell to not lose the diesel volume to biodiesel. For these reasons, it is not recommended that biodiesel manufacturers become fuel distributors.

• Possibly selling B100 to one or more independent fuel distributor/retail businesses that wish to target ‘green’ customers and create a niche brand image for their distribution company. Independent fuel distributors might be prepared to blend biodiesel with the petrodiesel they buy from Esso or Shell. These volumes have the potential to be a small share of the total market volumes because the independent distributor/retailers only have a small market share. If several independent distributors could be attracted to install blending equipment and facilities, the total volume for all of Manitoba might perhaps be up to 1 MMly under the current incentive policies and perhaps up to 2 MMly if the incentives were available for the agriculture and off-road markets as well as for on road markets. These volumes are very small, and would not be sufficient for a biodiesel plant to have any economies of scale if it sold only in this market segment.

• Export markets in the US. Or, in the future, possibly to the EU.

In Manitoba, as at late 2006, the volumes of biodiesel being produced and sold are minimal.

In Canada, the only significant commercially operating biodiesel manufacturing plant in Canada is Rothsay’s 35 MMly plant in Montreal. Almost all of its biodiesel is sold into the US market.

BC Fleet challenge sources much of its biodiesel volume from the US.

Distribution After An RFS is Implemented

Once the anticipated RFS is implemented (and only if it is implemented), the major oil companies will begin to distribute the mandated blend with biodiesel, just as has and is occurring with ethanol in Saskatchewan, Manitoba and Ontario.

The logistics system will likely develop to have all biodiesel manufacturers deliver the biodiesel to central locations, which will predominantly be the Esso and Shell tank farms on the east and north east side of Winnipeg. There, a centralized blending infrastructure will be installed and the biodiesel blend will move through the regular distribution system with no extra logistics costs.

For the Esso tank farm at Gretna, a small volume of biodiesel may be used to blend with the diesel which moves from that location. Depending upon the mandated biodiesel percentage blend, this could be in the ball park range of ½ million litres/year.



For FCL, there will have to be arrangements made to deliver biodiesel to the FCL refinery in Regina, if the current structure to the incentives is retained. I.e. the current 11.5 cents/litre of provincial incentive is only available for biodiesel manufactured in Manitoba. So, it would need to be Manitoba biodiesel that would move to Regina, if the current provincial incentive structure is retained. If the national announcements restructure the incentives so the biodiesel sold in Manitoba will receive the new incentive, regardless of where it is manufactured, then it may be Saskatchewan based biodiesel plants that supply FCL in Regina for the fuel shipped to Manitoba.



16.0 Biodiesel Markets

16.1 Uses for Biodiesel Biodiesel can be used in blends with diesel fuel or fuel oil as a substitute for diesel fuel or heating oil, and for a variety of other smaller volume products.

1. Diesel fuel blends: Of the 55 billion gallons of distillate fuels sold in the US each year, the single largest category is on-road diesel fuel at approximately 35 billion US gallons. This category is consumed almost entirely by over-the-road trucks99.

2. Heating oil blends: For example Bioheat100 uses biodiesel and biodiesel-blended heating oil. In the initial experience with biodiesel-blended heating fuel, odour, particulate and sulphur oxide levels were reduced as well as nitrogen oxides (NOx). There were three compelling reasons to use 5 percent biodiesel blend in heating oil in this initial market:

• It most closely fits the current supply and demand profile for biodiesel and heating oil (I.e. the greatest demand for diesel is in the summer, and the demand for heating oil is in the winter, smoothing the variability in total demand.)

• The consumer was willing to pay an extra 4 to 5 cents per gallon for renewable blends.

• A 5% blend reduced the chance of any technical problems caused by the fuel.

3. A wide variety of products: For example West Central Soy markets numerous products based on biodiesel including cutting oils, penetrating oil, lubricants, hydraulic oil, fifth wheel grease, chain bar oil, solvent, graffiti oil stain remover, asphalt release, road dust suppressant and diesel fuel additive. These products can command a premium retail price as some consumers prefer the biodegradable oil lubricant benefits101. The fuel additives, such as the diesel fuel treatment for lubricity is manufactured by a number of companies including Milligan Bio-Tech. Inc. and John Shack at Beausejour.

16.2 Quality – A Marketing Factor Quality has become a major marketing factor, as displayed by Appendix 4 which shows a news release promoted by the CRFA emphasizing the quality assurances that customers should require of suppliers.

16.3 Global, EU & US - Biodiesel Market To put the US and other markets in context as to the potential size of the biodiesel market, the following table is provided.

99 Biodiesel Magazine, Oct 2005 100 Biodiesel Magazine. Nov 2005 101 Biodiesel: Made in Manitoba (Feb. 2005, Man. Govt.)



Table 16-1: Global Petrodiesel Consumption (2003)

Global Petrodiesel ConsumptionTotal

Petrodiesel Petrodiesel % Used For @B5Consumption Transportation Transportation B2 B5 Canola Seed

(Volume in millions of litres per year) (million tonnes)World 1,125,301 626,506 56% 12,530 31,325 68.9US 214,458 139,759 65% 2,795 6,988 15.4EU 310,843 184,337 59% 3,687 9,217 20.3Canada 27,711 13,253 48% 265 663 1.5Source: International Energy Agency & authors' analysis

Biodiesel - @Transportation

The table above shows, using 2003 data, the size of the global, US, EU and Canadian diesel motor fuel consumption markets, the transportation sector portion of this total diesel motor fuel102 consumption, and the volumes of biodiesel required to supply a B2 or a B5 blend to the transportation sector only. Also shown, in the right hand column is the volume of canola seed that would have to be crushed (assuming a 40% yield of extracted oil) to provide these volumes of biodiesel. To put the canola seed volumes in perspective, the EU rapeseed crop is approximately 14 million tonnes/year and the Canadian canola crop is approximately 8 to 9 million tonnes/year.

The world (using 2003 data) requires 31.325 billion litres of biodiesel to provide a B5 blend for the transportation fuel. If other motor fuels (but not the light and heavy fuel oils) were included these volumes would approximately double. To supply this 31,325 MMly, it will require 313 biodiesel plants with 100 MMly capacity each.

In the US the market has grown due to the RFS mandate for biofuels, including biodiesel, with annual targets set by the EPA leading to the overall target for 2012. The market has also grown due to the state programs, such as Minnesota’s. These incentives have been described earlier in this report.

The United States used 214,458 MMly of diesel motor fuel in 2003; 227,000 MMly of diesel fuel in 2005 and is estimated to reach 378,000 MMly in the next 20 to 25 years.103

When all diesel fuel is included (all motor fuel plus non-motor fuel such as heating fuel, etc.) and the 2006 volumes are estimated, the total is in the range of 235,000 MMly (62 billion US gallons).

In the US, the incentives for biodiesel apply for all uses; motor fuels and non-motor fuels. Thus the estimate of 235,000 MMly is the appropriate estimate of the market volume into which biodiesel would blend. At a B2 blend for total diesel fuel use this creates a theoretical total demand for biodiesel of 4,700 MMly. At B5, it is 11,750 MMly. These numbers represent the realistic size of the potential market if all diesel distributors and retailers handle biodiesel and 2% and 5% blends are achieved in all diesel fuels.

102 The total diesel motor fuel consumption includes the diesel used in the transportation sectors and the diesel motor fuels used in the off-road sectors (agriculture, off-road construction, forestry, etc.) It does not include the light and heavy fuel oils such as heating oils. 103 Young, D., "CSU lab may turn algae into biodiesel”, Times-Call News Group, Fort Collins, CO



The nearly 8,500 to 9,500 MMly of biodiesel production capacity in 2008 (calculated in section 6.3) will require an average blend of 3.6% to 4% in all diesel fuel use in the US if the biodiesel plants are to run at capacity.

The US National Biodiesel Board has issued forecasts that US biodiesel demand will exceed 3,785 MMly by 2010104 and 7,570 MMly by 2020.

Based on the above calculations, the outlook for biodiesel demand - supply balance in the US market is a cause for concern. As recently as July 2006, it was expected that customers will be available105 for all the biodiesel that will be produced, even by the rapidly expanding and newly constructed biodiesel plants. However, the extremely rapid growth in production capacity that has occurred recently (with data in this report as at November 28), plus what is currently under construction, and may be further supplemented by proposed plants yet to have construction start, will create a production capacity that may exceed the market demand in the shorter term. In addition, the infrastructure and logistics capacity will need to expand if these large volumes are to be efficiently moved from production plants to consumers.

Further up to date research is needed by each biodiesel plant proponent on this issue before deciding whether to proceed.

16.4 Canadian - Biodiesel Market On December 20, 2006, the Federal Government announced its intention to introduce a national mandate for biofuels, incentives for production of biofuels, programs to support producers investing in biofuels plants, and support for R&D to develop technologies for the future.

The regulations that will create the mandate and incentives for biodiesel production are not yet available. The general outline of the policy indicates it will be a B2 blend by 2012.

The mandate will ensure that the oil companies which control the distribution channels will market biodiesel to the marketplace.

The volumes of diesel motor fuel used in Canada for each of the five years ending 2004 and the corresponding volumes of biodiesel that would be consumed if there was a 2% and 5% RFS mandate are shown in the table below.

104 Forecast by the Energy Information Administration of the US Department of Energy, in Food Business News, November 14, 2006, p. 10 105 Mr. Lelond Tong, a widely recognized biodiesel consultant with Marc-IV Consulting and Mr. Larry Sullivan with Delta-T Corporation, a highly regarded ethanol and biofuels technology supplier, are quoted in “Crushing Questions” Biodiesel Magazine, July 2006, p. 47.



Table 16-2: Provincial & Canadian Total106 Diesel Consumption (Biodiesel with B2 and B5 RFS)

Provincial and Canadian Diesel Consumption (Volume in millions of litres per year)

2000 2001 2002 2003 2004 B2 B5Maritimes 2,472 2,402 2,412 2,449 2,564 51 128Quebec 3,806 3,492 3,546 3,851 4,100 82 205Ontario 6,601 6,295 6,399 6,487 6,890 138 345Manitoba 846 830 809 885 972 19 49Saskatchewan 1,559 1,365 1,418 1,533 1,605 32 80Alberta 4,684 4,804 4,449 4,926 5,258 105 263British Columbia 3,150 3,151 3,211 3,282 3,473 69 174Yukon 44 49 53 49 56 1NWT 119 200 195 202 219 4 11Nunavut 99 100 51 48 39 1Total Canada 23,380 22,688 22,543 23,712 25,176 504 1,259Source: Statistics Canada

Biodiesel - @

3

2

Thus, the size of the Canadian biodiesel market for a B2 blend in all diesel motor fuels (transportation sector and off-road) is estimated at 504 MMly initially, rising to 1,259 MMly if and when the mandate is raised to a B5 level.

In Canada approximately 46% of the diesel consumed is used by the transportation sector.

If the transportation sector diesel motor fuels are the target for the incentive systems that are implemented in Canada (as is the case in November 2006 with the tax relief at the retail level) then the potential biodiesel market volumes would be 46% of the above numbers. I.e. The size of the Canadian biodiesel market for a B2 blend in only transportation sector diesel motor fuels is estimated at 232 MMly initially, rising to 579 MMly if and when the mandate is raised to a B5 level.

In addition to the above volumes of diesel motor fuels, there are significant volumes of light and heavy fuel oils used for residential and commercial heating oil, rail and maritime applications, etc. The 2004 sales of light and heavy fuel oils totalled 18,100 MMly107. The prices in these markets are generally 10 to 14 cents/litre lower than for diesel motor fuel. Because these are lower priced markets, they are not as attractive for the biodiesel market, and are not included in the estimate of the potential biodiesel market size.

The total Canadian consumption of all diesel (motor fuels plus the light and heavy fuel oils) in 2004 was approximately 43,300 MMly (25,200 MMly + 18,100 MMly). Thus, biodiesel mandates and incentives that include all diesel use (motor fuels and heating fuels) will create a larger market for biodiesel than shown in the right hand columns of the table above (potentially 70% larger).

Prior to a new national incentive system being implemented, the incentive system in place as at November 2006 provides incentives to customers who pay fuel taxes at the retail level. Thus, all users 106 The total diesel consumption includes the diesel used in the transportation sectors and the diesel motor fuels used in the off-road sectors (agriculture, off-road construction, forestry, etc.) It does not include the light and heavy fuel oils such as heating oils. 107 The Energy Statistics Handbook (Statistics Canada, November, 2005)



that pay the federal 4 cents/litre, will have that incentive. However, for the provincial tax relief incentive of 11.5 cents/litre, several key target markets will not get this. E.g. agriculture and off-road construction

Also, as at November 2006, the oil companies have not agreed to distribute biodiesel blends, so the market is restricted. When a national mandate is implemented, the distribution system will become available for the total potential market.

16.5 Manitoba - Biodiesel Market To date, biodiesel production in Manitoba has been limited to small and infrequent production quantities.

If a federal government policy is implemented that has a B2 or a B5 RFS mandate and has biodiesel production plant or blender incentives (i.e. incentives paid to the biodiesel plants or blenders, not at the retail level), there are two key differences. One is that the incentives will apply for biodiesel sold to off road (e.g. agriculture and construction as well as potentially for heating oils) market segments. The second is that these federal incentives will not be available for biodiesel imported from outside Canada, dramatically reducing the competition from imports compared to the situation with federal retail tax incentives which (at least for the current 4 cents/l) are available to imports.

In 2006, the statistics for the Manitoba sales of distillate fuels, from the Department of Finance, are expected to show that the Province of Manitoba would represent a market for biodiesel as follows:

Table 16-3A: Manitoba Market by Sector – 2006

Fuel Sector Litres (million)Diesel Fuel (Clear) Trucking, transit, commercial & retail 689.4 Diesel Fuel (Dyed) Agriculture, off-road 277.5 Heating Oil Commercial, residential 20.2 Total 987.1

This excludes the jet fuel, bunker fuel and locomotive markets due to technical or price issues.

This results in a potential 2006 estimated Manitoba market size of:



The table below displays the relative size of each of the Manitoba biodiesel market segments, based on 2004 data. The 2006 data above provides a more current estimate of the market size, but the table below shows the relative sizes of different market segments, e.g. Road Transport versus Agriculture.

Table 16-3B: Manitoba Diesel & Biodiesel Motor Fuel Market Segments



MB - Diesel & Biodiesel Market Size (Based on 2004)

Diesel Percent B2 B5

Road Transport and urban transit 272.6 31% 5.5 13.6Retail pump sales 122.3 14% 2.4 6.1Public Administration 70.3 8% 1.4 3.5Commercial and other institutional 52.9 6% 1.1 2.6 Short Term Subtotal 518.1 58% 10.4 25.9

Agriculture 288.2 32% 5.8 14.4Railways 87.1 10% 1.7 4.4 Subtotal 375.3 42% 7.5 18.8

Total (Longer Term) 893.4 100% 17.9 44.7

Biodiesel - @

(Volume in Millions of Litres)

Source: Statistics Canada, Report on Energy Supply-Demand in Canada 2004.

In the above table, the categories are defined as follows:

• Road Transport and Urban Transit are primarily engaged in truck transport services, in the operation of urban, interurban and rural transit systems, school buses, charter and sightseeing buses, taxis and limousine services to airports and stations. Card lock operations are also included in this category. This category of users pays both the federal 4 cent/litre and the provincial 11.5 cents/litre taxes. Therefore sales of biodiesel to this category would benefit (currently as at November 2006) from the 15.5 cents/litre of incentives in Manitoba.

• Retail Pump Sales are from retail fuel service stations. This category of users pays the federal 4 cent/litre and the provincial 11.5 cents/litre taxes. Therefore sales of biodiesel to this category would benefit (currently as at November 2006) from the 15.5 cents/litre of incentives in Manitoba.

• Public administration is defined as establishments of federal, provincial and municipal governments primarily engaged in activities associated with public administration. Examples include such establishments as the Federal Public Service, National Defence, RCMP and provincial and local administrators. NAICS code 91. This category of users pays both the federal 4 cent/litre and the provincial 11.5 cents/litre taxes under a reciprocal tax agreement that the province has with the federal government. Therefore sales of biodiesel to this category would benefit (currently as at November 2006) from the 15.5 cents/litre of incentives in Manitoba.

• Commercial and other institutional includes service industries, related to mining, transportation, as well as storage and warehousing, communications and utility (excluding electricity and natural gas), wholesale and retail trade, finance and insurance, real estate and business service, education, health and social services and other service industries. Many within this category of users pay both the federal 4 cent/litre and the provincial 11.5 cents/litre taxes. Therefore sales of biodiesel to these users within this category would benefit (currently as at November 2006) from the 15.5 cents/litre of incentives in Manitoba. However, not all users within this category will pay both taxes. Some, such as mines, will only pay the federal 4 cents/litre. Because the majority of the use in this category will pay both taxes, and because this category is only about 10% of the total diesel use, a simplifying assumption is made in the table above that all users in this category pay both taxes and that biodiesel sales to this category will benefit from the full 15.5 cents/litre incentive.



• Railways pay a reduced locomotive fuel tax of 6.3 cents/litre rather than 15.5 cents/litre. Therefore, it is assumed that under the incentive system in effect as at November 2006, biodiesel sales to this category would receive only a 6.3 cents/litre incentive.

• Agriculture includes establishments primarily engaged in agriculture, hunting, and trapping activities. NAICS codes 111, 112, 1142, 1151, 1152. Excluded are any operations primarily engaged in food processing, farm machinery manufacture and repair. Agriculture pays only the federal 4 cents/litre tax and does not pay the provincial 11.5 cents/litre fuel tax. Therefore, it is assumed that under the incentive system in effect as at November 2006, biodiesel sales to this category would receive only a 4.0 cents/litre incentive.

As described in the previous section titled, “Distribution”, it may be possible to develop short term local markets by having farmers or trucking companies or others become the owners of a biodiesel refinery business and take the biodiesel for their own use. This will require the biodiesel plant to be small.

Seasonality of Biodiesel Markets

The seasonality of consumption in Manitoba market segments for diesel and related fuels are shown in the following table108. This data is from several years ago, but it displays the higher volumes in the 3rd quarter and the lower volumes in the 1st quarter of the year for diesel motor fuels. The agriculture sector has the most variation, with the 3rd quarter volumes being nearly 2/3 more than the 1st quarter. While the fuel oil volumes are small, if biodiesel was sold into that market, it would slightly offset the seasonality in the diesel motor fuels markets. The seasonality of volumes will be a factor to consider when projecting the sales for the year. Does the biodiesel plant capacity match the peak month’s market demand and operate at less than capacity the rest of the year? Or, does the capacity match the lowest month’s market demand and not serve all the demand the rest of the year, allowing competitors to serve that higher volume?

Table 16-4: Seasonality of Manitoba Diesel and Fuel Oil Markets

Manitoba - Seasonality of Consumption

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Year(Million Litres) (Million Litres) (Million Litres) (Million Litres) (Million Litres)

Diesel fuel Total industrial 13 16.8 19.7 16 65.5Diesel fuel Total transportation 88.7 108.9 108.7 99.2 405.5Diesel fuel Agriculture 57.8 64.4 94.7 66.5 283.4Total Diesel 159.5 190.1 223.1 181.7 754.4Total Diesel Percent of Year 21.1% 25.2% 29.6% 24.1% 100.0%

Light fuel oil Total industrial 1.6 0.9 0.7 1.1 4.3Light fuel oil Agriculture 1.2 0.1 0.1 0.5 1.9Light fuel oil Residential 4.7 0.4 0.2 2.1 7.4Total Fuel Oil 7.5 1.4 1 3.7 13.6Total Fuel Oil Percent of Year 55.1% 10.3% 7.4% 27.2% 100.0% In this table the “Diesel fuel” is the diesel motor fuel and the “Light fuel oil” is the heating fuel and related uses. Source: Statistics Canada & author’s calculations – 2000 data

108 Statistics Canada



16.6 Biodiesel Prices The following figure shows the retail (excluding tax) and wholesale prices of diesel fuel in Winnipeg over 14 years. To arrive at the wholesale price, it has been assumed that the average retail margin has been Cdn 7 cents/l. The figure also shows the price of light crude oil in Edmonton. All prices are in Cdn cents/l. Note that a price of 30 cents/l for crude oil is equal to a price of Cdn.$49.09/barrel and US$43.20/barrel109 at an US$0.88/$Cdn.

Table 16-6: Retail & Wholesale Diesel & Crude Oil Prices – 1990 to 2004

Diesel Fuel Prices - Winnipeg

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Cen

ts p

er L

itre

Retail Diesel ex Tax Wholesale Diesel Crude Oil

The pricing structure of diesel fuel is generally defined at the different points in the supply chain. Crude prices are generally quoted as the index price for West Texas Intermediate (WTI) in US$, or at some other location such as Edmonton in Cdn$. After adding the refining margin the diesel is shipped by pipeline to terminals. Rack prices or wholesale prices are typically quoted at the terminal, such as the two tank farms owned by Shell and Esso on the east and north east side of Winnipeg. When transported to the retail outlet and the retailer’s margin to cover all retailing costs and profit, the price is considered to be the retail (excluding tax) price. When federal, provincial and any municipal or other taxes are added, it becomes the retail price consumers pay.

109 There are 163.65910 litres per imperial barrel (note that there are 158.98730 litres per US petro. barrel) Source: www.sciencemadesimple.net

http://www.sciencemadesimple.net/



Biodiesel manufacturers will be selling their biodiesel at the rack/wholesale price, typically quoted FOB the terminal or tank farm, such as the two tank farms near Winnipeg.

The average rack price for diesel in Winnipeg for 2004 and 2005 = Cdn 51.2 cents/l

For the months in 2004 and 2005 when the West Texas Intermediate (WTI) index crude price was between US$45 and US$50, the average diesel rack price in Winnipeg was Cdn 50.6 cents/l.

For all 2005 the average diesel rack price in Winnipeg was Cdn 59.8 cents/l.

