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November 12, 2008
Canada Reaches Out to Obama on Climate Change Policy

While most of the world was still adjusting to Senator Barack Obama's victory in the presidential election, the recently-instated Canadian prime minister offered a proposal to the U.S. president-elect for a joint climate- change pact. Prime Minister Stephen Harper's proposal came less than 24 hours after Obama's victory with intentions to protect Alberta's oil sands project from potentially tough U.S. climate-change regulations.

During Obama's campaign, he said in June he would break America's reliance on "dirty, dwindling, and dangerously expensive" oil. One of his top advisers, Jason Grumet, addressed the oil sands specifically during a campaign conference call held in late summer.

There is "a lot of technological development underway" to reduce the carbon footprint of oil sands production, he said, but there continues to be "unacceptably high carbon emission" associated with production of the fuel.

"The amount of energy that you have to use to get that oil out of the ground is such that it actually creates a much greater impact on climate change, as well as using much more energy than even traditional petroleum," he said.

The oil sands, also known as tar sands, generate three times as much greenhouse gas as conventional oil. They account for about 4% of Canada's greenhouse gas emissions. However, Canada has the biggest oil reserves outside of the Middle East. This puts Obama at a tug-of-war between finding cleaner sources of energy and securing energy independence for America.

"I believe that the Canadian overture to the Obama administration is an astute move," Purvin & Gertz analyst Gerry Goobie told OPIS. "The U.S. needs energy. Canada needs secure access to U.S. markets. If we work together on this, we can kill several birds with one stone. Both governments will be seen to be doing something about emissions, about energy security, about economic development, etc. It is also early in both governments' mandates, so something might actually be able to be accomplished even if there are unpopular aspects to it."

The oil sand production is currently at 1.25 million b/d and is expected to reach 3 million b/d by 2015. Last year, total conventional oil and oil sands exports from Alberta -- which is the primary producer of oil sands -- were approximately 1.3 million b/d, about 13% of total U.S. crude imports.

"Given that Canada is the largest supplier of oil products to the United States, we believe that Albertan oil sands will play a significant role in meeting increasing demand for fuels and enhancing our nation's energy security by reducing dependence on oil from unstable regions in the world," Bill Holbrook, spokesman for the National Petrochemical & Refiners Association, told OPIS.

Obama pledged to cut greenhouse-gas emissions down to 1990 levels by 2020, a reduction of about 15-20%. Meanwhile, Harper's administration has planned a cut of 20% to greenhouse gas emissions by 2020. The Canadian government is expected to release its regulations for large industrial emitters that will take effect in 2010.

Last year, Senators Joe Lieberman and John Warner proposed legislation to limit greenhouse gas emissions, mainly carbon dioxide from the combustion of coal, oil and natural gas. Emissions would be capped by requiring producers to acquire federally created permits, or allowances, for each ton emitted.

The legislation didn't pass into law; however, it drew great attention from the oil and gas industry as numerous studies were released looking into possible affects. The Canadian government also became involved in U.S. energy policy due to Section 526 of a U.S. energy law that, through broad interpretation, could bar government contracts for alternative fuels including oil sands.

In June, the Government Accountability Office released a report through surveying 18 economists who agreed that a market-based mechanism should be proposed to Congress to control greenhouse gases in light of the failure to create comprehensive climate change legislation. They suggested a fixed-price tax on every ton of emissions, a cap-and-trade program, or a hybrid program.

Studies have shown, however, that adding market-based fees to carbon dioxide emissions will trickle down to consumers.

Premier Ed Stelmach of Alberta recently sent a message to president-elect Obama concerning this and the importance of Alberta's oil sands to the U.S.
economy. One of Stelmach's biggest concerns for Alberta in the climate-change negotiation is that Canada will join an international trading system in which the industry buys credits to offset emissions, the premier's director of communications Paul Stanway told OPIS. This would send money out of Alberta that could be better used for researching technology to reduce emissions, Stanway said. In Canada, the provincial governments control the natural resources in their respective province.

