Saskatchewan’s first ethanol mega project is coming on stream as prices for the biofuel are falling.
Earlier this summer, ethanol sold in the northeastern United States for as high as $5.75 US per gallon wholesale. Last week, blenders bought it at prices less than one-third that amount, or about $1.80 per gallon, and analysts expect continued downward pressure.
“The farmer and ethanol plant owners are obviously losing as the price falls down,” said Hank Williams, vice-president of fuels at Jim Jordan & Associates, one of the leading ethanol market analysis firms in the U.S.
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The unveiling of the 130-million-litre Husky Energy plant in Lloydminster, Sask., was scheduled for Sept. 26.
“I would be very wary if I had a project out there coming up in the face of all these lower prices,” said Williams.
But Husky spokesperson Dennis Floate said commodity price fluctuations were built into a business plan that takes advantage of Husky’s existing infrastructure and relationships.
“From our perspective, the trick is having the distribution system and the marketing arrangements already in place before we made the investment,” he said.
Other plants may not have the same mechanisms for weathering the storm, said Williams. As ethanol prices approach the critical make-or-break level, some new debt-laden facilities will face a financial squeeze.
“The question is would they operate for a short time at a loss? In many cases they just don’t have the deep pockets to be able to do that.”
Ethanol prices have fallen back to earth after a sky-high spike prompted by U.S. oil companies using it to replace about two billion gallons of an octane-boosting fuel additive called methyl tertiary butyl ether, or MTBE.
MTBE had been losing ground to ethanol for years but that trend accelerated when oil companies were denied liability protection regarding potential pollution of water systems.
By May, ethanol demand had risen to more than 400,000 barrels per day, up from less than 300,000 in March.
At first the logistics weren’t available to meet that demand, leading to the summer price spike. But the industry geared up production and smoothed delivery of the oxygenate.
“It is adequately supplied now, unlike what we saw in April, May and June, when the market was really converting over from MTBE to ethanol,” said Williams.
The sector now faces an oversupply, which will push prices lower.
Williams said ethanol costs $1.05-$1.10 per gallon to produce. With freight and return on investment factored in, the plants would need at least $1.40-$1.50 per gallon to operate.
The price hasn’t hit that critical level yet, but Williams expects ethanol to continue tracking gasoline values on their downward slide. He said the industry is definitely oversupplied.
Lionel LaBelle, president of the Saskatchewan Ethanol Development Council, believes few communities working on ethanol projects based their business plans on the “seriously crazy” summer prices.
The modelling tool the council uses to assist communities in developing those plans has an ethanol price of $2.10–$2.35 per gallon.
At the prices available this summer, a $100 million plant would pay for itself in two years. LaBelle said that is unrealistic.
“Our modelling has always said it has about a five to nine year repayment cycle and that is pretty terrific. Two years is a dream.”
He said new plants should get by fine on today’s ethanol values, but he would like to see more parity between Canadian and U.S. prices.
“Canadian oil companies are paying less for ethanol just because they can and that’s just inappropriate.”
Once Canada establishes a national mandate for ethanol content in gasoline, the market will move to one North American price for the alternative fuel.
“That’s a good thing,” said LaBelle.