For the last 26 weeks of 2005 the average diesel rack price in Winnipeg was Cdn 66.0 cents/l.

(Price source: Selected Crude Oil Prices - Weekly, MJ Ervin & Associates Inc.)

The US Department of Energy has issued a price outlook for 2006110 which projects a retail price per gallon of US $0.13/US gallon (Cdn $0.04 /litre) higher than the average for 2005. If this factor is applied to the 2005 the average diesel rack price in Winnipeg (Cdn 59.8 cents/l.) the projected average 2006 price would be Cdn 63.8 cents/l.

As at July 4, 2006 the retail price (excluding taxes) of diesel in Winnipeg was 77.8 cents/l. This would equate to wholesale price of approximately 70 cents/l, and a rack price of slightly less, in the range of Cdn 69 cents/l, FOB the tank farms.

Typically biodiesel is expected to sell for the same price as diesel, with the biodiesel producer receiving the tax incentives as well. However, biodiesel may sell for periods of time at a premium, or at a discount to this price. If sold into the Winnipeg market at the projected average 2006 rack price, it is expected to generate 63.8 cents/l for the diesel component plus 15.5 cents/l for the tax exemption/incentive, for a total net back of Cdn 79.3 cents/l, FOB Winnipeg.

During 2006 the estimated111 rack/wholesale price of diesel in Winnipeg varied widely during a short time period. On August 15, 2006 the estimated rack price for diesel in Winnipeg was 76.0 cents/l. Just over 3 months later, on November 21, it was 54.4 cents/l; a decline of 21.6 cents/l and over 28%.

The biodiesel manufacturing business will typically need to cover the cost of freight to this pricing point.

16.7 Biodiesel Price Outlook The outlook for future rack diesel (and thus biodiesel) prices are directly tied to the crude oil price. The West Texas Intermediate (WTI) index crude price is the typical reference price quoted (in US$) in Canada and the US.

A range from US$50 to US$70 (or more) per barrel is forecast for 2010, with general agreement that higher prices will occur after that time.

The prices that are used for projecting the profitability and feasibility of a new biodiesel business in Manitoba must be conservative if risk is to be managed and financiers are to approve financing. The financial projections may use higher prices to show owners and managers what the upside scenario could be, but conservative prices must be used if the business is going to obtain financing.

110 Milling and Baking News, January 10, 2006 issue, page 29. 111 Selected Crude Oil Prices - Weekly, MJ Ervin & Associates Inc. provides retail (ex. tax) for diesel in Winnipeg. The transportation and retailing margins have been estimated at 7 cents/l to estimate the rack/wholesale price.



17.0 Glycerine Markets Glycerine, a co-product of biodiesel production, is a clear, odourless, and viscous substance. It can be purified at the biodiesel plant site, or sold to refineries which will sell the purified glycerine as a raw material in the manufacture of other products. Glycerine has over 1,500 known end uses, including many applications as an ingredient or processing aid in cosmetics, toiletries, personal care, drugs, and food products. In addition, glycerine is highly stable under typical storage conditions, compatible with many other chemical materials, non-toxic in dilute quantities and non-irritating in its varied uses, and has no known negative environmental effects112.

Glycerine demand, supply and pricing are dictated by global market forces. As global biodiesel production soars, so does crude glycerine production. In addition, a growing oleochemical industry in Asia is adding to the glut of glycerine worldwide. Although most of this glycerine production is now being shipped to China, it further exacerbates the situation. The increased supply of glycerine has created havoc in the synthetic glycerine market and has resulted in several synthetic glycerine plants being closed in the US. In the EU, there have been offers in June/July 2006 to sell crude glycerine for free, if the customer will pay the freight to pick it up at the biodiesel plant.

The US biodiesel industry is expected to produce an estimated 1.4 billion pounds (635,612 tonnes) of glycerine valued at $289 million (US) between 2006 and 2015, according to an economic study113. According to projections, it is estimated that the biodiesel could produce as much as 200 million pounds (90, 802 tonnes) of crude glycerine in 2006. Prices for glycerine have fallen from $0.20 to $.25 (US) to less than $0.05 (US) due to the glut of glycerine on the world market. In fact, some small biodiesel producers have had to pay to dispose of glycerine because of its small quantities and varying levels of residual methanol and accompanying salts.

Although prices for crude glycerine have fallen dramatically, its floor price is its value as an energy source. In fact, many proposed biodiesel projects are considering the possibility of using their crude glycerine in various forms as a boiler fuel source in replacement of a No. 4 or No. 6 fuel oil. In addition to using glycerine as an energy source, new uses for glycerine are being investigated and may become commercialized. The National Biodiesel Board expects that glycerine will replace petrochemicals in the manufacture of some products within the next 3 to 5 years114. Study is currently underway to investigate the benefits of adding glycerine to poultry diets.

Like biodiesel itself, glycerine quality can vary greatly from plant to plant and is a great concern to glycerine refiners. The glycerine produced at Crown Iron Works biodiesel plants is typically 80% pure while the glycerine from Rothsay Biodiesel is considered to be relatively crude. However, as Rothsay scales up to full capacity, it will continue to work on improving its glycerine quality consistency.115 Crude glycerine from the Asian fatty acid markets is generally more consistent than the North American crude supply. The most consistent North American crude glycerine is typically from biodiesel plants integrated with oil processors.

Some biodiesel producers are installing glycerine refineries in their biodiesel facility. Cargill recently built a 13.6 million kg/year116 glycerine refinery at its 142 million litre/year biodiesel plant in Iowa Falls, 112 The Biodiesel Plant Development Handbook, Independent Biodiesel Feasibility Group, LLC, January 2006 113 John Urbanchuk, director of LECG Inc., cited in an article in Biodiesel Magazine, September, 2006. 114 Biodiesel Magazine, September 2006 115 Biodiesel Magazine, January 2006, p. 14 116 Press release from Cargill. February 22, 2006.



Iowa making it the first company in North America to combine soybean crushing, biodiesel production, and pharmaceutical grade glycerine production. Cargill has announced plans to build a similar facility for Kansas City, Mo. Purada Processing LLC, a World Energy wholly owned subsidiary, operates a 68MMly biodiesel plant in Lakeland, Florida with a 15 million pounds (6810 tonnes) per year glycerine refinery on site117. In addition, ADM plans to build a polyols facility that would use glycerine-based feedstocks to produce propylene glycol and ethylene glycol. In Europe, Solvay is planning to build a 10,000 tonne per year epicholorohydrin plant in France and will manufacture glycerine products to make epoxy resins, paper-reinforcing agents, and other products118.

There are very few producers/processors of glycerine in Canada – AkzoNobel in Saskatoon and Cognis in Mississauga are two recognized players in the Canadian market. In addition, Banner Pharmaceuticals has expressed interest in acquiring crude glycerine for their gelcaps.

Much of the current Canadian glycerine market is served by imports from the US. However, it must be noted that the Canadian market for glycerine is small. In fact, a 38 MMly biodiesel plant would produce approximately 4,060 tonnes of glycerol, which represents more than half the Canadian market and about 2% of the historical market for refined glycerine in the US.119.

Other companies that have been identified as marketers of glycerine including Baker Commodities120, Biodiesel Systems121, Chemrez Incorporated122, Sustainable Systems Inc.123, and West Central124.

A survey of proposed biodiesel plants in Canada and the US from June 2006125 shows that the options for glycerine marketing are becoming a larger concern. Several projects have proposed innovative solutions to deal with the biodiesel co-product. Some plants plan on using the glycerine to fire power plants. One proposed plant, Fry Away Fuels in Coates, Minnesota, is planning to blend glycerine with coffee grounds and sawdust, which will then be fired in wood-burning boilers. Other facilities are looking at ways to introduce glycerine into cattle feed.

There are many existing and new uses for glycerine including:

• Animal feed. FUMPA (Farmers Union Marketing and Processing Association) developed an animal feed, Gro Mor Hi-Torque, consisting of a blend of Central Bi Products’ hydrolyzed feather meal and the biodiesel plant’s glycerine.

117 Biodiesel Magazine Aug/Sept 2005 118 Biodiesel Magazine, September 2006 119 Biodiesel Production Feasibility Study for Durham Region, BBI Biofuels Canada. 2006 120 Baker Commodities, 4020 Bandini Blvd., Los Angeles, CA 92614. Website: www.bakercommodities.com 121 Biodiesel Systems, 2701 International Lane Suite 204, Michigan, WI 53704. Website: www.biodieselsystems.biz 122 Chemrez Incorporated, 65 Calle Industria, Bagumbayan, Quezon City, 1110 Phillippines. Website: www.chemrez.com 123 Sustainable Systems, Inc. PMB 1005, 91 Campus Dr., Missoula, MT 59812. Website : www.sustainableinc.com 124 West Central, PO Box 68, Ralston, IA 51459. Website: www.soypower.net 125 June 2006 issue of Biodiesel Magazine, pages 36 to 56.

http://www.soypower.net/



• Antifreeze. The University of Missouri has developed a process to turn glycerine into propylene glycol, a non-toxic agent that can be used in antifreeze as a safer alternative to ethylene glycol126. Recently commercialization of this process has begun which could utilize significant volumes of glycerine. ADM has announced plans to make propylene glycol from glycerine instead of propylene oxide, using new advanced catalysts127.

• Heating fuel. Redland Industries Inc. is building a biodiesel plant in Guymon, Oklahoma and plans to consume much of the plant’s glycerine internally as fuel to burn in their boiler system. The properties of glycerine, in its raw form, are similar to that of heating oil128. As with other uses of glycerine, purity is an issue. In studies that used glycerine as a fuel supplement, the less pure the glycerine the less energy value129. Moreover, incomplete combustion of glycerine can release toxins.

• Fuel oxygenate. Butoxyl glycerine is a fuel oxygenate that reduces particulate matter emissions from compression ignition engines.

• Succinic acids and succinic salts and hydrogen via aqueous phase reforming. A Succinic acid is an important industrial chemical. The quality of glycerine – both crude and refined – is key to standardizing the processes needed to refine or use the product130.

• Hydrogen. Virent Energy Systems believes that glycerine can be an energy source through aqueous phase reforming (APR). 10 pounds of glycerine can be converted to 1.5 pounds of hydrogen in Virent’s process. They can generate gas from glycerol for less than $2/kg as long as the glycerol is so inexpensive131.

• Biodegradable polymers - which can be used in products such as films, sheet, plastics, and gel-like coatings. The Agricultural Research Service’s Environmental Quality Laboratory in Beltsville, MD, discovered that glycerine from biodiesel production and citric acid can be chemically combined to produce biodegradable polymers, which could be used in produce packaging and other products. The key to this process is using unrefined glycerol specifically from biodiesel production. Citric acid is reacted with various alcohols, or hydroxyl-containing materials such as glycerol, to obtain a polyester polymer that is biodegradable, edible, and biocompatible. Other products developed include films, sheets, plastics, and gel-like coatings.

• Biogas. Glycerine can also be used in a biodigester to produce biogas

• Other uses. It is thought that replacing petroleum-based chemicals with glycerine produced from biodiesel plants would be the best solution to the coming glut of glycerine on the world market.

The quality of glycerine – both crude and refined – is key to standardizing the processes needed to refine or use glycerine132 and is the key to which markets are available. I.e. if crude (unrefined) glycerine is being sold it must be sold to refiner, rather than an end user.

126 Biodiesel Magazine Nov. 2005 127 Chemical and Engineering News, 84(6) 2006 128 BioDiesel Magazine, Nov. 2005 129 Studies done by AURI (Agricultural Utilization Research Institute) and cited in Biodiesel Magazine, Sept. 2006 130 Biodiesel Magazine August/Sept 2005 131 Biodiesel Magazine Aug/Sept 2005 132 Biodiesel Magazine Nov. 2005, page 15



The decision to include a glycerine refinery with the biodiesel plant must be made on the basis of economics. With the prices of crude and refined glycerine falling and with existing synthetic glycerine producers in the US closing, an investment in a glycerine refinery would be unwise for independent biodiesel manufacturers at this time, unless they had significant marketing expertise in this market and integrated the glycerine refinery with a large (in excess of 200 MMly) biodiesel plant. Manitoba biodiesel producers should concentrate on selling crude glycerine rather than attempting to add value to it by refining the product. Using the glycerine for fuel, biomass or in animal feed might be possible without refining.



18.0 Meal Markets Canola meal is used in beef and dairy cattle, swine, poultry, and specialty (horse, sheep and aquaculture) feeds. Based on nutrient content alone, canola meal is worth, on a unit weight basis, 65 to 70 per cent of the value of 44 per cent protein soybean meal for feeding poultry and about 70 to 75 per cent of the value of soybean meal for feeding swine and ruminants.

Canola meal is an important co-product if a biodiesel producer includes a crush plant integrated with the proposed biodiesel facility. Canola meal is used in animal rations as a protein source. However, the quality and consistency of inputs is a prime issue with feed mill operators. For any biodiesel producer to be able to sell canola meal to the feed industry, the feed industry would have to be certain that the meal quality would be on par with the meal that they purchase from other crushers. Any deviation from the standard product specifications creates a need to rebalance ingredients in each ration that is manufactured.

Smaller canola crush plants (integrated with biodiesel refineries) will need to develop local or regional markets for their meal to develop additional revenue for the business.

Most large canola crushing plants use solvent extraction is order to maximize the oil yield. However, a small canola crush plant is not likely to utilize solvent extraction due to its capital cost. The meal from such a plant would have a relatively high oil content compared to canola meal from other sources. Given that this would make it different from the majority of the canola meal a feed mill would use, they would need to handle it as a different ingredient, if they are to maximize the nutritional value. In addition, feed mills will not usually pay any premium for high oil meal products.

There is a broad range of production capacities in the oilseed crushing and biodiesel industries. As capacity increases, so does the challenge of marketing the main co-product – canola meal. To assist in putting the different sizes of biodiesel plants in perspective, the following table is provided.

Table 18-1: Canola Meal produced if canola is crushed in-house.

Biodiesel Plant Size (MM/y

Canola seed required (tonnes/year)

Canola meal produced (tonnes/year)

2 4,400 2,640 10 22,000 13,200 57 125,400 75,240

114 250,800 150,480

If a biodiesel plant is integrated with a canola crushing facility, the producer is not only in the biodiesel business, but also in the canola meal business as well. To reduce freight costs to customers, it would be advantageous to sell the meal into local markets.

In Manitoba, feed mills represent a major market for canola meal. The feed manufacturers in Manitoba include:

• Landmark Feeds Inc. (a division of Maple Leaf Foods) with mills located in Landmark, Rosenort, Otterburne, Winnipeg, and Souris.

• Puratone Corporation with mills located in Niverville, Arborg, and Winkler

• Eastman Feeds in Steinbach and Winnipeg

• Hart Feeds near Landmark, a wholly owned subsidiary of Uni-Feed



• Uni-Feeds in Carman and Somerset (owned by Agricore United)

• Masterfeeds in Dauphin

• Precision Feeds in Winnipeg

• Feed-Rite in Winnipeg, Brandon, Grunthal (Green Valley Feed Service Ltd.), Manitou, and Arborg

• Steinbach Hatchery and Feeds Ltd., Steinbach

• Cargill Ltd. in Brandon and Winnipeg

• Federated Co-operatives Limited in Brandon

• Gretna Feed Service Ltd. in Gretna

• Kola Feeds in Kola

• Hytek Ltd. in La Broquerie and St. Malo

• Neepawa Feed Mill in Neepawa

• New Life Feeds in Winnipeg

• New Rosedale Feedmill in Portage La Prairie

• FeedMax in Killarney (a subsidiary of Patterson Grain Ltd.)

Although the local livestock feed industry is a good market for canola, the majority of the canola meal produced in Canada is exported. As can be seen in the following table, there was 1,904,000 tonnes of canola meal produced in Canada of which 1,414,000 tonnes were exported.

Table 18-2: Canola Meal Supply and Demand

Canadian Canola Meal Supply and Demand - updated December 14th, 2005 Crop Year - August 1st to July 31st

Source: Statistics Canada - Cereals and Oilseeds Review & COPA Newsletter (000 Tonnes)

1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Forecast2005-06

Stocks 33.0 59.0 41.0 39.0 30.0 22.0 21.0 25.0 23.0 18.0Production 1,649.0 2,004.0 1,940.0 1,858.0 1,870.0 1,427.0 1,390.0 2,120.0 1,904.0 2,060.0Imports 5.0 5.0 4.0 5.0 3.0 3.0 20.0 3.0 2.0 2.0Total Supply 1,687.0 2,068.0 1,985.0 1,902.0 1,903.0 1,452.0 1,431.0 2,148.0 1,929.0 2,080.0Exports 1,087.3 1,419.0 1,259.0 1,139.0 1,135.1 799.4 830.0 1,572.0 1,414.0 1,550.0Domestic Utilization 540.7 608.0 687.0 744.0 746.0 632.0 576.0 553.0 497.0 510.0Total Demand 1,628.0 2,027.0 1,946.0 1,883.0 1,881.0 1,431.0 1,406.0 2,125.0 1911.0 2,060.0Ending Stocks 59.0 41.0 39.0 30.0 22.0 21.0 25.0 23.0 18.0 20.0



Table18-3: Canadian Canola Meal Exports

Canadian Canola Meal Exports Crop Year - August 1st to July 31st


1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05Europe 52.5 40.8 20.0 25.5 39.1 - - - 31.3 41.4Japan 111.1 120.6 26.3 23.8 1.0 16.0 0.3 1.5 - 4.9Pakistan - - - - - - - - - -Indonesia 37.2 - 11.1 - - - - - - -Taiwan 5.8 4.8 0.8 10.7 19.4 5.2 1.0 2.1 35.9 18.5South Korea 76.9 34.9 49.8 56.2 - - - - - -U.S.A. 874.3 849.3 1,223.0 1,134.5 1,077.0 1,113.8 791.9 826.6 1,485.1 1,328.4Others 56.9 36.9 88.0 8.1 3.0 0.3 5.9 0.2 18.1 20.7TOTAL 1,214.7 1,087.3 1,419.0 1,259.0 1,139.0 1,135.1 799.4 830.4 1,570.4 1,413.9

As detailed in the above table, Canadian canola meal is exported to Europe, Asia, and the US. Over the 10 crop years ending in 2004/05, an average of 1,185,820 tonnes of canola meal were exported from Canada, with the vast majority of it going to the US. In the 2004/05 crop year, 94% of the canola meal exports went to the US.

The historic prices for canola meal are shown in the following table.



Table 18-4: Historic Canola Meal Prices

CROP CALENDARYEAR YEAR

1983 173.73 192.53 168.77 177.98 191.59 182.85 175.44 171.13 167.12 177.901984 169.90 161.47 164.18 161.66 162.23 157.98 157.30 168.57 158.70 136.76 125.82 114.33 114.26 148.721985 111.52 110.32 109.13 105.90 103.25 105.89 105.30 116.77 101.75 100.75 110.03 122.34 131.95 109.841986 141.18 146.93 149.69 157.53 153.76 160.03 153.86 135.82 149.69 158.90 146.32 142.73 139.61 150.021987 138.10 133.36 130.84 132.58 141.69 150.52 147.77 142.68 150.45 152.93 161.44 178.30 189.91 150.661988 180.54 176.08 176.72 173.54 184.32 209.62 216.12 179.16 213.98 214.98 197.95 201.29 197.86 195.251989 199.25 191.95 188.13 189.44 181.06 176.40 179.43 194.33 166.78 161.62 157.46 159.42 160.90 175.991990 153.78 148.65 146.76 153.97 153.24 153.97 152.30 155.75 146.54 144.34 141.34 132.65 132.87 146.701991 143.84 141.29 141.15 143.16 142.28 139.98 140.11 140.80 121.57 145.33 139.59 128.55 127.54 137.871992 130.53 134.56 139.18 148.27 156.63 158.06 157.46 140.61 159.43 163.72 162.95 165.85 169.16 153.821993 172.29 168.65 165.17 164.12 167.52 171.89 167.52 166.52 151.24 171.28 173.14 185.03 178.49 169.701994 180.34 184.15 180.52 177.54 191.60 192.02 179.07 178.70 176.51 170.95 125.17 151.85 142.97 171.061995 144.46 141.58 148.82 147.93 142.17 147.27 153.11 149.40 151.84 162.88 167.38 180.32 201.01 157.401996 214.76 214.81 220.87 228.32 234.13 246.11 239.81 205.19 252.59 242.00 222.08 226.35 219.56 230.111997 234.76 244.51 260.17 267.19 274.28 249.38 238.29 244.26 229.27 194.76 198.78 213.12 189.12 232.801998 175.02 162.14 156.12 152.25 155.85 160.22 156.26 178.58 138.48 131.77 130.72 131.65 141.09 149.301999 143.62 145.17 148.01 142.07 142.78 154.20 148.94 141.54 145.23 143.97 138.10 143.57 151.80 145.622000 161.37 165.29 163.19 166.75 177.75 166.74 151.42 156.27 171.03 169.72 178.63 192.93 210.24 172.922001 215.16 216.96 206.80 204.79 218.26 240.58 233.34 204.87 234.36 224.42 225.63 223.81 208.37 221.042002 210.59 214.12 234.15 223.19 218.65 215.24 240.88 222.78 225.47 227.35 210.28 223.93 231.84 222.972003 231.84 225.44 207.12 201.31 204.57 201.11 176.32 213.88 191.00 198.36 214.74 231.50 228.11 209.292004 242.89 258.78 282.46 290.85 258.85 259.73 231.90 240.76 180.10 158.67 143.01 139.76 145.60 216.052005 160.19 154.88 170.44 170.91 170.18 195.87 205.04 166.22 167.00 151.78 159.50 173.57 192.87 172.692006 162.47 152.43 146.25 144.81 152.15 153.36 156.05 159.35 139.60

CANOLA MEAL AVERAGE PRICES - updated November 24, 2006CDN. $/TONNE - F.O.B. VANCOUVER

* Note: April 1983 - July 2000 F.O.B. PLANTS; August 2000 to Present F.O.B. VancouverSource: Cereals & Oilseeds Review - Statistics Canada

YEAR JAN FEB MAR APR MAY JUN JUL DECAUG SEP OCT NOV

The historic average price of meal, FOB Vancouver, for the 10 year period of crop years ending July, 2006 is $193.00. If the average basis to Manitoba was $40/tonne, the Manitoba average price for this period would have been $153/tonne. Recent prices have been in the $115/tonne range FOB Manitoba crush plants.