Studies suggest that the cap-and-trade program would also have direct impact on the consumers. In April 2007, the Congressional Budget Office highlighted the consequences of a cap-and-trade program for carbon dioxide emissions in an issue brief, "Trade-Offs in Allocating Allowances for CO2 Emissions." The brief
stated:

"Regardless of how the allowances were distributed, most of the cost of meeting a cap on CO2 emissions would be borne by consumers, who would face persistently higher prices for products such as electricity and gasoline. Those price increases would be regressive in that poorer households would bear a larger burden relative to their income than wealthier households would."

Goobie told OPIS that a cap-and-trade program "is an interesting idea in theory but a very bad idea in practice."

"It's ripe for abuse," he said. "And it will have little if any impact on total emissions."

Goobie told OPIS a carbon tax would be more effective in reducing emission but would be politically unpopular because it will hit the consumer directly at their pocketbooks.

"Look at how much anger there was at high gasoline prices this past summer,"
Goobie said.

Harper has campaigned on "soft caps" rather than firm targets for reducing greenhouse gas emissions. "Soft caps" focus on the intensity of the emissions, aiming to cutback on pollution for each unit of production without imposing a "hard cap" on total emissions -- which would increase as economic output expanded. Obama's plan has discussed "hard caps."

Alberta already has legislation in place for reducing carbon emissions and was the first province in Canada to do so. In the first six months of the compliance periods, Alberta's largest greenhouse gas emitters made 2.6 million tons of actual reduction, Premier Stelmach said in a speech in the United Kingdom this week. Companies unable to meet their reduction targets were fined $40 million to a fund for supporting projects and technologies to further reduce greenhouse gas emissions in the province.

Alberta is actively researching carbon capture and storage to reduce emission levels.

"Unlike emissions from vehicles, the oil sands are stationary and concentrated in one area, making them an ideal candidate for capture and storage," Stelmach said in his speech. "My government is working with industry to develop a strategic plan for implementing carbon capture and storage. We've allocated $2 billion to support the work. Through this investment, we hope to see three-to-five large-scale projects developed, with the potential to permanently store up to 5 million tons of CO2 per year by 2015."

November 07, 2008
Dingell Vows to Remain Chairman House Energy Committee

U.S. Rep. John Dingell (D-Mich.), current chair of the House Energy and Commerce Committee, has no plans to relinquish his post for the next Congress, and has begun
to roll out a whip team to gain support among his Democratic caucus, he announced earlier today.

The news comes as Rep. Henry Waxman (D-Calif.), current chair of the House Oversight and Government Reform Committee and the second ranking Democrat (behind Dingell) on the Energy and Commerce Committee, announced his intention to seek Dingell's chairmanship.

"When Democrats convene to organize for the 111th Congress, I will be seeking another term as chairman of the Committee on Energy and Commerce, and I am writing to ask for your support," Dingell wrote to members of the Democratic Caucus on Thursday. He also headed the committee from 1981-1995.

The House Energy and Commerce Committee has jurisdiction over a variety of energy-related issues, including biofuels and climate change -- two issues that are likely to be priorities for Obama's administration.

In his letter, Dingell outlined three committee priorities he expects during the next term--healthcare reform, climate change and safe food and drug supplies. On climate change, Dingell and fellow committee member Rick Boucher (D-Va.) recently drafted elements
of a cap and trade bill, while Waxman introduced his own climate change-related bill
in 2006.

"I am proud to say that the Committee on Energy and Commerce has proven repeatedly that it is capable of moving, and seeing signed into law, enormously complex and difficult legislation," Dingell noted. "It would be an honor and privilege to again serve my colleagues, the House of Representatives and the nation as Chairman of the Committee. I ask for your guidance and support," he concluded.

Earlier today, Dingell announced a 27-member whip team, led by Reps. Chet Edwards (D-Texas), Bart Stupak (D-Mich.) and Mike Doyle (D-Pa.), to help him maintain his post. His whip team includes 11 current members of the Energy and Commerce Committee.

"When a member runs for a Committee Chairmanship, he should have a strong case for why the current chairman cannot or should not continue," said Doyle. "There is simply no basis for challenging Chairman Dingell. In fact, there is a clear need to keep the gavel in Dingell hands, and I'm pleased by the strong support that Dingell has received in the last couple of days," he added.

