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US exports 530 mln litres of renewable diesel to Canada in

H1

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Falling credit market values will hit cash flow for new

projects

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British Columbia government not planning changes to LCFS

program

By Shariq Khan and Nia Williams

NEW YORK, Oct 29 (Reuters) - Canadian renewable fuel

producers are facing lower returns on new facilities due to a

slump in British Columbia's low carbon fuel standard (LCFS)

credit market, a trend expected to persist amid a flood of

exports from the United States.

Weakness in British Columbia's LCFS credit market reflects

growing pains in the international biofuels industry, where many

regulators are cracking down on imports to protect their nascent

domestic markets from oversupply.

Low-carbon fuels are more expensive to produce than

petroleum-based gasoline or diesel. LCFS programs help to bridge

the gap by issuing credits to suppliers of fuels with lower

emissions intensity, which can be sold to those with

higher-carbon fuels that need to bring down their emissions.

Canada has lagged the U.S. in setting up domestic renewable

diesel production. British Columbia is the only Canadian

province with an LCFS credit market, which helped encourage

Calgary-based Tidewater Renewables ( TDWRF ) to open the

country's first standalone renewable diesel refinery last year.

Others are also betting on the credits to support construction

of more facilities in British Columbia and other provinces.

At the same time, the LCFS has also made Canada an

attractive outlet for a glut of U.S. renewable diesel.

U.S. producers shipped at least 530 million litres of

renewable diesel to Canada in the first six months of 2024, a

jump from 151 million litres in the same period last year,

according to data compiled by Will Faulkner, founder of industry

analysis firm Carbon Acumen.

British Columbia's LCFS credits fell to C$207 in July and

C$350 in August, after trading above C$400 for more than two

years previously, ringing alarm bells for Tidewater.

The company said in August that the slump hurt its ability

to generate revenues, and blamed weakening prices on a surge in

renewable diesel imports from the United States. Tidewater

subsequently sold some assets and future credits to its majority

stockholder to avoid financial distress.

British Columbia LCFS credit values rose to C$456 in

September, but credit market transactions reported last month

could have been completed before the price crash in July,

Faulkner said. There has not been a significant slowdown in U.S.

imports, he noted.

Tidewater only produces renewable fuel at its 3,000

barrel-per-day, or about 170 million liters-per-year, plant in

British Columbia, so is highly exposed to low credit values

there.

However, falling BC LCFS credits will also weigh on returns

for diversified energy producers such as Imperial Oil ( IMO )

and Parkland, said Sam Harrison, senior analyst at

Navius Research.

Imperial is building a C$720 million ($518.25 million)

20,000-bpd renewable diesel facility in Alberta, the largest in

Canada, that will be partly funded by LCFS credits granted by

British Columbia.

"This correction downwards in the market will affect

Imperial's cash flow from the renewable diesel that they're able

to sell into the British Columbia market," Harrison said.

Construction on Imperial's project, which is expected to

start production in 2025, is progressing and the project is

highly attractive, a spokeswoman told Reuters when asked about

the decline in credits.

Parkland declined to comment on how a renewable fuel

producing unit at its 55,000-bpd Burnaby refinery would be

impacted by declining LCFS credit values, but said a stable

policy environment had helped incentivize low carbon fuel

manufacturing in British Columbia.

REGULATORY CHALLENGES

Biofuels are set to play a major role in global efforts to

cut climate-warming emissions from transportation. The

International Energy Agency forecasts global renewable diesel

demand will grow to 26.4 billion litres per year by 2028 based

on current policies, from an estimated 18.6 billion litres in

2023. More aggressive policies could see demand surpass 39

billion litres.

British Columbia aims to produce 1.5 billion litres of

renewable fuels by 2030.

The provincial government told Reuters it is not currently

considering changes to the program, as credit prices naturally

fluctuate based on supply and demand dynamics.

In contrast, the European Union this year began levying

anti-dumping tariffs on Chinese biofuels after complaints that

Chinese producers benefit from artificially low output costs.

The EU has also levied tariffs on U.S. and Canadian biodiesel

imports since 2021 following similar complaints.

Some analysts expect British Columbia's LCFS market to

remain under pressure, with oversupply from the U.S. compounded

by lower biofuel feedstock prices that make renewable diesel

cheaper to produce.

Low-carbon fuel producers and importers can now also claim

Canada's Clean Fuel Regulation (CFR) credits for actions that

earn them LCFS credits. Introduced last year, the CFR credits

are adding to British Columbia's attractiveness as an outlet for

excess U.S. renewable diesel.

Higher government support for renewable diesel producers in

the U.S. has the potential to limit Canadian industry growth,

the U.S. Department of Agriculture said in a report last year.

"At issue is the fact that U.S. producers can claim the

$1/gallon U.S. federal Blenders Tax Credit which is issued for

producing and blending biomass based diesel in the U.S., along

with Canadian CFR credits, which are issued for selling

renewable fuels in the market in Canada on top of B.C.'s LCFS

credits," Faulkner said.

($1 = 1.3893 Canadian dollars)