As the global biodiesel industry expands, so does the supply of its main co-products soymeal and rapeseed/canola meal. It is expected that these meal prices will depress due to their increased supply. Another factor in this market is the ethanol industry’s primary co-product, distillers’ dried grains. An estimated 9 million tonnes of DDGS were produced in 2005, with up to 14 million tonnes projected for 2012133.This will affect the entire livestock protein market but will likely affect the soymeal market more negatively because the distillers’ grains will be substituted in beef rations for soymeal. Less of the distillers’ grains will find its way into hog rations, where canola meal is more dominant.

133 “Demand surge for ethanol raising questions, but seen as sustainable”, Milling & Baking News, November 7, 2006, page 30



19.0 Site Location & Regulatory/Environmental Issues

19.1 Site Requirements A site should be evaluated against a number of requirements and criteria. It is suggested that two types of criteria be utilized.

One type is the ‘Veto’ criteria. These are criteria, which if not met, prevent the location from being acceptable, e.g. lack of natural gas. The Veto criteria include satisfactory availability of:

1. All season “RTAC” highways (no load restrictions in the spring) with favourable routes for inbound and outbound freight. Typically at least a significant portion of the feedstock is delivered by truck, and frequently out bound biodiesel will move by truck. Roads must allow consistent year round feedstock supply in and product out; with no spring load restrictions. If these roads are not available, the site is not acceptable.

2. Rail. If all feedstock and products can be efficiently moved by truck, rail is not a requirement or a veto criteria. However, this should be checked relative to the final market/customer needs, both for the short term and the long term. For instance, if there is a probability of a future need (as competition and markets change) to ship biodiesel that cannot be sold in Manitoba to more distant markets, rail will then be a requirement and be a veto criteria. In addition, if the plant is to be integrated with a crushing operation, the sourcing of continuous supplies of canola, even in years of local crop failure, will likely require rail access, unless the plant is small volume and the supply is assured from truck accessible sources.

Access to two main line railways is a great feature, as it allows shipment to customers by the most efficient route, and it puts the biodiesel business in a strong position for the ongoing negotiations of freight rates and terms of service.

3. Electricity, available at reasonable capital cost for supply lines to a site. A typical ballpark estimate for electrical use in a biodiesel plant using oil as its feedstock is 30,000 kwh134 per million litres of biodiesel production. An integrated canola crush and biodiesel plant may have a ballpark estimate of 125,000 kwh135 per million litres of biodiesel production.

Access to lines with sufficient voltage is required. An existing substation located nearby is desirable to reduce the capital costs of building a new substation. While Manitoba Hydro has a good distribution system, not all sites have sufficient line capacity serving them. The capital costs that must be paid by the new biodiesel business versus what Manitoba Hydro will pay; must be investigated for each site, as the capital costs faced by a new business can be significant.

4. Water of sufficient quality and quantity. Water can be supplied from: wells on the property or nearby; municipal/town water; or surface water such as a river. In rural areas, most plants use well water. Capital costs for test-wells, licensing, and well drilling must be considered. Many locations do not have sufficient aquifer capacity or quality for well water to be satisfactory. If municipal or city water is available, it will likely reduce the capital costs for water conditioning systems within the plant.

134 Authors research with biodiesel technology supplier, based on their historical experiences up to late 2006 135 Economic Impact Study for a Canola-Based Biodiesel Industry in Canada, prepared for Canola Council of Canada, by BBI Biofuels Canada, July, 2006, p. 3-2



Water is used for process water, makeup water for steam production, cooling water and staff washrooms. Water use varies dramatically with process design. Typical ball park estimates for a biodiesel refinery can be in the range of 302,272 litres of water136 per million litres of biodiesel. (0.3023 litres of water per litre of biodiesel.)

5. Waste water treatment capacity for the production process (many process technology suppliers have designs that release little or no process water) and cleanup water discharges. Most of the effluent to be discharged from a biodiesel plant is either evaporative losses to the atmosphere or from cooling tower and boiler blowdown (cleaning) operations. The blowdown water is typically very similar to the makeup water but with an increase in hardness. The discharge water is typically discharged to a local sewer, or to surface water (with the appropriate licenses/regulatory approvals), or to an evaporation pond (with the appropriate licenses/regulatory approvals).

The volume of waste water varies dramatically with the process technology. With modern recycling and reuse technologies, the volume of waste water is estimated to be in the ball park range of 198,571137 litres per million litres of biodiesel production. (0.1986 litres of waste water per litre of bidiesel.)

If the ‘veto’ criteria / requirements are met, the second type of criteria to be evaluated for each site is the ‘Competitive Advantage’ criteria. The Competitive Advantage criteria include:

6. Feedstock availability and cost. Because feedstock comprises 70% or more of biodiesel production costs and because of the strategic concerns of feedstock supply, this is by far the most important consideration for a site. The availability of sufficient supply to support the capacity of the plant will make a site more attractive.

7. Market availability for biodiesel and the co-products. If a large local biodiesel market is available, that will make a site more desirable, as transportation costs to market will be reduced, and if competitors are distant, their higher freight costs will create a competitive disadvantage for them.

For an integrated crush plant and biodiesel refinery, the sale of canola meal is a significant part of the revenue stream. Although most canola meal is exported, some local markets can be developed in some locations. If local markets are available at competitive prices, that will make the site more desirable.

Glycerine forms about 10% of the volume by weight of the biodiesel volume. Thus, as a low value and a smaller volume product, the proximity to markets is much less important than for the other products noted above.

8. Natural gas, available at reasonable capital cost to the biodiesel plant. Biodiesel production, without a canola crush plant, will typically use natural gas to generate process steam and to power evaporation and distillation processes. Natural gas use for a biodiesel refinery is typically in the ballpark estimate of 281,690 m3 per million litres138 of biodiesel produced. Without a canola crush plant, the biodiesel plant may use a low enough volume of heat to make other fuel options possible, if natural gas supply is not available, or if it is projected that natural gas prices will be sufficiently high to justify alternatives, if they are available. These alternatives include the burning of the glycerine along with other biomass (e.g. Fry Away Fuels in MN). A site with an existing natural gas supply to the site, or nearby will be viewed more favourably.

136 Authors research with biodiesel technology supplier, based on their historical experiences up to late 2006 137 Authors research with biodiesel technology supplier, based on their historical experiences up to late 2006 138 Authors research with biodiesel technology supplier, based on their historical experiences up to late 2006



9. Zoning, licensing and environmental issues.

10. Community resistance/support and services. Biodiesel plants create a number of benefits for communities, such as jobs for young people in the community, increased tax base, etc. However, a new biodiesel business also creates changes that some people may resist, such as increased traffic. Noise and odours are routinely dealt with by modern engineering designs and operating procedures and are not considered a problem. However, it is desirable to have buffers between industrial businesses, such as a biodiesel plant, and residential areas. The size of the buffer depends on the plant size and the level of activity.. Those sites located with considerable buffer distances will receive a higher rating.

In addition, the availability of support services such welding, electrical, plumbing, machine shops is desirable; and

11. Available workforce and a location with amenities that would make recruiting senior management easier. E.g. desirable housing, schools, hospital, recreational facilities, access to airport, etc. A combined crush-biodiesel refinery operation will require in the range of 15 to 40 employees, depending on the size of the business. The workforce must be available from a reasonable commuting distance. Specialized positions such as plant manager or laboratory supervisor may have to be recruited from outside the community.

12. Sufficient property for the biodiesel refinery, offices, storage of feedstock and products, truck turning and parking, and especially for the rail siding sufficient to hold twice the maximum number of rail cars that will ever be needed.

The siding must accommodate all rail cars for inbound feedstock and for outbound product shipments. And, it must accommodate twice this number because as a row of cars is loaded, they move from one side of the loading spot to the other side as each car in the row is filled. Thus, all cars start on one side of the loading spot and end on the other side, requiring a siding with twice the capacity. For an integrated canola crush plant and biodiesel refinery, the length of the rail siding, even with 4 rows of track, will require a large property. The land required for rail and truck movement is much more than the buildings require. Thus, the preliminary conceptual design of the rail and truck requirements will be the dictating factor in determining the property size requirements.

19.2 Regulatory and Environmental Licenses

Minimal regulatory or environmental issues are anticipated to prevent the typical biodiesel refinery business from being able to be established in Manitoba, if the proponents of the new business follow all the regulatory and environmental requirements. A canola crush plant, with solvent extraction, may require additional environmental and workplace health and safety approvals, due to the nature of the hexane solvent. As there are several canola crush plants operating in Manitoba that use hexane solvent extraction, it is not expected to be a problem to receive the required licenses, if appropriate environmental engineering consulting expertise is utilized along with appropriate process engineering that meets all environmental, workplace health and safety, fire codes, building codes and other requirements.

The environmental assessment and licensing process under the Manitoba Environment Act (Act) will be required for a biodiesel facility to be built. A biodiesel refinery is considered a Class 1 development under the Act. If a crush plant was also to be built, it would likely also be considered a Class 1 development only if it did not have solvent extraction and was not too large.



Currently Manitoba considers the biodiesel refineries to be in an “emerging industry”. Therefore the environmental licenses are issued with terms and conditions that must be met by the biodiesel plant when it is operational. The filing of the Environmental License Application requires much less detail, and therefore is much lower cost to hire an environmental consulting engineer, than for more complex manufacturing projects, such as for an ethanol plant.

The process requires filing an application after consulting with staff of the Manitoba Conservation Department. Information can be obtained by contacting Mr. Ken Plews, Ph: (204) 945-7067. All relevant information must be provided, and then it is screened by a Technical Advisory Committee. The TAC can advise whether a full Environmental Impact Study (EIS) is needed. They may in some cases, also advise as to the need for a public hearing. These public hearings typically only occur where a development generates significant public interest or impacts a large number of Manitobans. The final decision on issuing a licence rests with Manitoba Conservation.

Delays and/or problems in this licensing process often occur because the business applicant has not provided all the appropriate information, has not presented the information in the appropriate technical format, or has provided information that later turned to be incorrect, requiring revisions to the regulatory approvals. For these reasons, it is recommended that all business applicants obtain the necessary experienced advice and ensure the information is thoroughly prepared and presented.

Additional information can be obtained from the following sources:

The relevant information bulletin is available at www.gov.mb.ca/conservation/envapprovals/publs/index.html, or www.gov.mb.ca/conservation/envapprovals/publs/env-assess-info.pdf.

The Classes of Development Regulation is available at www.gov.mb.ca/conservation/envapprovals/publs/index.html, or http://web2.gov.mb.ca/laws/regs/pdf/e125-164.88.pdf

If financial support is received from federal government programs supporting capital costs, the development of the biodiesel plant will be subject to the Canadian Environmental Assessment Act (CEAA). Further information on the CEAA is available at www.ceaa.gc.ca or by contacting the Canadian Environmental Assessment Agency by telephone at (613) 957-0700.

All other regulatory requirements will have to be complied with. These include highways and transportation (especially for truck access and turning lanes off highways), workplace health and safety, water, building and fire codes, etc. The new biodiesel business proponents need to contact each of these and confirm what approvals are required, what information must be filed with applications/requests, and what timelines are typically required for review and approvals.

http://www.gov.mb.ca/conservation/envapprovals/publs/index.html

http://www.gov.mb.ca/conservation/envapprovals/publs/env-assess-info.pdf

http://www.gov.mb.ca/conservation/envapprovals/publs/index.html

http://web2.gov.mb.ca/laws/regs/pdf/e125-164.88.pdf

http://www.ceaa.gc.ca/



20.0 Biodiesel Production Process

20.1 Processing Technology The production process for refining biodiesel is generally known as transesterification and includes the following types of processes:

• Base-catalyzed transesterification of the oil with methanol. (widely used in biodiesel industry)

• Direct acid-catalyzed esterification of the oil with methanol.(seldom used in biodiesel industry)

• Conversion of the oil to fatty acids, and then to alkyl esters with acid catalysis. (seldom used in biodiesel industry)

These reactions can be batch mode or continuous, depending upon the company and the technology. Almost all of the biodiesel businesses in North America utilize the base catalyzed reaction because it is the most economical process technology for the following reasons:

• It is a low temperature (160 – 180 F) and low pressure (15 to 30 PSI) chemical process

• It yields a high conversion (98%A) with minimal side reactions when low free fatty acid feed stocks are used. (Note: oil feedstock pre-treatment is required if the FFA% exceeds 0.055).

• No exotic materials are required for construction.

High Free Fatty Acid Feedstock Pre-treatment

Some biodiesel plants that are using feedstocks with high free fatty acids (such as recycled fats, oils and greases) pre-treat the feedstock with a caustic refining to remove free fatty acids. More biodiesel businesses are using degummed incoming feedstock to improve downstream processing. Also, it may be necessary to remove the natural sterols from feedstocks. As at November 2006, research is underway to determine if sterols play a role in causing precipitates in biodiesel that has been blended and then stored in cool weather with high humidity present. Thus, the ASTM specifications may, in the future, focus on sterol levels as well.



Table 18-1: Biodiesel Process Flow Diagram

Source: US National Biodiesel Board in “Economic Analysis of Alternative Indiana State Legislation on Biodiesel,

July 2003, by Centre for Food and Agricultural Business, Department of Agricultural Economics.



Biodiesel Transesterification Formula

Excess methanol is used to ensure the process is driven to completion. The basic formula139 is as follows:

100 pounds of oil + 20 pounds of methanol =

100 pounds of biodiesel + 10 pounds of glycerol + 10 pounds of methanol

The excess methanol input and output is often netted out to show a process formula of:

100 pounds of oil + 10 pounds of methanol =

100 pounds of biodiesel + 10 pounds of glycerol

Catalyst

The catalyst is usually sodium or potassium hydroxide that is mixed with the methanol.

Reaction

The methanol/catalyst mix is charged into a reactor, either continuously or batch, and the oil feedstock is added. The reaction time is dependent upon temperature. The catalyst will react with any free fatty acids first, making soaps, before reacting with the oil in the transesterification process. The soaps can form emulsions and hamper separation. Increased catalyst cost and emulsion formation are the key reasons why low free fatty acid feedstocks are desirable.

Methanol Recovery

In some process technologies, the methanol is removed immediately after the reaction is complete. In others the methanol is recovered after the glycerine and esters have been separated. The methanol is recovered and distilled using conventional distillation processes to remove any water. It is then recycled back into use again.

Product Separation

Once the reaction is complete and the methanol has been removed, two major products exist: methyl esters and glycerine. Due to the density difference, the two separate easily in a gravity separator. The crude glycerine is drawn off the bottom. In other cases a centrifuge is used.

Methyl Ester Washing

Once separated from the glycerine, the methyl esters are washed with warm water to remove residual catalyst and soaps. The esters are vacuum dried and sent to storage. It is a critical quality control issue to ensure that no methanol, soaps or other contaminants remain in the methyl esters (biodiesel).

The product is typically 98.5% methyl ester and is ready to be sold as biodiesel. In some cases, the esters are distilled under vacuum to achieve an even higher level of purity and can then be sold in the chemicals market.

Glycerine Recovery

The co-product, crude glycerine, contains water, residual catalyst and fatty acid base soaps.

139 Source: Methanol Institute



20.2 Plant Logistics As noted in the earlier section on site requirements, the site will require significant space for truck traffic and for rail sidings.

The following estimates of the volumes for different size plants provide an insight into the logistics issues for an integrated crush plant and biodiesel refinery.

Table 18-2: Logistics Volumes for Various Size Integrated Biodiesel/Crush Plants

Biodiesel and Crush Plant Size in MMly of Biodiesel 10 MMly 38 MMly 114 MMlyINbound Volume: Oilseeds (trucks/yr) 593 2,253 6,754 Chemicals & catalysts (trucks/yr) 45 141 141 Total Inbound Trucks per Year 638 2,394 6,895 OUTbound Volume: Biodiesel (trucks/yr) 528 2,005 6,011 Protein Meal (trucks/yr) 368 1,397 4,188 Glycerine 59 224 670 Soapstock 50 162 162 Total Outbound Trucks per Year 1,004 3,788 11,031 Total VolumesTotal Trucks per Day 5 18 51 Total Trucks per Year 1,642 6,182 17,926

Source: Economic Impact Study for a Canola-Based Biodiesel Industry in Canada, prepared for Canola Council of Canada, by BBI Biofuels Canada, July, 2006, p. 7-5

The above shipments are assumed to be maximum weight trucks, with 36 tonnes of canola seed, etc. If rail shipments are used, the number of shipments will drop, because a rail tank car will carry the same volume of biodiesel as about 5.5 tanker trucks, and each rail car of canola seed or canola protein meal will carry the same volume as 3 trucks.

20.3 Process Technology Stage of Development For the purposes of a feasibility study it is known that biodiesel plants can be built to operate efficiently and produce biodiesel of consistent high quality, if good quality assurance practises are implemented. It is also known that canola oil will produce biodiesel with the most competitive characteristics in two key areas - lubricity and cold flow properties.

It is also true for the biodiesel manufacturing technology, as with all new technologies and industries, that as more plants are built and the cumulative volume produced continues to grow, that there will be further developments which improve the production processes and reduce costs.

20.4 Technology Issues Regarding Biodiesel’s Characteristics Biodiesel for use as a fuel has a number of characteristics that are worthy of attention. These include:

• Most engine Original Equipment Manufacturers (OEMs) have declared a lack of harmful effects for B5 and lower blends based on a statement by the leading fuel injection equipment suppliers, as long as the biodiesel meets ASTM D6751 and/or the European Biodiesel specification. Some OEMs



recognize higher blends levels, such as New Holland approving up to B20 in a number of engines.140 To achieve ASTM D6751 standards vigorous quality assurance measures must be implemented. Without assurances of such measures, including BQ9000 certification of the quality assurance practises, it may become difficult to market biodiesel in the future.

• Cold weather performance. During December 2005 and January 2006, Minnesota faced biodiesel quality problems, as described in the earlier section on Biodiesel Fuel Quality Standards. It is perceived by some that the ASTM specifications are not stringent enough in regards to glycerine content141. Therefore, it is critical that the quality control processes be stringently followed, to produce biodiesel that more than meets the ASTM D6751 specifications.

• ASTM International released in October 2006, a new standard for biodiesel that will help ensure that biodiesel blends of up to 20 percent will be compatible with future diesel exhaust emissions technology. The new standard, D 6751-06a, adds new limits on calcium and magnesium, which can be introduced during the biodiesel manufacturing process. Previous changes to the ASTM D6751 standard, to limit sodium and potassium used as catalysts in the biodiesel manufacturing process, passed earlier in 2006. The on-going changes to the ASTM D6751 standard indicate that the biodiesel production quality assurance practises must continue to improve in order to meet the tightening standards.

• Precipitation of biodiesel, as B100 or blends, after shipment in cool weather with humid air. A few shipments to California, Washington and Utah have found a “white slime” precipitate in the bottom of tanks, even after the incoming fuel has been tested and confirmed as being compliant with ASTM standards. The cause of the problem, which has occurred only on a small number of shipments, has been mystifying. Research142 by CytoCulture International Inc. and the German Biodiesel Quality Control Board is pointing to the potential cause being related to the level of sterols in the biodiesel. This may become a specification that the ASTM D6751 standards will address in the future, subject to the research findings.

20.5 Safe Handling of Methanol and Chemicals The Methanol Institute, in collaboration with the International Fuel Quality Center has produced a report titled, “A Biodiesel Primer: Market and Public Policy Developments, Quality Standards and Handling”. It addresses the proper and safe handling of chemical feedstocks, in particular methanol. The report is available at www.methanol.org.

Extreme care and caution needs to be applied in handling methanol. It is NOT safe to handle methanol without proper training and instruction from someone who is knowledgeable and qualified. Methanol is a hazardous chemical that is highly flammable and extremely toxic to humans if ingested or if vapours are inhaled. Direct exposure to methanol should be avoided, as methanol can be harmful if swallowed, absorbed through the skin, or inhaled. Ingestion of as little as one to four ounces can cause irreversible injury to the nervous system, blindness or even death. Accumulations of methanol vapours in confined spaces may explode if ignited, and containers filled with methanol may rupture violently if exposed to fire or excessive heat for a prolonged duration.

140 Biodiesel Benefits, 2005. Biodiesel Association of Canada. 141 Biodiesel Magazine, February 2006. 142 Dr. Randall von Wedel, director at CytoCulture, in “Bound by Determination”, Biodiesel Magazine, October 2006, p. 42 - 50

http://www.methanol.org/



20.6 New Biodiesel Manufacturing Technologies New Commercial or Near Commercial Process Technologies

Several improvements on the existing transesterification process technologies are being commercialized. Some of these include:

1. Green Star Products Inc. claims to have a new biodiesel production technology referred to as a conversion reactor that makes biodiesel more rapidly.

2. North American Biofuels Corp. is operating its 3.8 MMly pilot conversion outfit on Long Island, N.Y., located within a waste management company’s water treatment site. The primary feedstock for the pilot plant is brown trap grease. The company has several patents pending.

3. Axens licensed its solid, heterogeneous catalyst technology (called Esterfip-H), to a few biodiesel plants in 2006. The novel catalyst eliminates the use of sodium methylate, sodium hydroxide or potassium hydroxide; thus, eliminating the need to recover these, and reducing waste streams.

4. Biox Corp.’s one-of-a-kind refinery began commercially producing biodiesel in 2006. Biox claims that its particular inert co-solvents, resident during the conversion reaction of feedstocks with high free fatty acid contents, provide real cost-savings benefits—and it’s fast.

