The Cutting Edge

As the price of oil drops to around $60 per barrel and the pain subsides at the gas pump, drivers of the trucks and long haul carriers that carry 90 percent of the consumer goods across Canada are feeling just the opposite.

In a country of enormous petroleum resources, refinery shut-downs have caused diesel shortages that have put a vice-grip on the Canadian trucking industry. This supply constraint has threatened to create shortages of everything from holiday consumer goods to food on the grocery store shelves. This diesel shortage combined with the slowing pace of development in Canada's oilsands development remind us that alternatives to petroleum diesel should be pursued with vigor.

Ironically, that's as true in one of the world most oil-rich countries - Canada - as it is in a more energy-security sensitive country such as the U.S.

Planned and unplanned shutdowns and upgrades at three refineries in the petroleum-rich province of Alberta have caused the fuel supply shortfall that began in late September 2008. Suncor's 260,000 barrel per day Northern Alberta oilsands plant that supplies diesel to the wholesale market went down on an unplanned outage in early October. Petro-Canada's 135,000 barrel per day Edmonton refinery has had its major diesel producing unit off line since the summer. Imperial Oil's 187,000 barrel per day refinery in Strathcona, Alberta, was the last to go down after it could not wait until the other diesel producing refineries were back on line to begin its scheduled maintenance. 

This supply shortfall has caused enormous headaches for the trucking sector. This has led, in some cases, to fuel rationing, as the refiners are reportedly fulfilling only those contracts where they have supply guarantees in place. Is this fuel shortage just an unlucky coincidence in a country that has vast reserves of petroleum just waiting to be refined? Ironically, this country with proven reserves of approximately 180 billion barrels is on the wrong side of the current price of oil. Much of Canada's petroleum supply is in the oilsands--requiring a heavy industrial and environmentally costly extraction process that, according to some observers, becomes economically unfeasible when the price of oil falls below $80 per barrel.

Large oilsands supply development projects have already sounded the alarm with both Suncor's $16.2 billion Voyageur upgrader and Petro-Canada's Fort Hills project upgrades already being pulled back. In this unfolding scenario of lower prices leading to lower supply, there is another option that could improve the ability of goods to get to market on diesel driven trucks and improve the environment in the process; canola-based biodiesel.

Biodiesel as a fuel is certainly not a new idea and the glamour might have come off a bit after the "food vs. fuel" debate reached its crescendo in April 2007. The media focus has since abated as grain and oilseed prices returned to Earth with the bursting of the commodity speculation bubble in September 2008. The fact remains that in Canada there is a deep shortfall in biodiesel production capacity.

As Canadian farmers are pulling off the largest canola crop in history (approximately 11 million tonnes by latest estimates), the rationale for jump-starting the build-out of a western Canadian biodiesel industry has come to the fore. While oilsands project economics deteriorate because of the low market price of oil, the same price movement has the opposite effect for canola farmers, as their petroleum-based fertilizer costs decrease and allow them to boost yields.

This year's estimate of just the canola 'carry out stock' - the amount left over after all domestic and export markets have been satisfied - is an impressive 2 million tonnes. This is sufficient for more than 8 million barrels of biodiesel; enough to keep the diesel fleets rolling and reduce the transportation sector's environmental footprint in the process. Moreover, crop scientists describe canola's state of development as comparable to that of corn in the 1970's - huge increases in canola yield and oil content lie ahead. Canola's chemistry makes it preferable in the colder climates of Canada; canola biodiesel blends have undergone on-road testing in truck fleets, making trips between Edmonton and Fort McMurray, two key (and cold) locations in Alberta's petroleum heartland.

On November 3, it was reported that the three major refineries have begun ramping up their diesel production after completing the necessary retooling. This is a process of weeks - not days - with Petro-Canada stating that their Edmonton refinery will not be at full capacity until Q1 of 2009. The return to normalcy in the diesel market is a good thing in the near term, but the project stalls in the oilsands bear warning of future supply issues for a North American market place that has long looked to Canada as a friendly source of oil. These recent refinery shut downs and changing economics in the oilsands should remind North America that the province that contains these vast reserves of petroleum also has some of the largest canola producing zones in the world.

Certainly, the current global recession means demand destruction. But when the recovery is under way, resurgent demand will run full tilt into the recessionary downside on crude prices - supply destruction. Development of the Canadian biodiesel industry should proceed as fast as possible - or else the next supply shortfall might be much worse.

Fred Ghatala is an assistant director at Canadian Bioenergy.