5. New sources of oil feedstock are being commercialized from the corn oil in the distillers grains from dry mill ethanol plants which use corn as their feedstock. The corn oil extraction equipment can be installed in new and existing ethanol plants. G.S. Clean Technology Corp., supplier of such technology, with a patent pending process, claims the process will produce a volume of corn oil equal to about 6%143 of the ethanol produced in a dry mill plant. If the potential 6% corn oil was extracted from all of the 24,693144 MMly US corn based dry mill ethanol expected to be produced in the US by late 2007, it would total 1,482 MMly of corn oil available as a new feedstock for biodiesel plants. If a 25% share of this potential was achieved, it would produce 370 MMly of corn oil.

These volumes can be compared to the 6,500 MMly of biodiesel feedstock volumes (calculated biodiesel volumes in section 6.3) required in 2007. If a large portion of the dry mill US ethanol plant capacity was to install this corn oil extraction technology it could provide a 5%, to near 20%, of the feedstock oil needed by the US biodiesel industry in the future.

R&D - New Process Technologies

Several improvements on the existing transesterification process technologies are not yet ready to be used in commercial production, but are being researched and developed. Some of these include:

6. Iowa State University researchers have announced145 that they have developed an improved technology for making biodiesel, using nanotechnology for preparation of a new, high-tech catalyst that takes some of the energy, labour and toxic chemicals out of biodiesel production.

143 “The Matchmaker”, Biodiesel Magazine, November 2006, page 47. 144 The Ethanol Plant Map – Fall 2006 in the Ethanol Producer Magazine, November, 2006 shows existing production capacity plus plants under construction of 33,189 MMly (8.765 Billion US gal.). Biodiesel Magazine, November 2006, page 50 states 4 out of 5 gallons (80%) of US ethanol is produced in dry mill plants. The Ethanol Plant Map – Fall 2006 in the Ethanol Producer Magazine, November, 2006 shows 93% of US ethanol is produced from corn. (33,189 x 80% x 93% = 24,693 MMly). 145 Iowa State Scientists Find a Better Way to Make Biodiesel, April 28, 2006 in Manitoba BioEnergy Technology News, First Edition, August 15, 2006



7. The USDA Agricultural Research Service (ARS) patented an in-situ method of biodiesel production in 2006. This approach to processing allows producers to make biodiesel from virtually any lipid-bearing component, including flaked soybeans. It also eliminates the need for hexane extraction—the most common, large-scale method of oil recovery during the crushing process. One drawback, as indicated by the economic modeling, is that there are significantly higher utility costs involved in this technique.

8. Some oil companies may be researching the direct use of vegetable oils and recycled fats and oils as feedstocks, along with crude oil, into petroleum company refineries, and producing a partial biodiesel through a hydrocracking technology146, without separate biodiesel refineries. Hydrocracking is a widely used technology, but the direct input of vegetable oil in a refinery has not previously been commercially used.

9. In the EU there is discussion of “second generation” biofuels, including biomass-to-liquids fuels such as Fischer-Tropsch diesel fuel. However, due to the significant capital expenditure on the process technology and the high manufacturing costs, these “second generation” biofuels cannot be economically produced147 at the same level of support as the current biofuels. It is expected that at some point in the future these “second generation” biofuels will be a large volume source.

10. John Massingill, of Texas State University developed an advanced fibre-based neutralization process that could eliminate biodiesel producers’ need to use a centrifuge. Lab-scale trials show advantages to using this trademarked Fiber-Film technology, according to Massingill, who presented a summary at the 2006 AOCS conference. The process is claimed to offer fast, clean reactions as a result of the short contact times needed on the high surface-area medium.

11. Enzyme-maker Diversa Corp. announced in late 2006 that it had received US EPA approval of its trademarked Purifine enzyme, which could have applications for biodiesel producers. According to Diversa, Purifine is a novel approach to degumming oils, or the removal of phospholipids from unrefined feedstocks. While biodiesel companies utilizing degummed virgin oils may not find the need for such enzymes, biodiesel processors using lower-quality feedstocks—and oilseed processors—may indeed find value in potential new technology.

12. Colorado State University announced a partnership to develop ways to mass produce biodiesel from algae. Jim Sears, founder of Solix Biofuels Inc., and Dr. Bryan Willson, director of the Engines and Energy Conversion Laboratory at Colorado State are leading the project. Solix grows a type of algae containing high levels of fat in large photobioreactors. The devices keep the algae in constant motion, allowing all the organisms to receive sufficient sunlight, which aids photosynthesis. The algae cells are then harvested from the fluid with a centrifuge, and the oil is extracted and refined into biodiesel with the same method used to process other biodiesel crops. The benefit of algae, according to Sears, is that algae can produce 100 times as much oil per acre as the crops now grown, such as soybeans and canola. This technology is still in the early stages of development, and will take a considerable time to reach commercialization. If it does, it will be a significant factor in biofuels production.

Over time the marketplace will determine which of the newly commercial process technology improvements, and which of those under R&D, will be successful in commercial scale biodiesel refineries.

146 S. Pratt, “New process concerns advocates of biodiesel”, The Western Producer, November 2, 2006, p. 3 147 Bernd Pischetsrieder, Volkswagen Chairman, in Diesel Fuel News, September 13, 2006 at www.worldfuels.com/trialmarketing/dieselfuel_news/

http://www.worldfuels.com/trialmarketing/dieselfuel_news/



21.0 Plant Contracting Strategies

A number of different strategic alternatives exist in regards to contractual arrangements for managing the construction of a plant, including:

• One overall general contracting contract;

• Design/build contract;

• Multiple design/build contracts;

• Sequential tendering of various trade contracts;

• Construction management and/or project management approach;

• Guaranteed maximum price (GMP);

• Etc.

The design build contract, negotiated with a process technology supplier and construction contractor (often consisting of a consortium of companies under one contract) can provide the lowest risk, even if it is not the lowest price. For a new industry like biodiesel, higher levels of equity may be required to mitigate the project and construction risk.

Many of the new companies starting biodiesel plants are currently managing the design of their own process and manufacturing equipment. However, to obtain debt financing they will require a high level of equity, or have some way to prove to the lender that the production plant will be completed on time, on budget, and will perform as projected. I.e. will produce the specified volumes and quality while using no more inputs than projected.

If this production plant confirmation is not available with sufficient documentation to convince the lenders that there is modest risk, then a higher level of construction and performance insurance or bonding will be required to reduce the risks identified by lenders.



22.0 Process Technology and Equipment Suppliers

22.1 Criteria For Selecting Suppliers The biodiesel industry is relatively new. Compared to the ethanol industry, the process technology for manufacturing biodiesel is relatively simple. However, there are only a limited number of plant suppliers that have well proven technology. Others are developing new technologies and some of these will likely hold great merit. A number of biodiesel plant developers have also researched and developed their own process technology designs.

It is assumed that the user of this Generic Biodiesel Feasibility Study is a community group or entrepreneur with reduced levels of equity and consequently higher financing requirements.

Therefore, the following criteria are identified to assist with the selection of an acceptable supplier. In addition to the technical and value criteria that all buyers will require, the following supplier criteria will be required by financiers and debt lenders:

1. Having a proven record with at least two or three similar plants that have been completed successfully on schedule, on budget, commissioned without delays, reached production targets and met performance specifications for the volumes of biodiesel at the specified quality using the specified input volumes.

2. Having the capacity to build a plant within a reasonable time, given previous contracts for plants currently under construction.

3. Having the financial strength to post bonds ensuring that the plant will be completed and go into production on time and on budget, if required.

4. Having the financial strength to post bonds ensuring the plant’s performance once it starts production.

22.2 Biodiesel Process Technology/Plant Suppliers The first five companies on the following list are already known to meet the criteria in the previous section. Others may also meet the criteria, but require further due diligence research to have this confirmed. They have been listed in an order that may indicate their familiarity with rapeseed/canola oil based biodiesel plants as well as their overall credibility. A number of others may be credible as well. Some (noted) are developing a name for themselves, but which do not yet have a history of successful plants due to the short length of time the company has been selling plants. Several of these may gain the experience in the near future and soon have a number of successful plants completed. Thus, this list will change rapidly over the next months and years.

This preliminary list includes the following:

1. Lurgi PSI provides technology, engineering, and general construction for biodiesel plants. Lurgi is an experienced credible technology company operating worldwide in the fields of process engineering and plant contracting. The stated technological leadership is based on proprietary technologies and exclusively licensed technologies in the areas of gas-to-petrochemical products via synthetic gas or methanol and synthetic fuels, gas generation and treatment, petrochemical intermediate and end products, biofuels as well as food and oleochemicals. From project development to the turnkey construction of plants through to full plant operation, Lurgi globally engineers, builds



and commissions plant complexes. It offers biodiesel plants with capacities from 20 MMly to 500 MMly. An EU industry presenter at a November 2006 conference noted that Lurgi PSI has now built 21 biodiesel plants in the EU. Contact: Lurgi PSI, Inc. Memphis, Tennessee, Ph: (901) 756-8250, Fax: (901) 756-8253, E-Mail: [email protected] www.lurgipsi.com

2. Biodiesel International (BDI) is a credible company located in Austria. It offers process engineering, construction, start-up services and customer support. BDI uses multi-feedstock technology, including animal fats. The biodiesel produced in the process conforms to EU and US standards. They have considerable experience and list references showing 9 previous projects and 11 underway with start-up in 2006. One of these is in the US; all others are in the EU or eastern European countries. An EU industry presenter at a November 2006 conference noted that BDI has now built 22 biodiesel plants in the EU. Website: www.biodiesel-intl.com

3. Desmet Ballestra is believed to be a credible designer of oilseed crushing and biodiesel plants. Desmet Ballestra claim to be the world leaders in engineering of oils & fats, oleochemical technologies, detergent and surfactant technologies and soap technologies. More recently they have added biodiesel to their business. Since early December 2004, Desmet Ballestra is operating as one integrated group. An EU industry presenter at a November 2006 conference noted that De Smet Ballestra has now built 28 biodiesel plants in the EU. Contact: Mr. Tim Kemper, President & CEO, Email: [email protected] De Smet Process & Technology, Inc., Marietta, GA, USA, Ph: (770) 693-0061, Fax: (770) 693-0071 General E-mail: [email protected] (www.desmetballestraoleo.com )

4. Renewable Energy Group (Ralston, Iowa) (REG) builds turnkey biodiesel plants (with soy as the raw material to date). REG’s technology is an energy efficient continuous flow process that recovers excess methanol and produces no process wastewater stream. REG was formed through a partnership with West Central Cooperative, engineering & construction firm Todd & Sargent, located in Ames, IA, and in alliance with process equipment builder Crown Iron Works (see below), Minneapolis, MN. West Central Cooperative is a full-service, farmer-owned cooperative located at Ralston, Iowa. West Central's operating divisions include grain, agronomy, feed, soy processing, and administration. In mid-2006, they added Bunge and other strategic partners and investors to expand their capabilities and the size of their business.

In 2005, REG completed construction of a 114 MMly capacity plant for SoyMor Biodiesel, LLC (Albert Lea, Minnesota) and in 2006 completed construction of a 114 MMly capacity plant for Western Iowa Energy, LLC (Wall Lake, Iowa). In mid 2006, REG broke ground on a 114 MMly capacity plant for Central Iowa Energy LLC (Newton, Iowa), and on Sept. 5 REG broke ground for a 228 MMly plant at Ralston, Iowa costing US$70 million. REG often takes a minority ownership interest.

In August 2006, REG announced it intends to build and operate four biodiesel plants of its own over the next two years and to oversee construction of up to ten third party facilities over the next three years. REG has said its overall biodiesel production will reach approximately 2,423 MMly by 2009, including third-party plants.

REG builds turnkey biodiesel plants at customer's site, trains the customer's operating staff, provides "hands on" start up assistance and guarantees the process design for reliability and finished product quality. The process design is a continuous "zero discharge" transesterification process that can be start-up ready 12 months after all construction and environmental licenses have been approved. Contact: Ph: (800) 843-4769 www.renewable-energy-group.com

5. Crown Iron Works Company (Minneapolis, MN) generally works in a strategic alliance with REG. It offers a range of services including turnkey design to construction of systems for oilseed processing

http://www.lurgipsi.com/

http://www.biodiesel-intl.com/



http://www.desmetballestraoleo.com/

http://www.renewable-energy-group.com/



and biodiesel production. They are a highly reputable company and have 500 installations of oilseed crushing and other types of facilities worldwide. They provided the process design and equipment for the Ralston Iowa plant (45 MMly capacity) and for the two large-scale biodiesel plants in Minnesota. Contact: (651) 639-8900. www.crowniron.com

6. Greenline Industries, located in northern CA, is a company whose mission is to become the world’s leading manufacturer of small-to-medium scale biodiesel processors. Greenline was spun off of Bio-energy Systems in late 2004 to develop, fabricate and produce biodiesel processing units. Greenline’s technology is continuous flow and it excludes the expensive and environmentally challenging process of water-washing methyl esters.148 The company President is Jacques Sinoncelli. It has 9 plant sizes that range from under 2 MMly to over 150 MMly. (Due diligence research is needed to confirm that this company and its existing plants can meet the four criteria listed at the beginning of the previous section.) Contact: Toll Free: (866) 247-4763, Direct: (415) 259-4041, Fax: (415) 259-5832 Email: [email protected]

7. Superior Process Technologies of Minneapolis, MN offers modular systems in multi-feedstock process technology and turnkey systems. (Due diligence research is needed to confirm that this company and its existing plants can meet the four criteria listed at the beginning of the previous section.) Contact: Ph: (612) 378-0800. www.superiorprocesstech.com

8. Biodiesel Systems LLC, Head Office at Madison, Wisconsin, is able to plan, design, supply, build, invest in and guarantee turnkey biodiesel plants of varying capacities. The plants use continuous process technology and are capable of using multi-feedstocks.

Their full range of services includes: 1) Plant Development Services including construction management, employee hiring, operator training, start-up assistance & plant management. 2) Business Services including feasibility studies, business plan development, site selection, project over-site, financial packaging, market assistance, logistics & legal services. 3) Engineering Services including detailed engineering, environmental assessment, licensing, equipment and material procurement, field engineering, HAZOP analysis, laboratory assistance and analysis, telephone support, maintenance, continuous research and development. 4) Feedstock and Sales Services including feedstock sourcing and procurement, as well as biodiesel fuel and glycerine sales.

The company shows an interest in Canada, as well as the US, by having a good summary of the policies impacting biodiesel described on their website. They appear to have significant experience as they say that their technologies are commercially operated in five countries. (Due diligence research is needed to confirm that this company and its existing plants can meet the four criteria listed at the beginning of the previous section.) Joel Laubenstein is the biodiesel contact person at Ext. 17 at Ph: (608) 244-7901 Fax: (608) 244-7908 E-mail: [email protected] www.biodieselsystems.biz

9. Biosource Fuels LLC of Butte, MT and Kenosha, WI. They are aligned with an international construction firm and can therefore design, build, and install process equipment and systems. It offers a continuous biodiesel process technology and has a proprietary multi-feedstock production process that is insensitive to free fatty acid (FFA) content. Their website lists a variety of feedstocks, but canola is not one of them. Given the emphasis on feedstock with high free fatty acids (FFA), the process technology may not be suited to canola. They indicate they have four US plant installations completed. (Due diligence research is needed to confirm that this company and its existing plants can meet the four criteria listed at the beginning of the previous section.) Contact: Ph: (406) 494-6644 www.biosourcefuels.com

148 Biodiesel Magazine, Nov. 2005

http://www.crowniron.com/


http://www.superiorprocesstech.com/


http://www.biodieselsystems.biz/

http://www.biosourcefuels.com/



10. Bratney Companies of Des Moines, IA provides engineering, construction and equipment to a number of grain and commodity industries, including coffee etc. in North America. They are responsible for all sales and service of Cimbria cleaning and sizing equipment. They also design, build and provide equipment and services for oilseed crushing and biodiesel plants around the world. (Due diligence research is needed to confirm that this company and its existing plants can meet the four criteria listed at the beginning of the previous section.) Contact: Ph: (515) 270-2417; Email: [email protected], www.Bratney.com

11. Capital Technologies International (CTI) of Pittsburgh, Pennsylvania. It is a privately owned firm at the Carnegi Mellon University that has developed its own proprietary technology using a catalyst for biodiesel production. It offers pre-assembled skid-mounted (8’ x 8.5’ x 40’ plus storage tanks) biodiesel plants with capacities from 19 MMly and up. They also state they will enter into joint ventures, whereby the cash paid for the plant would be reduced in return for shares in the biodiesel production business. They have indicated that they have no problem supplying plants into Canada. They have a 3.78 MMly (1 million US gal/yr) plant operating in Pittsburgh, but have only just begun to deliver commercial plants of 19 MMly. For 2006 they planned installation of 3 plants. Thus, they do not yet have a history of successful plants that provide the necessary credibility and experience for their new process technology and their new business. If these plants are all successful, then they may have a proven history by sometime in 2007. According to CTI, the process produces pure glycerine.149 (Due diligence research is needed to confirm that this company and its existing plants can meet the four criteria listed at the beginning of the previous section.) The general office is at Ph: (412) 268-1000 Mr. Bruce Polatnick is the Director of Business Development, located in the New York office at Ph: (212) 995-1000 Email: [email protected] www.capital-technologies.com

12. Biodiesel Industries (Santa Barbara, CA) states that it offers standardized modular production units (MPUs) capable of producing up to 11 MMly. The MPUs are sold and licensed into exclusive territories with qualified joint venture partners interested in becoming part of a mutually supportive network of biodiesel producers. Technical, marketing and operational support are part of the licensing arrangement. A feasibility study conducted by Biodiesel Industries and funded by the potential joint venture partner is required for each proposed project. Biodiesel Industries does not distribute directly to individual consumers, but rather works through its affiliates and network of distributors to service large volume users, such as government and private fleets, or other qualified petroleum distributors. (In the future, perhaps by 2007, due diligence research is needed to confirm if this company has had time to establish successful plants and then it may be able to meet the four criteria listed at the beginning of the previous section.) Contact: Ph: (805) 683-8103 Email: [email protected] www.biodieselindustries.com

13. Blue Sun LLC (Fort Collins, CO) is a vertically integrated agriculture-energy company and marketer of premium agricultural and renewable fuels products. Blue Sun Biodiesel LLC, headquartered in Fort Collins, CO plans to build a joint canola processing and biodiesel production facility in Oklahoma.150 (There are comments of an interest in winter canola that may be suited to some of the less northern USA production areas.) It is not clear what, if any, interest they may have in supplying plants or becoming a strategic alliance partner to a group in Manitoba, Canada, but they have focussed on canola based biodiesel. (Due diligence research is needed to confirm that this company and its existing plants can meet the four criteria listed at the beginning of the previous section.)

149 Biodiesel Magazine, February 2005 150 Biodiesel Magazine, Nov. 2005


http://www.bratney.com/


http://www.capital-technologies.com/

http://www.capital-technologies.com/


http://www.biodieselindustries.com/



14. It is expected that there are others that are credible, but that have not yet been identified.

It appears likely that design build, turnkey or other types of biodiesel process technology suppliers, plant construction companies, and engineering companies are available. The companies already identified supply plants utilizing a variety of feedstocks, with a number having extensive rapeseed/canola oil plant experience from their EU activities. The research conducted has not identified a supplier of very small plants (under 10 Ml/yr) that currently meets the criteria listed at the beginning of the previous section.

Failing the ability to identify a company to supply a turn key facility, smaller plants will require the necessary engineering expertise to design and construct a plant using manufactured components. Lenders will require this approach to meet the criteria previously identified in section 22.1, or to have a high level of equity.

Process Technology/Plant Supplier Services:

Most of the biodiesel process technology/plant suppliers provide a number of assistance programs to the new biodiesel business. Training of the staff that are hired prior to completion of construction (so the key staff can work in other plants for a period of time) is offered by most of the companies. Most offer an experienced on-site supervisory staff during the time period when the plant is being commissioned and biodiesel production is commencing. Often this support will be provided for a specified length of time or until the plant reaches specified volumes and quality of production.

The range of services varies by company and can include some or all of:

1. Plant Development Services including construction management, employee hiring, operator training, start-up assistance and plant management

2. Business Services including feasibility studies, business plan development, site selection, project over-site, financial packaging, market assistance, logistics & legal services.

3. Engineering Services including detailed engineering, environmental assessment, licensing, equipment and material procurement, field engineering, HAZOP analysis, laboratory assistance and analysis, telephone support, maintenance, continuous research and development.

4. Feedstock and Sales Services including feedstock sourcing and procurement, as well as biodiesel fuel and glycerine sales.

22.3 Equipment Suppliers In addition to the key process technology/plant construction companies noted in the previous section, there are a large number of suppliers of miscellaneous equipment and parts to the biodiesel industry.

Literally hundreds of companies can be found in publications such as:

• Biodiesel Industry Directory (www.biodiesel-directory.com) The 2007 issue comes out in late fall. It contains contact information for over 600 companies serving the biodiesel industry. The directory is searchable on line by keyword category. All Web sites and email addresses are hyperlinked in listings and advertisements.

• Biofuels Journal 2006 Equipment Catalogue (www.biofuelscatalog.com) On this website you can conduct searches by company name (about 200 companies listed) or by type of equipment.

• Biodiesel Magazine (www.BiodieselMagazine.com)

• Renewable Energy Canada Industry Guide 2006/07 (www.contactcanada.com) Contains listings of companies involved in renewable energy of all types, including biodiesel, active in Canada.

http://www.biodiesel-directory.com/

http://www.biofuelscatalog.com/

http://www.biodieselmagazine.com/

http://www.contactcanada.com/



Also, a great deal of information can be gathered from attending tradeshows, such as the following:

• 3rd Annual Canadian Renewable Fuels Summit, December 10-12, 2006, in Banff, Alberta Canada (www.bbibiofuels.com/crfs/)

• The 2007 National Biodiesel Conference and Expo held Feb. 4-7, 2006, in San Antonio, Texas. It is the biggest event of the year for the biodiesel industry (www.biodieselconference.org/2007/)

• The National Institute of Oilseed Products (NIOP) 2007 Annual Convention, “Food and Energy: Striving for Balance”, March 20-24, 2007, Palm Springs, California (www.niop.org/)

• A very good website to monitor the calendar of upcoming events for the Canada and USA biodiesel industry is at www.biodieselmagazine.com/events.jsp

Local Manitoba and western Canadian events can also be monitored by:

• Contacting your local Manitoba Agriculture, Food and Rural Initiatives (MAFRI) representatives, or

• Checking their website at www.gov.mb.ca/agriculturenews/conferences.html, or

• Checking the Provincial Department of Science, Technology, Energy and Mines for their Agri-Energy website at www.gov.mb.ca/agriculture/agrienergy/

http://www.biodieselconference.org/2007/

http://www.niop.org/

http://www.biodieselmagazine.com/events.jsp

http://www.gov.mb.ca/agriculture/agrienergy/



23.0 Human Resource Requirement The number of staff required for a larger volume integrated canola crush plant and 114 MMly biodiesel refinery can be over 50 people. A smaller non-integrated biodiesel refinery may only require 8 or less.

Surveys of US biodiesel refineries (without crush plants) indicate the following are ball park estimates of the typical number of employees for a variety of sizes of plants.

Table 21-1: Number of Employees for Various Size Biodiesel Refineries (No Crushing)

3.8 ML/YR 28.4 ML/YR 57 ML/YR 114 ML/YR# of Employees # of Employees # of Employees # of Employees

8 - 10 10 - 12 17 19 Source: The Biodiesel Plant Development Handbook by Independent Biodiesel Feasibility Group, LLC, January 2006, distributed by the National Biodiesel Board; available at www.biodiesel.org/ with adjustments by the authors for the smaller plant sizes.

An analysis of typical staffing requirements for an integrated plant showed the following:

Table 21-2: Number of Employees for Various Size Integrated Biodiesel & Crush Plants Total Total Total Total Total

Production (l./yr.) 38,000,000 76,000,000 114,000,000 227,000,000 303,000,000

Administration/Management General Manager 1 1 1 1 1Plant Manager 1 1 1 2 1Quality Control Manager 0 1 1 1 1Controller 0 1 1 1 1Commodity Manager 0 0 1 1 1Administrative Assistant 1 1 1 2 4

Subtotal 3 5 6 8 9Production Labour

Microbiologist 0 0 0 0 0Lab Technician 1 1 1 2 2Shift Team Leader 3 4 4 5 6Shift Operator 6 8 10 12 14Other positions 2 4 6 8 9Yard/Commodities Labour 1 0 1 2 3

Subtotal 13 17 22 29 34Maintenance

Maintenance Manager 1 1 1 1 1Boiler Operator 1 1 1 2 2Maintenance Worker 2 2 3 4 5Welder 1 1 1 1 1Electrician 1 1 1 1 2Instrument Technician 1 1 1 1 1

Subtotal 7 7 8 10 12TOTAL NUMBER OF EMPLOYEES 23 29 36 47 55Staff per 1.0 MMly of production 0.61 0.38 0.32 0.21 0.18 Source: Economic Impact Study for a Canola-Based Biodiesel Industry in Canada, prepared for Canola Council of Canada, by BBI Biofuels Canada, July, 2006, p. 7-6 & 7-7, and from adjustments made by the authors based on industry research.




As can be seen in the bottom row of the above table, the economies of scale for the personnel are significant. For plants that are very small, such as any below 10 MMly, the economies of scale can amount to a difference of over 10 cents/litre between large and small plants, just for the personnel costs.

It is critical for the success of the business that the plant manager/general manager has the appropriate business management experience. Paying a performance bonus based on several revenue and cost control measures is a good system.

A licensed boiler operator who meets the requirements for operating a boiler will be required.

A laboratory technician, with the appropriate experience will also be required.

As noted in the previous section, most of the biodiesel process technology/plant suppliers provide a number of assistance programs to the new biodiesel business. Training of the staff who are hired prior to completion of construction (so the key staff can work in other plants for a period of time) is offered by most of the companies. Most offer an experienced on-site supervisory staff during the time period when the plant is being commissioned and biodiesel production begins.

A variety of courses are offered on basic biodiesel production at conferences throughout the year, however the majority of the training for most of the plant workers will occur on the job in the plant.

Typical wage rates will vary dramatically depending upon the size of the biodiesel business, as well as other factors. The larger the plant, the greater the number of staff to supervise and the more compensation that will be needed to recruit satisfactory senior management.



24.0 Future Competition The following are the key competitive issues, in the expected order of importance based on their expected impact on the biodiesel business’ competitive advantage position relative to its competitors:

24.1 Incentives Available At the time this document was written, the various incentives available create a greater difference in competitive position than any other factor.

It is expected that the Canadian Federal Government and the provincial governments will implement a national program of biodiesel production incentives that will create a level playing field with the US incentives. And, they are expected to provide a national biodiesel mandate that will assure biodiesel producers of a domestic market.

Currently the federal incentives of 4 cents/l that are in the form of retail level tax relief are not restricted to be available only for biodiesel produced and consumed in Manitoba and Canada. So, imports can access this 4 cents/l. The provincial 11.5 cents/l cannot be accessed by imports.

When further policy announcements from the Province &/or the Federal governments occur, this competitive disadvantage to the US competitors is expected to be reduced or eliminated.

24.2 Economies of Scale – Lower Costs For businesses that produce a commodity such as biodiesel (and may also include canola meal) economies of scale are one of the typical ways to reduce costs and create a competitive advantage.

Size of Plants in the Biodiesel Industry:

Biodiesel plants do not have the same economies of scale factors as ethanol plants, but they do have economies of scale, with a few of the largest US plants now being built in excess of 300 MMly by ADM at Velva, ND and others. A more common size of biodiesel plant is in the range of 114 MMly. Some much smaller biodiesel plants are also being built.

Economies of Scale Analysis – Biodiesel Refineries:

The table below displays the economies of scale that occur for biodiesel plants. The table estimates the total project costs for a variety of sizes of biodiesel plants. The right hand column shows the capital cost per litre of annual capacity. As the size increases from very small plants (e.g. 3.8 MMly) to the larger plants, the capital cost per litre of annual capacity drops significantly.



Table 24-1: Biodiesel Plant Economies of Scale

Total Project Cost Plant Size x Average x Average

(Millions L./yr) x (Millions $) x ($/L) 3.8 x 4.87 x 1.29

11.4 x 9.35 x 0.82 18.9 x 12.75 x 0.67 28.4 x 16.35 x 0.58 37.9 x 19.47 x 0.51 56.8 x 24.63 x 0.43 75.7 x 29.59 x 0.39

113.6 x 37.58 x 0.33 189.3 x 51.11 x 0.27

Based on data from the Biodiesel Plant Development Handbook, January 2006 distributed by the National Biodiesel Board; available at www.biodiesel.org/ and on industry research by authors 1. Assumes biodiesel plant only, for low FFA degummed feedstock, no pre-treatment, no canola crusher. 2. Project costs add 15% for soft costs, interest during construction, professional fees, etc. 3. Adjusted based on industry research for cost escalation during 2006 and contingency factor

These differences in capital cost per litre of annual capacity impact:

• Amount of equity and debt financing that must be raised

• Depreciation and interest costs per litre of production

Financial analysis has shown that the above differences in capital costs impact the production cost per litre for depreciation and interest by approximately a $0.14/litre difference between the smallest and large plants.

Labour costs per litre of production are also a significant source of economies of scale. The labour costs per litre for the large plants are in the range of $0.07/litre to $0.11/litre less than for the 3.8 MMly plant. Management, general overhead and marketing costs are all impacted by economies of scale.

While economies of scale are driving the industry to build larger plants with lower costs to produce biodiesel, smaller plants can compete on other factors such as a focus on a local market that larger, more distant competitors cannot efficiently serve, or can only serve by incurring high freight costs.

The final section of the Crushing section addressed the topic of economies of scale for canola crush plants.



24.3 Cost of feedstock relative to other competitive biodiesel plants The majority of costs (often in the range of 70% to 80% of total costs) are for the raw material feedstock for a biodiesel plant.

Because of this, each proponent of a biodiesel business needs to analyze their feedstock costs against their competitors. The situation will vary for every new biodiesel plant.

It is interesting to note the relationship between canola prices and biodiesel feedstock costs. A $10.00 /t. price difference for canola will equate to a price differential, if all is related to the oil, of 2.2 cents/l. (One tonne of canola yields 0.40 tonnes of oil. Canola oil is 0.88kg./litre. One tonne of canola seed yields about 456 litres of canola oil)

24.4 Smaller Plant Competitive Factors A small to mid size biodiesel business can compete using factors other than economies of scale, to create competitive advantage. Community led biodiesel projects may have to create competitive advantages by:

• Creating unique business models such as tolling, new generation co-operatives, or other business advantages. Tolling is where biodiesel customers supply the feedstock and pay a tolling fee to the biodiesel plant to process the feedstock into biodiesel As long as the fee covers the operating and overhead costs, the biodiesel business can be viable against competitors.

• Developing niche premium market opportunities that make it difficult for competitors to serve the same customers. Having markets available that can be served with low freight costs, or that face limited competition, create a source of competitive advantage. These market advantages can be for biodiesel, or if an integrated plant is built, for canola meal

• Sourcing lower cost feedstock than competitors. If competitors do not have access to this lower cost feedstock, they cannot drive up its price.

Every biodiesel plant will face different market challenges and opportunities. Each new plant must analyze its own situation.



25.0 Strategic Risk and Mitigation Strategies

25.1 Lower Than Projected Biodiesel Prices Low crude oil prices will create corresponding low diesel and biodiesel prices for the new biodiesel business. Lower than projected biodiesel prices can also occur due to discounts on the biodiesel price relative to the diesel price. This price discount can occur if there is an oversupply of biodiesel relative to the market demand at any one time. (Because biodiesel is a commodity, it can always be sold into some market somewhere in the world, but at what price, FOB the plant, if there is an oversupply?)

The margin between the feedstock cost prices and the biodiesel selling price is the primary focus of the ongoing risk management activities of all businesses like a biodiesel business. The biodiesel business lives or dies based on this margin. High prices, or low prices, are not the risk. It is when feedstock costs and biodiesel selling prices move causing the margin to narrow that problems occur.

Sophisticated risk management procedures are needed to manage this risk. Specialized expertise is typically required. This can be obtained either through strategic alliances with a business that already utilizes these sophisticated procedures (such as a large oil seed crusher business) or from third parties that are contracted. Two of the best known risk management firms that provide training and deliver their services to a large number of ethanol businesses as well as a growing number of biodiesel businesses are:

• FC Stone LLC, Head Office: 2895 Westown Parkway, Suite 200, West DesMoines, IA, USA, 50266 OR Winnipeg Office: Jonathon Driedger, Risk Management Consultant, 90 Garry St., Suite 103, Winnipeg, MB, R3C 4H1, Ph: 204-942-5804, Cell: 204-612-3160, Ph. Toll Free: 866-634-7392, Email: [email protected] Website: www.fcstone.com

• R.J. O’Brien, Head Office: 939 Office Park Road, Suite 225, West Des Moines, IA, USA, 50265, Email: [email protected] Website: www.rjobrien.com

The risk management strategies must be designed to never be speculative, but to manage the risk to the operating margin.

These risks can be addressed by:

• Projecting sufficiently low biodiesel prices in the base case financial projection and sensitivity analysis

• Utilizing risk management programs such as those noted above

• Structuring the new biodiesel business with sufficient financial strength that if short term discounts on biodiesel prices (relative to diesel) occur, the business has the financial resources to continue until the discount period ends.

25.2 Higher Than Projected Feedstock Prices As noted above, the primary impact from high feedstock costs (whether canola seed for an integrated business with a crusher, or oil prices for a non-integrated biodiesel refinery) is to reduce the operating margin for the business.

These risks can be mitigated by:

• Projecting sufficiently high feedstock costs in the base case financial projection and sensitivity analysis

• Utilizing risk management programs such as those noted previously


http://www.fcstone.com/


http://www.rjobrien.com/



• Structuring the new biodiesel business with sufficient financial strength that if short term high feedstock costs occur, the business has the financial resources to continue until the discount period ends.

• In some cases it may be possible, especially if canola growers are the owners of the biodiesel business, to have an arrangement similar to the farmer owned ethanol plants in the US. When corn prices went very high, the farmer owned ethanol plants had the owners deliver corn for less than market price, so the ethanol business could survive. When the corn priced dropped (after less than one year) the business went on to make far more profits than what was given up the owners during the period of high corn prices. If canola growers own a biodiesel business, they have the same potential to create much less risk for the business. And the canola grower owners would only have to accept less than market prices for canola when the canola prices were higher than projected, so the farm business would not be placed under financial pressure to do this. It is expected that lenders would view such a strategy for a new biodiesel business very favourably

25.3 Feedstock Supply Shortages While the biodiesel industries in the EU, and possibly in the US, face a future where there will not be sufficient domestic feedstock, the position in western Canada is much more favourable.

In the US, the soy crushing industry derives most of its revenue from soy meal, not soy oil. They will not crush to meet oil demand unless there is also meal demand. Thus, higher soy oil prices are not expected to significantly increase the volumes crushed and the oil produced.

In Canada, the canola crushing industry derives most of its revenue from the oil, not the meal. Thus, an increase in canola oil demand does increase the supply of oil. This fundamental difference between soy and canola industries is not well understood by those outside the crush industry. It creates a significant reduction in risk for future western Canadian biodiesel plants that use canola oil as the feedstock.

With large volumes of canola produced and either the seed or the oil and meal products exported, the supply available is significant. With large increases in canola acreage expected as markets become more available, yield increases due to new hybrid varieties, and oil yield increases as new high percentage oil varieties become available, it is expected that the ability to obtain a supply will not be a significant risk.

This does not mean that non-integrated biodiesel refineries without crush plants will not need to take action to assure a long term supply, but it appears very likely that the western Canadian biodiesel plants will find this easier to do than biodiesel plants in other countries. Thus, the competitive position is very favourable on this factor.

The risk can be mitigated by:

• Biodiesel refineries forming strategic alliances with oil seed crushing plants

• Biodiesel refineries integrating crushing plants into the business (if the volumes are sufficiently large to gain economies of scale and have a competitive advantage)

• Having canola growers as owners. If canola growers are the owners of the biodiesel business, whether it has an integrated crush plant or not, they can either deliver their canola to their biodiesel business (if integrated with crush plant) or they can deliver to a crush plant on the condition that the equivalent volume of oil must be sold to the biodiesel business.



25.4 Government Incentive Reductions In the short term, at the time this report was finalized (December 2006) the Canadian federal government had not announced the national incentive programs. Until such time as this occurs, there is great uncertainty about any financial projections that include any support other than the existing levels of 4 cents/litre federal and 11.5 cents/litre provincial tax relief.

25.5 Project Risks The risks related to the development period for any new business occur prior to the startup of operations. They relate to the pre-construction and construction periods for the business. The key risks can be mitigated by:

• Utilizing experienced companies to assist in the plant design and capital cost estimates. All soft costs will also be identified and estimated. All working capital requirements will be researched. Thus the total financing requirements will be identified.

• Contracting for comprehensive (perhaps turnkey design build) approaches from one or more process technology supplier, engineering and construction company/consortium that have successfully built several similar biodiesel plants, and where the company/consortium has financial strength

• Obtaining bonds or insurance coverage for delays, cost overruns or lack of plant performance once built

• Allow significant contingency factors in the capital cost estimates in the financial projections

• Having financial strength in the business to allow for unforeseen adversities.

25.6 Management Management of a business is always a challenge and a risk. This risk can be mitigated by:

• Prior to recruiting the senior management, prepare a thorough job description for the General Manager (GM)

• Retain a professional human resources consulting firm to assist in establishing and documenting the job descriptions, management and governance systems, identifying the characteristics needed in a GM, and assisting in recruiting the GM.

• Preparing a written description of the governance structure that clarifies the roles and responsibilities of ownership and management.

• Obtaining assistance from the technology supplier with contacts in the industry to find an experienced GM (other positions are much less critical)

• The Board of Directors performing its role and responsibility.

These actions will mitigate the risk of poor management performance and reassure lenders that the common causes of poor management performance will be avoided.

25.7 Other Risks • Other risks such as property loss, business interruption, third party liability, etc. will have to be

covered to the extent possible by insurance coverage. An insurance company with manufacturing industry insurance experience will be needed to identify and mitigate all sources of risk.



• If a biodiesel business was going to export the biodiesel or canola meal (if it had an integrated canola crush plant), it would be subject to the risk of changes in the exchange rate for the US $. However, this risk is much less than might be expected because the canola seed or canola oil that is purchased as the feedstock has its price set in the US export market, and is also directly impacted by exchange rates. Thus, because feedstocks comprise the vast majority of the costs for a biodiesel plant, there is a “natural hedge” that provides significant protection against adverse US currency exchange rate changes.



26.0 Financial Analysis

26.1 Capital Costs Plant Size and Capital Costs

Three primary considerations in determining the plant size are:

1. Feedstock supply

2. Market size

3. Economies of scale to gain a sustainable competitive advantage

4. An additional consideration (but it should not be the first consideration) is the amount of equity that can be raised by the initial proponents (within the community or region) and their orientation to bringing in other equity investors.

Criteria 1: Feedstock Availability

Manitoba has sufficient canola available to produce large volumes of canola oil. If an integrated crush plant and biodiesel plant is built, it is expected that a sufficient supply of oil can be obtained (negotiations required to confirm), such that feedstock supply will be available for any of the plant capacities that will be considered.

With feedstock not the limiting factor, the size of the selected target markets is the next most significant factor in the final determination of the appropriate plant size.

Criteria 2: Market Size

If there is an RFS mandate in Canada (using existing retail level incentives) the earlier sections shows the Manitoba market size is small relative to the biodiesel plant sizes required to gain economies of scale.

Regional multi-province markets create the potential for larger volumes, and the US market size is estimated to be sufficient that even a large plant (114 MMly) would supply a very small share (only one or two %). Thus, while the size of the Manitoba market is a restriction on building a plant with economies of scale, regional and the US markets are sufficient size that there are no restrictions on plant size.

Criteria 3: Economies of Scale - Competitiveness

Biodiesel is a commodity. With commodity type products it is not possible to differentiate them significantly from competitor’s products and be able to obtain a higher price. Therefore, with a commodity product, the only key competitive advantage is to have lower costs than enough of your competitors such that:

1. You can have above average profits, and

2. When a downturn occurs your business can survive longer than most others so that the odds are good of regaining profitability when the downturn ends.

To gain a competitive advantage from low costs, the dominant cost; feedstocks, must be available at a competitive price. In addition, the second most significant way to lower costs is to have sufficient plant capacity to gain economies of scale, lowering capital costs per litre sold and lowering labour/management costs per litre sold.



Criteria 4: Level of Equity Available

An additional consideration (but it should not be the first consideration) is the amount of equity that can be raised by the initial proponents (within the community or region) and their orientation to bringing in other equity investors. The reason this should not be the first consideration is that if a business and plant can be designed that have competitive advantages and thus have the potential to be quite profitable with moderate risk over an extended period of time; then it is possible to raise far more equity.

The level of equity that can be raised also impacts the amount of debt financing that can be obtained.

Biodiesel Plant Size

To assist in putting the different sizes of biodiesel plants in perspective, the following is provided:

A 2 ml/yr plant with integrated crush plant would require 4,400 tonnes/yr. of canola (at a 40% oil yield the oil volume = 2 MMly). (This equates to about 220 semi-loads of 20t. each (fewer if super B’s), per year. Or, about 4.7 semi-loads per week with 47 weeks/yr – 330 day/yr operations.) A 2 MMly plant would generate 2,640 tonnes of co-product canola meal.151

A 10 MMly plant with integrated crush plant would require 22,000 tonnes of canola (about 23.4 semi-loads/wk at 20t./load) (at a 40% oil yield the oil volume = 10 MMly) and would produce 13,200 tonnes of canola meal.

A 57 ml/yr plant with integrated crush plant would require 125,400 tonnes of canola (about 133 semi-loads/wk at 20t./load) (at a 40% oil yield the oil volume = 57 MMly) and would produce 75,240 tonnes of canola meal.

A 114 ml/yr plant with integrated crush plant would require 250,000 tonnes of canola (about 266 semi-loads/wk at 20t./load) (at a 40% oil yield the oil volume = 114 MMly) and would produce 150,000 tonnes of canola meal.

To decide on the size of plant, a strategic business decision has to be made. The choice is:

1. Will the biodiesel business be small and slowly develop a local market until there is an RFS mandate implemented and then focus just on the Manitoba market? In this case the plant size will be dictated by the expected market size, which will be small. And, the timing of its development may be delayed until the Canadian Federal Government policies are announced and perhaps until the details are known in the spring of 2007.

OR,

2. Will the biodiesel business be larger, of a size and business structure to gain economies of scale and compete with Dakota Skies Biodiesel (114 MMly) at Minot, ND, ADM (322 MMly) at Velva, ND and other plants such as the possible Canadian Bioenergy Corporation (114 MMly) at Fort Saskatchewan, AB. (These competitors will enter the Manitoba market and compete with all biodiesel businesses in Manitoba.)

If the plant is to be small, it must find niche markets. This may be possible until the biodiesel industry develops. Then, (e.g. when a national RFS mandate allows national marketing of biodiesel) there will be a rapid expansion of Canadian and Manitoba markets, increased competition from large efficient competitors, and the small plants will face increased price pressure at the wholesale level unless the business model minimizes the competitive pressures and costs wherever possible.

151 One tonne of canola yields 0.40 to .42 tonnes of oil. Canola oil is 0.88kg./litre. So 1 tonne of canola yields 483 litres of canola oil.



For a larger plant, the domestic market in Canada must be multi-provincial, and will only be of a sufficient size after an RFS mandate is established and the oil companies distribute biodiesel blends.

For a larger plant, the only currently available initial market on which to base a competitively sized biodiesel plant appears to be the US export market. The exact size of plant that will have a competitive advantage requires further intense analysis, including the input of the process technology suppliers, engineers and others. However, based on the size of plants now being built/proposed and on discussion with a number of industry participants, it appears that the 114 Ml/yr capacity plant size is a competitive scale. Even at this size, ADM in Velva, ND will be a serious competitor with its 322 ml/yr plant and its established biofuels (ethanol and biodiesel) marketing network and experience. The other plants in the US, many of which will face shortages of feedstock and do not have the advantage of economies of scale to the extent of even the Dakota Skies 114 M/l/yr plant, much less ADM’s size, may be at a competitive disadvantage to even a smaller plant, perhaps in the range of 57 Ml/yr. (Further research is required by each biodiesel proponent to identify the exact size of biodiesel plant that will be optimal.)

Biodiesel Plant Capital Costs

Estimates of capital costs are often stated without defining what is included in each estimate. The major pieces of equipment that form the core of the processing technology are typically only 20% to 25% of the total installed costs. If all equipment is included (e.g. valves, fittings, pipes, instruments, gauges, etc.). the cost of all equipment is typically still only in the range of 33% to152 40% of the total installed costs.

Even once the building construction, equipment assembly and installation costs are added; it is not all of the tangible capital costs. Land, and especially all the site services and infrastructure for electricity, water, waste water handling, on-site roads and parking, natural gas, etc. must be included. Even after all ‘hard’ costs are known, it is still necessary to add the ‘soft’ costs for engineering, design, professional fees (e.g. feasibility studies, business plans, environmental licensing applications, etc.), interest during construction, etc. to obtain a more accurate estimate of total capital costs.

In addition to these costs, there are the costs of management and business operations during the construction period, plant commissioning costs, etc. that must be added to obtain an estimate of the total project costs to get to the point where the plant is ready to start production of commercially saleable products.

When identifying the funding requirements for the new business, in addition to the above it is also necessary to identify the operating capital (building up the initial raw material and finished goods inventories, funding the initial accounts receivable until payments start to occur, etc.) and initial market development costs that must be funded by the new business before it begins to generate positive cashflow.

The use of recycled oils (yellow grease, etc.) adds to the capital costs, to cover costs for bleaching, filtration, pre-treatment and initial esterification of the recycled oils. These process units (often referred to as “flexible front end”) may comprise 25% of the total capital costs for a biodiesel plant. All capital cost estimates shown below are for plants using low FFA virgin vegetable oils (unless noted otherwise) so if recycled oils are going to be used, these added costs must be included.

The most recent and comprehensive study currently available was distributed by the US National Biodiesel Board is more current than the above information. The range of capital costs for different

152 Jon Van Gerpen, Department of Biological and Agricultural Engineering, University of Idaho, during June 2006 presentations in Manitoba



biodiesel plant sizes (no crush plant) suited to low FFA feedstock (and thus will be similar costs to a plant using canola as the feedstock), are shown in the table below. Also shown are the costs per litre of annual production capacity.

Research indicates that capital costs escalated rapidly in 2006. The table below is based on data released January 2006. An escalation factor of 35% has been applied, by the authors, to the original information.

Table 26-3 Range of Total Project Costs - Biodiesel Plant - 2006

Plant Size Low High Low High(Millions L./yr) (Millions $) (Millions $) ($/L) ($/L)

3.8 3.33 5.43 0.88 1.4311.4 6.31 10.51 0.56 0.9318.9 8.59 14.37 0.45 0.7628.4 11.04 18.40 0.39 0.6537.9 13.14 21.90 0.35 0.5856.8 16.65 27.69 0.29 0.4975.7 19.98 33.29 0.26 0.44

113.6 25.41 42.23 0.22 0.37189.3 34.52 57.47 0.18 0.30

Based on data from the Biodiesel Plant Development Handbook, Jan. 2006 distributed by National Biodiesel Board; available at www.biodiesel.org/ & on research by authors. The 2006 Escalation Factor = 35.0%1. Assumes biodiesel plant for low FFA feedstock & no canola crusher. 2. Project costs add 15% to "Installed Costs" for soft costs3. Adjusted for cost escalation during 2006 4. Assumes US$0.88 = Cdn$1.00

Total Project CostTotal Project Cost

The total project costs displayed in the above table show that the upper end of the range of estimates is a high of $1.43 per litre of annual capacity for a very small plant; to a low of $0.18 /l for a large plant at the lower end of that range of cost estimates. (All are in Canadian dollars per litre). This is a very wide range and displays the fact that while the economies of scale for biodiesel plants are not as great as for ethanol, when very small plants are compared to larger plants, economies of scale are still a significant factor. (Labour costs are similarly affected by economies of scale.) The table also shows that there is a wide range of costs for any particular size of plant.

As was previously identified in Section 24.2 “Economies of Scale – Lower Costs” analysis of the column in the above table for the estimates at the high end of the range shows that the cost/l of annual capacity drops from $1.43 to $0.49 when increasing the plant size from 3.8 MMly to 57 MMly. When the plant size is increased further, up to 114 MMly, the capital cost/l of annual capacity drops to $0.37. Thus, much of the cost reductions from economies of scale of a large plant are gained by a 57 MMly plant. As displayed previously in the graphical representation of capital costs, there are diminishing economies of scale improvement when increasing from large to even larger plants. The 189 MMly plant is 75 MMly larger than the 114 ml/yr plant, but the capital cost/l only drops from $0.37 to $0.30 respectively. However, this $0.30 is still significantly less than the $0.49 capital cost/l for the 57 MMly plant.

The 322 MMly and the 378 MMly plants being built in North Dakota and Washington will have economies of scale even greater than those shown in the table above.



Using recycled oils and greases as feedstock requires that they be degummed and pretreated. For a 38 MMly plant using recycled oils and greases, the capital costs for degumming are estimated to be $2,399,080153. An additional capital cost for recycled oil pre-treatment and esterification is estimated to be $5,959,540.

Integrated Canola Crush Plant

A 114 MMly biodiesel plant will require 100,000 t/yr of canola oil crushed from 250,000 t. of canola seed. A 57 MMly biodiesel plant will require 50,000 t/yr of canola from 125,000 t. of canola seed.

Canola crush plant capital costs for several size plants are estimated in the table below:

Table 26.4: Canola Crush Plant Capital Cost Estimates - 2006

Canola Crush Plant Capital Cost Plant Size Plant Size Plant Size Capital Cost Capital Cost Capital Cost

Canola Seed Input Tonnes of oil output L. of oil output x Estimate x Estimate x Estimate(Tonnes) (1) (Tonnes/yr) (Millions L./yr) x (Millions $) x ($/T seed) x ($/L. oil)

83,333 33,333 38.0 x 21,617,357 x 259 x 0.569166,667 66,667 76.0 x 29,778,075 x 179 x 0.392250,000 100,000 114.0 x 37,766,707 x 151 x 0.331331,140 132,456 151.0 x 47,171,869 x 142 x 0.312497,807 199,123 227.0 x 69,517,513 x 140 x 0.306664,474 265,789 303.0 x 90,082,206 x 136 x 0.297

Notes and AssumptionsSource: Report for Canola Council of Canada, "Economic Impact Study for a Canola-Based Biodiesel Industry in Canada"by BBI Biofuels Canada, July, 2006, p. 8-4

1 Assumes oil yield of 40% by weight from canola seed2 Assumes canola crush plant only (with solvent extraction & equipment to produce crude degummed oil) no refinery 3 Does not include plant commissioning, land, administration building/furnishings, rail siding, well & process water

treatment, site development costs, rolling stock and shop equipment, organization costs, fees, interest during construction, nor contingency.

4 Assumes US$0.88 = Cdn$1.00 5 Approximate announced costs; includes refinery for both and extra equipment for 840,000 t/yr plant.

A review of the size of the existing canola crush plants in western Canada in the earlier “Crushing” section of this document identified a number of issues regarding appropriate sizes of canola crush plants. Both the information developed in the earlier “Crushing” section, the table above, and research with industry participants, indicates that the minimum size for a canola crushing plant integrated with a biodiesel plant is in the range of 57 MMly to 114 MMly of canola oil output, or 50,000 to 100,000 tonnes or oil output or 125,000 to 250,000 tonnes of seed input for processing. Independent crush plants would have to be much larger to be competitive.

Small canola crush plants face challenges due to the lack of economies of scale to install solvent extraction. Equipment for smaller volume crush plants, without solvent extraction, can be obtained at capital costs of approximately:

• $650,000 at capacity of 7,500 tonnes/yr of canola seed processed (24 hour/day x 315 days) 153 Source: Feasibility Study for a Biodiesel Refining Facility in the Regional Municipality of Durham, by BBI Biofuels Canada, February, 2006, p. 8-6



• $1 million at capacity of 16,000 tonnes/yr of canola seed processed

• $1.8 million at capacity of 30,000 tonnes/yr of canola seed processed, and

• $2.8 million at capacity of 60,000 tonnes/yr of canola seed processed.

These costs are only for the core pieces of equipment to clean, heat, press (first press extracts 1/3rd to 1/2 the oil), extrude, press (second to again extract oil), cool and dry the meal. Also needed are: land, site improvements, building, installation, all professional design and business organization, all piping/valves/etc., storage and handling equipment for seed/oil/meal, all sites services (water, electrical, natural gas, etc.) and any other costs.

As noted previously, the major pieces of equipment that form the core of the processing technology are typically only 20% to 25% of the total installed costs.

Section 12.5 provides a competitive analysis of the challenges faced by plants without solvent extraction, such as those for which costs are provided above.

26.2 Accrual Basis Financial Information To provide information appropriate for making decisions regarding feasibility, it is necessary to develop accrual basis financial projections. The proponents of the new biodiesel business need this information to make sound financial decisions. Also, lenders and will typically not accept any other standard for the preparation of financial projections.

26.3 Clarity of Assumptions All assumptions must be clearly defined. In some cases, due to the reduced level of detail and documentation compared to a business plan, a feasibility study will note the sources of information and assumptions that lack the precise documented detail that must be developed later. E.g. for the final version of the business plan, the capital costs must be supported by detailed contracts from suppliers and contractors. However, for a feasibility study, this level of detail and documentation will not yet be available.

All significant revenue and cost items must have the assumptions clearly defined so that a reader of the document can have confidence and have few unanswered questions.

26.4 Proforma Estimated Income Statements Proforma (projected) accrual basis income statements must be prepared by each biodiesel plant proponent for the specific business that is proposed. The Example Income Statements (Proforma) found in Appendix 1, pages 1 and 2 are provided for three different size plants. The notes and assumptions that describe what the numbers on page one are based on, can be found on pages 2 and on page 4 “Biodiesel Plant Operating Cost Worksheet”.

The majority of the operating costs (60% to 73%) of a biodiesel plant are for the feedstock. Other operating costs consist primarily of labour, methanol, catalyst, and maintenance costs.

Methanol prices have been trending upwards from US$123/tonne in October 2001 to December 2004, when they were US$316/tonne. They stayed in the US$339 to US$356 range for 20 months (all of 2005



and until August of 2006). Then they increased rapidly to US$442/tonne154 in September and US$599/tonne in October of 2006.

Average methanol prices increased at this time for two reasons: 1) ongoing increasing global demand from the global biodiesel industry, and mostly, 2) the two largest methanol plants in the world experienced unplanned shutdowns in August. These plants, in Trinidad and Equatorial Guinea, supply a significant portion of the methanol serving the North American market. Average methanol contract prices, which had been around Cdn$378/tonne, rose to Cdn$681/tonne (US$599/tonne) in October, 2006.

The three different size plants have different costs per litre for a number of items. These are identified on the top of page 4.

The Example Income Statements (Proforma) found in Appendix 1, pages 1 and 2 show depreciation and interest are the items that differ the most between plants; from $0.148/l for the smallest plant to $0.057/l for the largest, a $0.091 (9.1 cents) per litre higher cost for the small plant. The next largest difference is direct labour. It differs from $0.062/l for the smallest plant to $0.008/l for the largest, a $0.054 (5.4 cents) per litre higher cost for the small plant.

Total costs per litre of biodiesel vary from $0.950/l for the smallest plant to $0.799/l for the largest, a $0.151 (15.1 cents) per litre higher cost for the small plant.

Net income before tax is shown, based on incentives that exist in early December, 2006. However, if the Manitoba and Canadian government incentives equal those in the US (or there were US sales), then the smallest plant is not profitable but the other two plant sizes are profitable. The 114 MMly plant would have the highest profits per litre and highest return on equity (ROE).

Total revenue per litre is shown. It displays the impact of different levels of incentives.

Individual biodiesel plant proponents should prepare multi-year income statement projections. The first year will show the impact of starting the plant production volumes in the first month at less than full capacity and ramping up over time. The estimates of ramp up should be based on the historical experience of similar plants and process technology from the same process supplier. If a proponent is developing their own processing technology and equipment, planning for a long period for the commissioning and ramp up to full production is recommended.

The multiyear income statement projections are not provided in Appendix 1 due to the need to show multiple plant sizes that provide appropriate information to a variety of users of this document. Proponents can obtain the assistance of their accountant or consultant to prepare their own multiyear projections based on their own specific plans.

26.5 Proforma Estimated Balance Sheets Example Balance Sheets (Proforma) are shown on page 3 of Appendix 1 for the same plant sizes. The assumptions regarding working capital items such as accounts receivable and inventories will have a significant impact on the amount of financing required when the plant commences operations and these items have to be funded. Each biodiesel plant proponent needs to develop their own specific assumptions.

154 Methanex methanol price sheet shows conversion of US$/MT using a rate of 332.6 US Gal. per MT or 1,259 litres/tonne



26.6 Proforma Estimated Sources and Uses of Funds Statement Financial planning must include a proforma Source and Use of Funds Statement. This displays the assumptions regarding all sources of financing and how the funds will be used. E.g. purchase equipment, etc.

26.7 Proforma Statement of Cashflows Proforma Statements of Cashflow should be prepared, showing monthly items during year one and annually thereafter. This information is needed to identify the timing of financing requirements and to make appropriate plans. These have not been provided in Appendix 1 because of the need to provide information for multiple plant sizes, thus making it excessively complex to attempt cashflow projections for multiple plant sizes.

26.8 Worksheets and Supporting Detail Biodiesel Plant Operating Cost Worksheet is shown on page 6, and Example Estimates of Personnel Requirements are shown on page 5. These provide the details that explain information on the Income Statements.

26.9 Breakeven, ROI & Ratio Analysis Breakeven Volume in litres and breakeven as a percentage of capacity, Return on Equity (ROE) (same as Return of Investment - ROI), Debt to Equity Ratio, Debt Coverage Ratio, and a variety of other ratios need to be calculated and shown.

26.10 Summary The financial proformas in Appendix 1 show that, for Manitoba biodiesel plants with the assumptions shown, with existing (December 2006) levels of incentives and conservative assumptions for future biodiesel prices, only the larger plants are profitable and only if the incentives are at the US levels. With higher oil prices and biodiesel prices than shown in these base case proformas, significant profit potential exists.

27.0 Sensitivity Analysis Sensitivity Analysis is required when preparing financial proforma for a new biodiesel business. Assumptions for the key factors should be changed (e.g. biodiesel price and feedstock price; and potentially other factors as well).

If such analysis was developed for the base case assumptions in Appendix 1, it would show that if the price of biodiesel or canola oil are changed, significant changes in the financial results occur.

Reductions in the price of biodiesel and increases in the price of canola oil feedstock have significant negative impacts. Based on the wide variation in diesel rack price that have occurred over the past two



years, it appears that the variation in biodiesel price are more probable than the same percentage variation in the price of canola oil feedstock. Given that canola oil prices are highly correlated to the price of canola seed, the above comment applies to canola seed as well.

Also, the biodiesel price represents nearly 80% of revenue, so its impact on net income is very significant. Canola feedstock represents about 70% of costs, so while very significant, it has less impact than a similar percentage change in biodiesel price.

If the price of biodiesel was changed from the base case assumption shown in Appendix 1, to a price of 68 cents/litre, the smallest plant would be slightly better than break even and the larger plants would be significantly profitable. This assumes that all other assumptions, including the feedstock price stay the same.

This highlights the sensitivity of the projected financial results for a biodiesel business to the price of biodiesel and costs of feedstock. A biodiesel plant is a high turnover business with narrow margins; so a few cents change in the margin (spread between feedstock costs and biodiesel selling price) has a huge impact on the profits of the business.

Methanol prices, while having risen dramatically, have a much smaller impact.

The Sensitivity Analysis also shows the impact of a delay in the commissioning of the biodiesel plant. The significant amounts shown, from over $1 million for the smallest plant to over $23 million for the largest, will require planning for such a contingency when arranging financing.



28.0 Financing the New Biodiesel Business Common Steps:

Obtaining financing for the business requires raising equity and debt. Common steps in this financing process include:

• Injection of initial risk money to conduct initial investigations

• Legal advice on raising equity

• Initially, personal or business investment by the initial proponents, close friends, economic development agency or government department funding part of the costs for a feasibility study, etc.

• Raising equity from a larger group to fund business planning, initial value engineering and other early stage costs

• Raising sufficient equity to finish all business planning, plant engineering/design costs sufficient to get a firm quote on a complete plant with soft costs included such as interest during construction, licensing costs, costs of the business during the construction and commissioning period, and including all business start-up and working capital funds required

• Negotiating with debt lenders to identify what terms and conditions have to be met for them to approve a loan or loans on satisfactory terms.

A Valuable & Different Perspective of Lenders:

Proponents of a new biodiesel business should think of lenders as if they were “customers”.

There are many different types of lenders. Banks, credit unions, Business Development Bank of Canada, Farm Credit Canada, venture capital funds, private equity funds investing in biofuels, and others all focus on different types of deals. The different types of lenders each have a specific lending criteria and security requirements. However, because there is no lending experience with biodiesel plants in Canada, a bank or credit union will not approve a high percentage loan (say 65% of total assets) with a long repayment term (say 12 years) on a new start-up biodiesel business. There are other financiers that may like this type of deal and would take a percentage of equity as well as debt in such circumstances. Or, the amount of debt being sought may be reduced by having a plant supplier invest equity. With a start up business in an emerging industry, it is anticipated that most lenders will require an increased level of equity, including the possible requirement of personal guarantees and a lower level of total debt prior to providing the debt financing.

General Requirements of Lenders:

It is important to recognize several general requirements of lenders:

• There are many types of loans available from a variety of sources, not just traditional term loans from banks or credit unions (although these are usually the lowest cost sources of debt). To avoid losing credibility, it is necessary to do sufficient research about what type of loan each lender will approve, before submitting a proposal or business plan requesting the completion by the bank/credit union of a draft term sheet.

• No lender will spend much time even reviewing a loan request, much less approving it, unless they believe the champions of the business have (or will hire in a timely manner) the experience and expertise to 1) ensure the management of the new business will be well executed, and 2) manage the



project of developing the new business throughout the construction, market development, plant commissioning, and recruiting of key staff. Lenders will typically focus their questions on the management of the business, because their experience shows this is a common deficiency.

• Lenders will want to see that there is a good understanding of the risks and of the need for strong financial management systems during construction and the start-up of the business.

Specific Requirements of Biodiesel Business Lenders:

This section provides information regarding the typical terms and conditions that are required for a loan to be approved from conventional lenders. It should be noted that until the biodiesel industry is more established in Canada, and more biodiesel plants have been successfully built and become profitable, lenders will remain cautious, especially most of the charter banks.

Manitoba Agricultural Services Corporation:

Manitoba Agricultural Services Corporation (MASC) may be able to provide some degree of loan guarantees (typically 25%) to assist commercial lenders to approve loans under better terms. However, they typically only provide these guarantees if the gross income is less than $1.5 million per year, and other criteria are met.

A biodiesel plant could qualify for a Rural Entrepreneurship Assistance Program loan (max $200,000 loan) guarantee if it has less than $1.5 million in sales and meets all the other criteria. Commercial scale biodiesel plants will therefore, not qualify.

A larger project could qualify for an Enhanced Diversification Loan Guarantee (DLG+) which has no maximum on project size if the majority of owners are farmers residing in Manitoba and meets all other criteria.

The project may also qualify for an Operating Credit Guarantee (maximum line of credit $700,000 for corporations) if the majority of owners are farmers residing in Manitoba and it meets all other criteria.

Consideration of any project’s request would be subject to various program terms and conditions and appropriate due diligence.

For more information contact:

Manager, Guarantee and Special Programs, Manitoba Agricultural Services Corporation

229 Main St. S., Box 100, Morris, Manitoba, R0G 1K0 (204) 746-7509

More information is available at www.masc.mb.ca/masc_lend.nsf/%20lend_home.html

Mr. Kelly Rich, Sr. Manager of Lending, for the Alberta Agriculture Financial Services Corporation (AFSC) advised in November 2006 that the potential terms of financing for biodiesel proposals that would be satisfactory to AFSC would include:

• Maximum total debt of 50% of total assets. (Note, other lenders have indicated they would not like to see total debt of more than 40% of total assets until they see a number of successful biodiesel businesses).

• Maximum of a 7 year term on fixed asset loans.

http://www.masc.mb.ca/masc_lend.nsf/%20lend_home.html



• Total debt to not exceed 3 times annual “net cashflow”.155

• Term loans of up to 65% of the value of specific fixed assets being financed.

• At least 20% contingency factor in the capital cost estimates for plant equipment, process technology and building.

• Demonstration that the equity has been raised, or confirmation that it will be raised before any loan is approved.

• Demonstration of long term supply contracts for feedstock (canola seed if the business is large enough to justify an integrated canola crushing plant or oil feedstock for the biodiesel plant).

• Demonstration of the risk management expertise and management systems to mitigate the potential negative impacts on the biodiesel business’s operating margins of higher feedstock costs or lower biodiesel prices. (See the “Strategic Risks and Mitigation Strategies Section for more information on this topic.) Typical insurance and other types of risk management would also be required.

• Confirmation of a market for the biodiesel and other key by-products using long term contracts.

• Corporate governance and management team with proven successful relevant business experience.

• Proven process technology and plant construction demonstrated in at least several previous plants where it came in ‘on budget’, ‘on time’ and where the plant performed to design specification for volume and quality of biodiesel in the specified time. The process technology supplier and contractor will be required to post performance bonds for each of these three aspects 1) on time, 2) on budget, and 3) plant performance. With the concerns regarding biodiesel quality being so significant, the plant performance for both volume and quality will have to be guaranteed by way of a bond.

Some Financing Sources:

Some of the sources of grants and low cost financing include local economic development agencies, such as Community Development Corporations, Community Futures, etc. Also, the Province of Manitoba can assist with feasibility studies and business plans through the Rural Economic Development Initiative (REDI) Feasibility Studies Program, Department of Agriculture, Food and Rural Initiatives. (Call any Growing Opportunities Office for further information.).

Other provincial programs include:

• Manitoba Community Enterprise Development Tax Credit Program

• Manitoba Agricultural Services Corporation (MASC)

• Manitoba Agricultural Value Added Initiatives (MAVI).

Federal Programs with a special focus on biofuels and farmers include:

• Biofuels Opportunities for Producers Initiative (BOPI) Website: www.agr.gc.ca/acaaf/bopi-imbp/index_e.php

• Capital Formation Assistance Program (CFAP):

155 Net cashflow is typically defined as the calculation of the amount that the business would be able to pay towards interest and principal and still be able to pay all other expenses for the year.





• $200 million over 4 years in repayable contributions

• Supports the construction of new or expanded transportation biofuels production facilities that use agricultural feedstock

• Opportunity for primary producers and new co-operatives to diversify their economic base and invest in the production of biofuels

• Program contributions are based on annual biofuels production capacity and level of farmer contribution to project costs

• Policy and funding announced December 20, 2006. Program details expected in spring 2007.

• Planning and Assessment for Value-Added Enterprises (PAVE) Website: www.agr.gc.ca/ren/plan/index_e.php?page=intro

• A number of other industry assistance programs also exist, including several under the National Research Council’s - Industrial Research Assistance Program (IRAP) Website: http://irap-pari.nrc-cnrc.gc.ca/

Some of the lenders that may be considered include:

• Credit Unions

• Banks

• Provincial government lending agencies such as Manitoba Agricultural Services Corporation (MASC) Website: www.masc.mb.ca/masc_lend.nsf/%20lend_home.html

• Farm Credit Canada (they have been increasingly active in the processing sector) Website: www.fcc-fac.ca/

• Business Development Bank of Canada (BDC) Website: www.bdc.ca

• A variety of specialty biofuels lenders are becoming active. They almost always are only interested in biodiesel businesses that are relatively large.

29.0 Strategic Alliances The selection of suitable strategic partners is critical. The most important factor is selecting a strategic partner that has compatible people with compatible values, culture, long term goals and decision making processes.

The suggested order of priority for targeting businesses is based on the strategic needs (other than money). Often these needs involve developing and accessing markets for biodiesel, followed by the other priority needs that the new biodiesel business is likely to face. An example of a potential priority list for a community group is shown below:

1. Provide identified markets and provide marketing expertise/experience for biodiesel is the most critical. In addition, markets for canola meal (if an integrated crush plant is built) and glycerine also need to be identified and accessed.

http://www.agr.gc.ca/ren/plan/index_e.php?page=intro

http://irap-pari.nrc-cnrc.gc.ca/

http://irap-pari.nrc-cnrc.gc.ca/

http://www.masc.mb.ca/masc_lend.nsf/%20lend_home.html

http://www.fcc-fac.ca/

http://www.bdc.ca/



2. Provide assured access to feedstock, at a competitive cost.

3. Provide general business management credibility with lenders (have operated a biofuels business successfully for a number of years.) This need can also be covered by confirming the process of recruiting the General Manager with such experience.

4. Provide proven process technology suited to the new business’s strategy and volumes (i.e. have constructed a number of plants that completed construction on-time and on-budget and produced the specified quality and quantity of products with the specified yields and plant operating results. Also, that the plants have been successfully operating for a period of time, and are appropriately sized plants, preferably using canola as the feedstock)

5. Provide credible Quality Assurance systems to meet ASTM and BQ9000 standards, etc.

6. Sufficient equity to assure lenders that they can weather a downturn - so financing can be obtained. (This criteria may be the first or second most important, but if all the other criteria can be met, then this criteria will be less difficult to achieve, because the credibility will exist and will allow the raising of equity and debt to be successfully completed.)

30.0 Business Concept & Structure A Feasibility Study should include at least a general review of the business structure options (e.g. sole proprietor, corporation, cooperative, partnership). If one business structure is clearly the obvious one to be used, it should be noted. If it is not clear which is appropriate (and that can only be finally decided after completion of the feasibility study), then the steps to be taken should be noted. The determination of the business structure after completion of the feasibility study could be due to a variety of factors. E.g. perhaps due to the need to commence negotiating a strategic alliance and find what business structure is required for the strategic alliance to be successfully completed.

Requirements for financing, producer delivery requirements for raw material (e.g. canola), taxation, governance, ownership control and other considerations will determine the optimal business structure. It is likely that professional expertise will be needed to finalize the business structure.

The business structure and concept can be used to create a competitive advantage for the business. For example, a new generation cooperative (or corporation that achieves the same objectives) can be used to attract canola farmers as investors and owners. A significant risk reduction can be created for both the farmer owners and for the biodiesel business from this structure. Farmers will benefit when canola prices are high, although the biodiesel business may suffer. However, when canola prices are low, the biodiesel margin should be profitable for the farmer owners although their canola sales revenue will be lower.

Other options exist to create competitive advantages from the business structure and concepts.



31.0 Determination of Feasibility and Summary At the completion of the feasibility study there should be a clear statement of whether the new business appears to hold the potential to be feasible (profitable and viable) for at least the foreseeable future. This section must state the relevant assumptions on which this conclusion is based. It should also identify the appropriate next steps that the new biodiesel business should take; either to proceed or if the business’s viability is in question, to see if there are alternatives that can improve the situation so that it could be feasible and viable.

The review of the US potential production capacity in Section 6.3 and the size of the US market in Section 16.3 indicates concern for the future. With the rapidly expanding US biodiesel production capacity, there are indications that by 2008 the production capacity will exceed the ability of the market demand, infrastructure and logistics systems to grow quickly enough.

If production capacity exceeds the US market demand for a period of time, the US plants may cut prices to gain added sales. If this happens, it will lead to price discounts for biodiesel relative to diesel rack prices. If capacity exceeds the US market demand, the US plants, especially those plants closest to Canada, will also seek expanded geographic markets and export more to Canada. This would lead to a period of intense competitive pressures and reduced profits, which typically could force the least competitive plants to cease operation. Thus, all Manitoba new biodiesel plant proponents need to conduct an in-depth market analysis at the time when they are making decisions. The feasibility study process should include interviews of US based biodiesel marketers to gain their up to date insights when decisions are being made.

The level of government incentives is the largest factor affecting profitability. Incentive levels are known in advance of building a biodiesel plant, so they are not a factor in future variability in profits.

The variability in the price of biodiesel is identified as the biggest impact on a biodiesel plant’s future profits, followed by variability in the price of canola raw material (seed or oil).

Quality assurance programs to ensure that all biodiesel production meets ASTM standards are a requirement that appears to need to be emphasized more than has occurred in the past. Proponents are encouraged to address this issue carefully, as surveys in 2006 indicate that up to 1/3rd of US biodiesel plants are not consistently achieving this standard. It appears that in addition to improved cold flow properties and lubricity characteristics, canola based biodiesel may also have other benefits, because in the EU (which predominantly uses rapeseed oil) there are virtually no reports of quality problems with biodiesel. More research is still underway regarding all the quality issues identified in the US.

The competitive position for Manitoba biodiesel plants with economies of scale should be favourable in the longer term, due to Manitoba growing more canola than is used domestically in the province. Thus, whether it is canola seed, or canola oil (raw material for biodiesel production) and meal, it will always be priced at the level that allows it to be exported into distant US and offshore markets. Also, compared to other locations in the US (and EU) that will face shortages of domestic feedstock, a Manitoba biodiesel plant should not face similar shortages. (However, this does not mean the biodiesel plant may not face price pressures to obtain its feedstock and therefore needs to be assured of a long term supply.)

Thus, a biodiesel plant in Manitoba can obtain its raw material at export basis prices, which should, on average in the longer term, allow Manitoba plants to export biodiesel and still be competitive with other locations that have large market opportunities. E.g. Ontario and a number of US regions.

While the Canadian national policies do not (at the time of this report) provide mandates to create a national market, or incentives sufficient to match US competitors, it is expected that federal government announcements will address these policy areas in late 2006 or early 2007. Whether they will match the US levels is yet to be identified. If they do not, Manitoba biodiesel businesses are expected to find it



attractive to market all biodiesel to the US where they can receive the higher incentives. Trade issues are not expected to be a problem for this liquid fuel, which is similar to exports of petroleum liquid fuels, for which Canada is the leading supplier to the US.

32.0 How to Retain Professional Advisors Typically the development of a new biodiesel business requires retaining professional assistance, such as an experienced engineers, environmental specialists, lawyers, consultants, etc. The key to obtaining satisfaction with these professional services is to:

1. Clearly define what assistance is needed. If this is the first time that the people involved are developing a new business of this type, it is recommended that they speak to a variety of people who have done it before, or who have at least participated in the development of a number of new businesses. This can include government representatives, accountants, lawyers, consultants, etc. The best is to find people who successfully started a new business, even if it requires travel out of province. Typically people are willing to share the knowledge gained “the hard way” from their previous experiences.

2. Then, prepare a written description of what the consultant needs to achieve. For example a brief statement for something relatively specific, as for an engineering consultant to assist with an environmental application:

a. Research, analyze, develop and prepare a report with all necessary information needed to be submitted to the Manitoba Conservation Department to obtain their approval for all environmental licenses for the new biodiesel business to proceed

b. Provide advice regarding the environmental licensing process, including preparing responses to questions from Manitoba Conservation Department while they are reviewing the application

c. Provide assistance in preparing all operating procedures and actions necessary for the new biodiesel business to remain compliant with all conditions in the Manitoba Conservation Department licenses that are approved.

3. Speak to others who have been involved in obtaining similar professional services and identify consultants they recommend.

4. Request ‘Statements of Qualification’ from a number of these consultants. Request that this include specific experience and three references.

5. When the list of potential consultants is narrowed to a maximum of the three with the most appropriate experience, request full Proposals for their services that outline the detailed description of the work that will be performed, a detailed description of the deliverables that will be provided (e.g. draft table of contents of all reports with not only primary headings but subheadings as well), the team of people that will do the work (noting the role of each person), the relevant experience of each of these team members, the timeline for completion of milestones, the terms of the work, note that ownership of any information developed belongs to the new biodiesel business, include requirements for confidentiality and non-disclosure clauses to protect the new biodiesel business, and the total cost for the work including fees and any other expenses.

6. Select the most appropriate consultant

7. Work closely with them to ensure there is good communication as they perform their services.



During the work, require that several milestone reviews be provided fairly early in the work to ensure it is ‘on-track’ and that the new biodiesel business is clear about what work is being done and what will be delivered.

If a business management consultant is assisting in preparing a feasibility study, then it should be made very clear that the proponents are planning what the business will be and the role of the consultant is to assist the proponents in their planning. The consultant should never write a feasibility study or business plan in isolation of the client. The knowledge gained by the client and the client’s ability to make relevant decisions is more valuable than the actual document that results. The consultant’s role is to assist the client in making good business decisions.

It is also recommended that the consultants selected have appropriate professional status. E.g. Professional Engineer, Certified Management Consultant, etc. These can be checked at the various professions websites. E.g. www.camc.com/

xxxxx

33.0 Appendices

http://www.camc.com/



Appendix 1 – Financial Information

Example MB Biodiesel Plant Version 5 Page 1

Example Income Statements (Proforma) - Stable State e.g. Year 2 or 3 after commissioningPlant Production (l./yr.)

IncomeBiodiesel Revenue - Diesel Rack Price (1) 5,980,000 $0.598 79.0% 17,940,000 $0.598 79.0% 68,172,000 $0.598 78.5%Revenue from Glycerine (2) 44,000 $0.004 0.6% 132,000 $0.004 0.6% 1,003,200 $0.009 1.2%Incentives from Gov't (If sell in MB) (3) 1,550,000 $0.155 20.5% 4,650,000 $0.155 20.5% 17,670,000 $0.155 20.3%Total Revenue 7,574,000 $0.757 100.0% 22,722,000 $0.757 100.0% 86,845,200 $0.762 100.0%

Operating Expenses Dollars $/litre Cost % Dollars $/litre Cost % Dollars $/litre Cost %Feedstock 5,808,000 $0.581 60.7% 17,424,000 $0.581 68.3% 66,211,200 $0.581 72.7%Freight to Biodiesel market (4) 300,000 $0.030 3.1% 1,200,000 $0.040 4.7% 5,700,000 $0.050 6.3%Methanol 467,455 $0.047 4.9% 1,402,365 $0.047 5.5% 5,328,988 $0.047 5.8%Processing Supplies 195,372 $0.020 2.0% 586,117 $0.020 2.3% 2,227,244 $0.020 2.4%Direct Labour (incl. benefits) (5) 621,400 $0.062 6.5% 624,000 $0.021 2.4% 872,100 $0.008 1.0%Maintenance (6) 204,000 $0.020 2.1% 378,000 $0.013 1.5% 841,600 $0.007 0.9%Natural Gas 107,999 $0.011 1.1% 323,998 $0.011 1.3% 1,231,193 $0.011 1.4%Electricity 15,000 $0.002 0.2% 45,000 $0.002 0.2% 171,000 $0.002 0.2%Water 0 $0.000 0.0% 0 $0.000 0.0% 0 $0.000 0.0%Waste Water Treatment 3,972 $0.000 0.0% 11,916 $0.000 0.0% 45,281 $0.000 0.0%Subtotal - Operating Expenses 7,723,199 $0.772 80.7% 21,995,396 $0.733 86.2% 82,628,605 $0.725 90.7%

Gross Margin -149,199 ($0.015) -2.0% 726,604 $0.024 3.2% 4,216,595 $0.037 4.9%

Administrative and ManagementGen. Sales & Admin. (7) 209,600 $0.021 2.2% 438,000 $0.015 1.7% 1,436,400 $0.013 1.6%Insurance and property taxes (8) 153,000 $0.015 1.6% 283,500 $0.009 1.1% 631,200 $0.006 0.7%

EBITDA (9) -511,799 ($0.051) -5.4% 5,104 $0.000 0.0% 2,148,995 $0.019 2.4%

Depreciation and InterestDepreciation (10) 1,020,000 $0.102 10.7% 1,890,000 $0.063 7.4% 4,208,000 $0.037 4.6%Interest on Long term debt (11) 459,176 $0.046 4.8% 901,528 $0.030 3.5% 2,229,515 $0.020 2.4%

Subtotal -Admin, Manage., Deprec. & Interest 1,841,776 $0.184 19.3% 3,513,028 $0.117 13.8% 8,505,115 $0.075 9.3%

Total Costs 9,564,975 $0.956 100.0% 25,508,424 $0.850 100.0% 91,133,721 $0.799 100.0%

Net Cost for Biodiesel (net of glycerine) 9,520,975 $0.952 25,376,424 $0.846 90,130,521 $0.791

Net Cost (after incentives) (12) 7,970,975 $0.797 20,726,424 $0.691 72,460,521 $0.636

Net Income Before Tax (NIBT) -$1,990,975 ($0.199) -$2,786,424 ($0.093) -$4,288,521 ($0.038)Return on Equity (before tax) -35% -25% -15%Break Even Volume (Litres) (13) More than 100% of capacity More than 100% of capacity More than 100% of capacityB.E. as % of Plant Capacity More than 100% of capacity More than 100% of capacity More than 100% of capacityAll amounts shown are estimated . Anyone using this information must conduct further research to determine their own specific, more accurate estimates.

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxIF INCENTIVES = $0.31/litre:Incentives from Gov't 3,100,000 $0.310 9,300,000 $0.310 35,340,000 $0.310

Net Income Before Tax (NIBT) (14) -$440,975 ($0.044) $1,863,576 $0.062 $13,381,479 $0.117Total Revenue per Litre $0.912 $0.912 $0.917Return on Equity (before tax) -8% 17% 48%Break Even Volume (Litres) (13) More than 100% of capacity 25,600,764 83,138,070B.E. as % of Plant Capacity More than 100% of capacity 85% 73%All amounts shown are estimated . Anyone using this information must conduct further research to determine their own specific, more accurate estimates.

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

10,000,000 30,000,000 114,000,000

ASSUMPTIONS AND NOTES: Version 5 Page 2It is assumed that the above is a biodiesel refinery, with no integrated canola crush plant, using canola oil as the feedstock.For details of all costs, see "Biodiesel Plant Operating Costs Worksheet"

1 For the months of 2004 and 2005 when the WTI Index crude price was between US$45.00 and US$50.00, the average diesel rack price in Winnipeg was Cdn 50.6 Cents/l.For all months of 2004 and 2005 the average diesel rack price in Winnipeg was Cdn 51.2 Cents/l.For 2005 the average diesel rack price in Winnipeg was Cdn 59.8 Cents/l. Source: Selected Crude Oil Prices - Weekly, MJ Ervin & Associates Inc.For the last 26 weeks of 2005 the average diesel rack price in Winnipeg was Cdn 66.0 Cents/l.Based on the US Department of Energy projection for 2006, it is projected that the average 2006 diesel rack price in Winnipeg will be Cdn 63.8 Cents/l.Price is assumed to be net of sales commission costs of 1%.

2 Glycerine volume is assumed to be 10% of weight of canola oil raw material, with higher sales prices per kg. for the larger plants, and lower sales prices for the smaller plants due to logistics and quality challenges. (One litre of canola oil has a density of 0.88kg/l)

Plant Capacity (litres) 10,000,000 30,000,000 114,000,000 Glycerine produced (kg) 880,000 2,640,000 10,032,000

Price/kg of glycerine $0.05 $0.05 $0.10

3 For sales in MB by a MB plant, it is assumed to be Cdn 4 Cents/l. from the Federal incentive and Cdn 11.5 Cents/l. from the Provincial incentive.

4 Assumes freight to nearby markets for smaller plants and more distant markets for larger plants.

5 See "Example Estimate of Personnel Requirements" page 7

6 Maintenance costs are assumed to be approximately 2.00% of the original capital costs shown on the Balance SheetSource: NBB - Independent Biodiesel Feasibility Study, p. 50 shows 2.5%. Source: Report for Canola Council of Canada, "Economic Impact Study for a Canola-Based Biodiesel Industry in Canada"by BBI Biofuels Canada, July, 2006 - Shows 1.5%An average of these two sources is used.

7 See "Example Estimate of Personnel Requirements" page 6 for personnel costsIn addition there are variable costs estimated at $0.011 per litre of biodiesel produced

8 Insurance and property taxes are assumed to be 1.50% of the original capital costs shown on the Balance SheetSource: Report for Canola Council of Canada, "Economic Impact Study for a Canola-Based Biodiesel Industry in Canada"by BBI Biofuels Canada, July, 2006 - Shows 1.5%

9 EBITDA is "Earnings before interest, taxes (income), depreciation and amortization.

10 Assumes a depreciation rate of 10% calculated as straight line depreciation on the capital costs shown on the Balance SheetFor an individual plant, the proponents should calculate the depreciation on each class of assets, based on its economic life expectancy.

0 Assumes an interest rate of about 8% Interest is calculated on the debt shown on the Balance Sheet

12 This is the number that can be compared to the diesel rack price to see if the market will cover costs and yield a profit, or not. It assumes customers will pay the rack price of diesel, plus the tax incentives, for biodiesel. Note that in times of shortage, there may be premiums to this. But, in times of surplus, there may be discounts.

13 Assumes that all Overhead Costs are fixed, and all Operating Costs are variable, except for Direct Labour, which is assumedto have approximately fixed % of 66.7%

14 Diesel rack price is the same, only the incentives change.

Example MB Biodiesel Plant Version 5 Page 3

Example Balance Sheets (Proforma)Production (l./yr.)

ASSETSCurrent Assets (1) Dollars $/litre % Dollars $/litre % Dollars $/litre %

Accounts Receivable (1 mo. revenue) 631,167 $0.063 5.5% 1,893,500 $0.063 8.4% 7,237,100 $0.063 13.0%Inventory - Raw Oil (2 weeks) 242,000 $0.024 2.1% 726,000 $0.024 3.2% 2,758,800 $0.024 4.9%Inventory - Supplies & Spares (1 mo.) 55,236 $0.006 0.5% 165,707 $0.006 0.7% 629,686 $0.006 1.1%Inventory - Biodiesel (2 weeks) 249,167 $0.025 2.2% 747,500 $0.025 3.3% 2,840,500 $0.025 5.1%Inventory - Glycerine (2 weeks) 1,833 $0.000 0.0% 5,500 $0.000 0.0% 41,800 $0.000 0.1%Subtotal - Current Assets 1,179,402 $0.118 10.3% 3,538,207 $0.118 15.7% 13,507,886 $0.118 24.2%

Fixed Assets (2)Building & Equipment 10,200,000 $1.020 88.9% 18,900,000 $0.630 83.9% 42,080,000 $0.369 75.5%Land 100,000 $0.010 0.9% 100,000 $0.003 0.4% 150,000 $0.001 0.3%Subtotal - Fixed Assets (3) 10,300,000 $1.030 89.7% 19,000,000 $0.633 84.3% 42,230,000 $0.370 75.8%

Total Assets 11,479,402 $1.148 100.0% 22,538,207 $0.751 100.0% 55,737,886 $0.489 100.0%

LIABILITIESCurrent Liabilities (4)

Accounts Payable 0 $0.000 0.0% 0 $0.000 0.0% 0 $0.000 0.0%Operating Loan 0 $0.000 0.0% 0 $0.000 0.0% 0 $0.000 0.0%Subtotal - Current Liabilities 0 $0.000 0.0% 0 $0.000 0.0% 0 $0.000 0.0%

Term LiabilitiesLong Term Loan (5) 5,739,701 $0.574 50.0% 11,269,103 $0.376 50.0% 27,868,943 $0.244 50.0%Subtotal - Term Liabilities 5,739,701 $0.574 50.0% 11,269,103 $0.376 50.0% 27,868,943 $0.244 50.0%

Total Liabilities 5,739,701 $0.574 50.0% 11,269,103 $0.376 50.0% 27,868,943 $0.244 50.0%

EQUITYTotal Equity 5,739,701 $0.574 50.0% 11,269,103 $0.376 50.0% 27,868,943 $0.244 50.0%

TOTAL LIABILITES & EQUITY 11,479,402 $1.148 100.0% 22,538,207 $0.751 100.0% 55,737,886 $0.489 100.0%xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxNOTES AND ASSUMPTIONS:

1 Current asset assumptions:Accounts Receivable- assumed to equal 1 month's revenueInventory - Raw Oil - assumed to equal 2 weeks' revenueInventory - Supplies & Spares - assumed to equal 1 month's revenueInventory - Biodiesel - assumed to equal 2 weeks' revenueInventory - Glycerine - assumed to equal 2 weeks' revenue These assumptions must be revised for each biodiesel plant's own specifc circumstances and terms.

2 Building & equipment capital costs are based on the estimates in section 26.1 of report . Anyone using this information must conduct further research to determine their own specific, more accurate estimates.

3 Fixed asset total costs, per litre of annual plant capacity, are as follows:Production (l./yr.) 10,000,000 30,000,000 114,000,000

Fixed Asset Cost/litre annual capacity 1.03$ 0.63$ 0.37$ 4 There would likely be some accounts payable, but since they will likely be small, as suppliers will want to be paid promptly when the business is new, it is assumed they will be nil.5 This assumes that term debt is 50% of total assets. Each individual biodiesel plant proponent must analyze their own level of debt. This much debt financing may not be available.

10,000,000 30,000,000 114,000,000

Biodiesel Plant Operating Cost Worksheet Version 5 Page 4Units Cost/Unit Units/litre Cost/litre

Operating Expenses ($/unit) Biodiesel Biodiesel ($/L)Feedstock (1) kg 0.66 0.88000 0.581 Directly VariableFreight to Biodiesel market (2) See Income Statement (I.S) p. 1 Varies with plant sizeMethanol (3) kg 0.65 0.07192 0.047 Directly VariableOther Processing Supplies

Sodium Hydroxide (4) kg 0.50 0.03236 0.016 Directly VariableHydrochloric Acid (5) kg 0.18 0.01918 0.003 Directly Variable

Direct Labour (incl. benefits) (6) See "E.g. Estimate of Personnel Requirements" - p. 5 Varies with plant sizeMaintenance (7) See Income Statement (I.S) p. 1 Varies with plant sizeNatural Gas (8) MBTU & M3 0.2543 0.04248 0.011 Directly VariableElectricity (9) kwh 0.050 0.03000 0.002 Directly VariableWater (10) litres 0.000 0.30230 0.000 Directly VariableWaste Water Treatment (11) litres 0.002 0.19860 0.000 Directly Variable

Overhead ExpensesGen. Sales & Admin. (12) See "E.g. Estimate of Personnel Requirements" - p. 5 and see I.S. p.1 Varies with plant sizeInsurance and taxes (13) See Income Statement (I.S) p. 1 Varies with plant sizeDepreciation (14) See Income Statement (I.S) p. 1 Varies with plant sizeInterest on Long term debt (15) See Income Statement (I.S) p. 1 Varies with plant size

Notes and Assumptions:1 Estimated feedstock costs, based on section 11.4, plus 2 cents/kg for inbound freight, any testing, etc. Cost per litre is 88% of this.

This e.g. assumes average price of canola oil = $0.660 ($/kg.) as per Feedstock section of this document. 2 Calculate freight to the target customers3 Assumes price, incl. freight, per tonne $650.00 Source: Brenntag Canada Inc. Dec. 2006. Also see Sec. 26.4 of Feasibility Study

Source: NBB - Independent Biod. F. Study 0.60 lb/USgal so is 0.272232305 kg/USgal

so is 0.071916163 kg. methanol/litre of biodiesel4 Assumes price, incl. freight, per tonne $500.00 Source: Brenntag Canada Inc. December 2006.


so is 0.032362273 kg. Sodium Hydroxide/litre of biodiesel5 Assumes price, incl. freight, per tonne $175.00 Source: J.V. Gerpen report Apr. 2006, p. 142.


so is 0.01918 kg. Hydrochloric Acid/litre of biodiesel6 See "E.g. Estimate of Personnel Requirements" - p. 5 and see Income Statement, p.1 for more information7 Calculated on the Example Income Statement for each size of plant.8 Price of natural gas, in $ per MBTU (million British thermal units) $8.000 BTU's Per Cu. Ft. = 900

(Price is based on wide variation in the past few years.) So, 1.0 MBTU is 1111.111 Cu. Ft.Use is M3/ million litres biodiesel 42,475 M3/MMl biodiesel M3 to Cu.Ft 35.3147 Conversion FactorUse is Cu. Ft./ litre biodiesel ise 1.500 Cu.Ft./l. biodiesel So, M3 / MBTU is 31.4631 (M3 / MBTU)

Source: Authors research , based on historical results So, price, in $ per Cu. Metre is $0.2543 per M3

So, price in $ per 1,000 Cu. Ft. (MCF) is $7.2000 per MCF9 Assumes MB Hydro price per kwh of $0.050

Useage of electricity, in kwh/l. 0.03000 kwh/l of biodiesel Source: Authors research with technology supplier, based on historical results.

10 It is assumed that water supply is from wells, with capital cost of wells included in the plant costs and pumping costsincluded in the operating costs for repairs and electricity. Each plant will have different costs that need to be used here.Thus, cost per 1,000 litres of water = $0.000Assumes water use per litre biodiesel 0.3023 litres/litre of biodiesel Source: Authors research with technology supplier, based

on historical results.11 The cost for treatment of waste water $2.00000 per thousand litres of waste water released.

Which equals $0.00200 per litre of waste water released. Quite a bit of water is lost to evaporation.Waste water releases are assumed at 0.1986 litres/litre of biodiesel. This varies widely with process design.

Source: Authors research with technology supplier, based on historical results.12 See "E.g. Estimate of Personnel Requirements" - p. 5 and see Income Statement, p.1 for more information13 Calculated on the "Example Income Statement" (page 1) for each size of plant.14 Calculated on the "Example Income Statement" (page 1) for each size of plant.15 Calculated on the "Example Income Statement" (page 1) for each size of plant.

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Example Manitoba Biodiesel Refinery - No Crush Plant Page 5

Example Estimate of Personnel Requirements (No Crush Plant)The number of employees is estimated to be as follows: Version 5

Plant Size 3.8 ML/YR (1) 11 ML/YR 34 ML/YR 57 ML/YR 114 ML/YR# of Employees # of Employees # of Employees # of Employees # of Employees

+/-8 10 - 12 12 - 14 17 19Total Personnel Cost/l $0.143 $0.072 $0.024 $0.017 $0.009Direct Labour (2) $0.124 $0.062 $0.021 $0.014 $0.008Admin. & Mgmt (2) $0.019 $0.010 $0.003 $0.002 $0.001

Notes and Assumptions:1 Source: NBB - Independent Biodiesel Feasibility Study, p. 50, with conversion to Canadian units; except for

the 3.8 MMly plant which is based on consultant's extraploation of information on the other plant sizes2 Based on industry research by the authors.

Example of Positions - Biodiesel Refinery (No Crush Plant)Total

Production (l./yr.) 38,000,000

Administration/Management General Manager 0Plant Manager 1Quality Control Manager 1Controller 0Commodity Manager 0Administrative Assistant 1

Production LabourMicrobiologist 0Lab Technician 1Shift Team Leader 2Shift Operator 4Yard/Commodities Labour 0

MaintenanceMaintenance Manager 0Boiler Operator 0Maintenance Worker 1Welder 0Electrician 1Instrument Technician 0

TOTAL NUMBER OF EMPLOYEES 12



Appendix 2 – USA - Biodiesel Plant List - November 2006

Source: www.biodieselmagazine.com/plant-list.jsp

At the above website, all plants in both of the lists below are provided and the list is updated regularly. The “Plant Name” column on the website has hyperlinks to each company’s website.

Currently Operating US Plants

As at November 28, 2006 there were a total of 86 biodiesel plants currently operating with a capacity of 2,529 MMly (668 MMgy). The plants range in size from under 4 MMly to 140 MMly. There are 27 plants with a capacity of over 38 MMly and 11 plants with a capacity over 114 MMly. The average size of the plants currently operating is 29 MMly.

US Plants Under Construction

As at November 28, 2006 there were a total of 40 biodiesel plants under construction or expansion. They had a combined total capacity of 3,907 MMly (1,032 MMgy). The plants range in size from under 3 MMly to 378 MMly. There are 24 plants with a capacity of over 76 MMly and 18 plants with a capacity over 114 MMly. The average size of the plants under construction is 97 MMly (more than 3 times the size of the existing plants currently in production.) The largest new plant under construction is Imperium Renewables at Grays Harbour, Washington, USA. It is adjacent to a port facility with a barge unloading dock next to the biodiesel plant, so it can import any feedstock that is the most favourable. The stated intent is to expand the production of canola in the state so that the plant can use canola oil as the feedstock.

http://www.biodieselmagazine.com/plant-list.jsp



Appendix 3 – Canada - Biodiesel Plant List – November 2006

Source: www.biodieselmagazine.com/plant-list.jsp

Note: If viewing the electronic file, the “Plant Name” column has hyperlinks to the company website.

Canadian Plants Currently Operating As at November 21, 2006 there were a total of 4 biodiesel plants currently operating in Canada with a capacity of 99 MMly. The plants range in size from under 4 MMly to 60 MMly. The average size of the plants currently operating is 25 MMly.

Plant Name City State Feedstock Capacity * Start Date

Agri-Green Biodiesel Sparwood BC multi-feedstock 0 N/A

Biox Corp. Hamilton ON tallow 60 N/A

Milligan Bio-Tech Inc. Saskatoon Saskatchewan multi-feedstock 4 Nov 2005

Rothsay Biodiesel Ville Sainte Catherine Quebec animal fats/yellow grease 35 Nov 2005

Total Plants: 4 Total Capacity: 99.0

Canadian Plants Under Construction

As at November 21, 2006 there were a total of 1 biodiesel plants under construction. It had a combined total capacity of 1 MMly. The average size of the plants under construction is 1 MMly

Plant Name City State Feedstock Capacity *

Milligan Bio-Tech Inc. Foam Lake SK multi-feedstock 1

Total Plants: 1 Total Capacity: 1.0

* Capacity noted in MMly. Last Modified on Nov. 21, 2006

http://www.biodieselmagazine.com/plant-list.jsp

http://www.biodieselmagazine.com/plant-list.jsp?view=&sort=name&sortdir=desc&country=Canada

http://www.biodieselmagazine.com/plant-list.jsp?view=&sort=city&sortdir=asc&country=Canada

http://www.biodieselmagazine.com/plant-list.jsp?view=&sort=state&sortdir=asc&country=Canada

http://www.biodieselmagazine.com/plant-list.jsp?view=&sort=feedstock&sortdir=asc&country=Canada

http://www.biodieselmagazine.com/plant-list.jsp?view=&sort=capacity&sortdir=asc&country=Canada

http://www.biodieselmagazine.com/plant-list.jsp?view=&sort=startup_date&sortdir=asc&country=Canada

http://www.biodieselmagazine.com/plant-details.jsp?plant_id=725




http://www.biodieselmagazine.com/plant-list.jsp?view=construction&sort=name&sortdir=desc&country=Canada

http://www.biodieselmagazine.com/plant-list.jsp?view=construction&sort=city&sortdir=asc&country=Canada

http://www.biodieselmagazine.com/plant-list.jsp?view=construction&sort=state&sortdir=asc&country=Canada

http://www.biodieselmagazine.com/plant-list.jsp?view=construction&sort=feedstock&sortdir=asc&country=Canada

http://www.biodieselmagazine.com/plant-list.jsp?view=construction&sort=capacity&sortdir=asc&country=Canada




Appendix 4 – Quality Focussed CRFA Press Release

Strict Biodiesel Standard Exists to Protect Consumer

Canadian Renewable Fuels Association FOR IMMEDIATE RELEASE

TORONTO, ONTARIO (CCNMatthews - Feb 15, 2006) – The Canadian Renewable Fuels Association today encouraged all users of biodiesel to ensure that their suppliers meet the universally accepted American Society of Testing Standard (ASTM D6751) of quality.

“Fuel-grade biodiesel must be produced to strict fuel quality specifications in order to perform properly in diesel engines,” said Executive Director of the Canadian Renewable Fuels Association Kory Teneycke. “Customers that are using fuel that does not meet the ASTM standard are likely to experience serious engine problems. This is why we encourage all biodiesel customers to demand independent testing of their fuel to ensure that it is indeed ASTM biodiesel.”

The Canadian Renewable Fuels Association, engine manufacturers, the Canadian government and the petroleum industry do not recommend or support blending any biodiesel that does not meet the very specific standard of ASTM D6751.

Biodiesel that meets ASTM quality is currently successfully used in municipal bus and truck fleets throughout Canada and around the world. It is a clean burning, biodegradable and renewable fuel made from a variety of bio-products such as vegetable oils, animal fats and recycled cooking oils.

Purchasers are encouraged to follow three steps to ensure they receive biodiesel that meets the ASTM standard:

1. Only deal with suppliers that declare they provide ASTM biodiesel product

2. Contractually require a supplier to deliver ASTM quality fuel

3. Demand a Certificate of Analysis conducted by an independent testing lab for each fuel shipment

Founded in 1994, the Canadian Renewable Fuels Association (CRFA) is a non-profit organization with a mission to promote renewable fuels for transportation through consumer awareness and government liaison activities.

- 30 -

For more information please call: Kory Teneycke, CRFA (416) 304-1324

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Appendix 5 – European Union Policies and Programs A brief summary of member state developments are shown in the table below.

Table 6-3: Biofuels Developments at the EU Member State Level

(Note: The countries listed below account for more than 80% of the EU25’s potential biodiesel market)

Country Duty Exemption?

Mandate? Notes

Austria Yes, partial Yes 2.5% (by energy content) biofuels usage from October 1, 2005, increasing to 4.3% from October 1, 2007 and to 5.75% (the Directive's objective for 2010) from October 1, 2008.

France Yes, partial

Yes via tax on polluting activities ‘TGAP’

The percentage of biofuels that fuel distributors must incorporate into their diesel and gasoline products annually are set at: 1.2% in 2005, 1.75% in 2006, 3.5% in 2007, 5.75% in 2008, 6.25% in 2009, and 7% in 2010.

Germany Yes, total currently; partial from 1/08/06

Admixture obligation to be introduced from 1/1/07

Details yet to be finalized as at mid 2006.

Italy Yes, partial Mandate proposal passed by Senate

The new decree requires that all transport fuels contain 1% (by energy content) biofuels from July 1, 2006 increasing by 1% per annum till 2010.

Netherlands Yes, partial Mandate to be introduced from 1/1/07

Fuel suppliers will be required to incorporate 2% biofuels (by energy content) from January 1, 2007. The required biofuels content will then increase annually to meet the EU Commission’s target of 5.75% by 2010.

Spain Yes, total No The Spanish Renewable Energy Plan sets a target of 5.83% (by energy content) for consumption of biodiesel and bioethanol in the transport sector by 2010. Sales tax breaks of €2.85 billion for bioethanol and biodiesel producers will be provided over the five-year period to support this aim.

Sweden Yes, total Mandate proposed for introduction on 1/1/09

The Swedish government is studying a proposal to phase out duty exemptions in favour of a “Green Certificate” system by January 1, 2009. It is recognized that a transitional period may be necessary in which a modified duty exemption system operates in parallel with the new Green Certificate process.

UK Yes, partial Renewable Transport Fuel Obligation to be introduced from 2008

The level of obligation will be 2.5% in 2008-2009, 3.75% in 2009-2010 and 5% in 2010-2011. The buy-out price will ultimately replace the duty incentive.

Source: International Fuel Quality Center - Biofuels Center, 2006.



Appendix 6 – References and Information Sources

Following is a list of sources to consult for more information on biodiesel, but this list is not exhaustive:

• Over 20 presentations that have been made in Manitoba since 2003 are available at www.gov.mb.ca/agriculture/agrienergy/ene00s01.html#fleet

• A diversity of sources of information are available from the US National Biodiesel Board website at www.biodiesel.org/

• A diversity of information on the Canadian biodiesel industry and the canola feedstocks for it, on their website specific to biodiesel at www.canola-council.org/biodiesel/ or information on production volumes and prices for seed, oil and meal is available at www.canola-council.org/industry_stats.html

• Alliance of Automobile Manufacturers, et al., World Wide Fuel Charter (proposed revision August 2005), http://www.autoalliance.org .

• Biodiesel Association of Canada, http://www.biodiesel-canada.org/ .

• Building a Successful Biodiesel Business, Second Edition by Jon Van Gerpen (and others) and additional information is available at www.biodieselbasic.com

• DOE’s Clean Cities Program maintains a Web site that summarizes state and local laws and incentives related to alternative fuels. This can be accessed at http://www.eere.energy.gov/cleancities/vbg/progs/laws.cgi.

• Engine Manufacturers Association (EMA), http://www.enginemanufacturers.org/info/ .

• EPA has reviewed many emission reports and has summarized them at http://www.epa.gov/OMS/models/biodsl.htm.

• European Biodiesel Board, http://www.ebb-eu.org/ .

• European Federation of Vegetable Oils Producers (FEDIOL), http://www.fediol.be/.

• Iowa State University has an online tutorial on biodiesel at http://www.me.iastate.edu/biodiesel/Pages/biodiesel1.html. They also offer classes in biodiesel production, analytical test methods, and business management for producers and marketing firms.

• International Fuel Quality Center at http://www.ifqc.org and the IFQC Biofuels Center at http://www.ifqcbiofuels.org

• Methanex Corporation, Technical Information & Safe Handling Guide for Methanol (Oct. 2002) available at http://biodiesel.org/pdf_files/Methanol_Handling_Guide.pdf.

• Methanol Institute, Biodiesel & Methanol: Working Together available at www.methanol.org.

• Methanol Institute, Methanol Emergency Response available at www.methanol.org

• Methanol Institute, Methanol Health Effects available at www.methanol.org

• National Biodiesel Accreditation Program, BQ-9000, http://www.bq-9000.org/.

http://www.gov.mb.ca/agriculture/agrienergy/ene00s01.html#fleet


http://www.canola-council.org/biodiesel/

http://www.canola-council.org/industry_stats.html

http://www.autoalliance.org/

http://www.biodiesel-canada.org/

http://www.biodieselbasic.com/

http://www.eere.energy.gov/cleancities/vbg/progs/laws.cgi

http://www.enginemanufacturers.org/info/

http://www.epa.gov/OMS/models/biodsl.htm

http://www.ebb-eu.org/

http://www.fediol.be/

http://www.me.iastate.edu/biodiesel/Pages/biodiesel1.html

http://www.ifqc.org/

http://www.ifqcbiofuels.org/

http://biodiesel.org/pdf_files/Methanol_Handling_Guide.pdf




http://www.bq-9000.org/



• National Biodiesel Board has compiled an impressive library of online documents located at http://www.biodiesel.org/resources/reportsdatabase/. It can add detail to these guidelines. The search engine is set up by market segment. You have to be creative and use a variety of key words to search on specific non-market topics or call 1-800-841-5849 for information.

• National Renewable Energy Laboratory, Biodiesel Publications, http://www.nrel.gov/vehiclesandfuels/npbf/pubs_biodiesel.html.

• US Department of Alternative Energy Development and Efficiency (DEDE), http://www.dede.go.th/dede/default_e.asp

• US Department of Agriculture, http://www.usda.gov.

• US Department of Defence A-A-59693A Biodiesel Commercial Item Description (CID) is located at http://assist.daps.dla.mil/docimages/0004/29/73/AA59693.PD0 in PDF format.

• US Department of Energy, Energy Efficiency & Renewable Energy, Alternative Fuels Data Center, FAQs about Alternative Fuels available at http://www.eere.energy.gov/afdc/progs/display_faq.cgi?afdc/0

• US Department of Energy has biodiesel related technical documents located at http://www.eere.energy.gov/biomass/document_database.html.

• US Environmental Protection Agency, Renewable Fuels Program, http://www.epa.gov/otaq/renewablefuels/index.htm.

http://www.biodiesel.org/resources/reportsdatabase/

http://www.nrel.gov/vehiclesandfuels/npbf/pubs_biodiesel.html

http://www.dede.go.th/dede/default_e.asp

http://www.usda.gov/

http://assist.daps.dla.mil/docimages/0004/29/73/AA59693.PD0

http://www.eere.energy.gov/afdc/progs/display_faq.cgi?afdc/0

http://www.eere.energy.gov/biomass/document_database.html

http://www.epa.gov/otaq/renewablefuels/index.htm

generic feasibility study for a new manitoba biodiesel

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