It's assumed that Waxman has his own whip team, but nothing has been announced.

Congress returns for a lame duck session the week of Nov. 17, and it will be then that the Democratic Steering Committee--chaired by House Speaker Nancy Pelosi (D-Calif.)--will likely decide chairmen assignments for the next Congress, source familiar with the House process told OPIS yesterday. "The Waxman/Dingell battle will be a two-week
sprint for support," one source said. Once the Steering Committee has approved the assignments, it could recommend that the entire Democratic caucus vote on it.
But sources said nothing formally will be decided until the next Congress begins in January 2009.

November 05, 2008
Biofuels See 'Win-Win' Under Obama, Democratic Victory

While some political observers are still digesting some of last night's election results for both the White House and Congress, they all agree that biofuels saw a huge win with the election of Democratic candidate Barack Obama.

"President-elect Obama and strengthened Democratic Party majorities in Congress is a win-win for ethanol and the biofuels industry," said Mark McMinimy, senior vice president of food, agribusiness, ethanol and tobacco with the Stanford Group Company. "The push-back against the renewable fuels standard (RFS) and other support mechanisms has come mainly from Republicans in Congress who have been severely weakened," he noted.

Democrats maintained their majority in both chambers, although several Senate races were still too close to call this morning.

"As such, we can expect that White House energy initiatives along the lines of the 60-billion-gallon biofuels target that Obama advocated during the campaign would very likely meet a mostly receptive audience on Capitol Hill and would receive serious consideration among leading Democrats who will be pulling the strings in the new Congress," McMinimy said. Obama has indicated an energy plan would be unveiled after economic stimulus and the middle class tax cut issues are addressed, he noted.

Beyond the proposal to require 60 billions of biofuels by 2030, Obama has also indicated he supports tax incentives and government contracts for developing cellulosic ethanol and other second-generation biofuels, and would mandate all vehicles sold in the U.S. to have flexible fuel capability by the end of his first term in office. He has not indicated he would repeal current biofuel tax incentives, unlike Republican opponent John McCain, who reiterated his opposition to both ethanol subsidies and to the 54cts/gal ethanol import tariff.

The Renewable Fuels Association (RFA) praised Obama for his win and said it was ready to work with the president-elect on biofuel-related matters. "We look forward to working with an Obama administration and members of Congress from both sides of the aisle to ensure the full potential of America's home grown ethanol industry is realized. This means continuing consistent public policies that allow investments in technology and infrastructure to be made with confidence, expanding the markets for ethanol in a manner that is responsible and collaborative with other stakeholders and fostering the kind of innovative expertise necessary to continuing moving this industry forward," RFA added.

"It is clear that renewable energy will be a top priority for President- Elect Obama, and there is a recognition by Obama and his advisors that corn and cellulosic ethanol represent the most viable and significant pathway toward greater energy security," added a biofuels observer. "Biofuels are a winner, while tar sands and dirty sources of energy will be losers," the observer added.

The American Petroleum Institute (API), whose many members would likely be subject to further environmental restrictions under a national low carbon fuel standard or a national carbon cap, issued a statement this morning saying it looks forward to working with Obama and Congress "to deliver a comprehensive and realistic energy policy that encourages development of all domestic energy sources, including oil and natural gas, for the benefit of consumers."

API spokeswoman Karen Matusic added that the biofuel targets under the RFS "are very aggressive. ... API will work with the government to ensure that the RFS is reasonable and workable and is in the best interest of the American consumer," she added.

Who Will Head USDA, DOE, EPA?

Now that the presidential horse race has ended, speculation has now turned to what Obama's cabinet will look like. Industry sources that spoke to OPIS floated several names for who could be named to head the agencies that would affect biofuels -- the U.S. Departments of Energy and Agriculture, as well as EPA. For USDA, several sources suggested Tom Buis, the current president of the National Farmers Union. "Tom knows how to bring people together, to achieve consensus among a wide array of viewpoints, has enormous respect in farm country and on Capitol Hill, and has the vision and leadership skills to make renewable energy a centerpiece of agricultural policy," said one political observer. "There will be many other excellent options at USDA, but Buis is my top pick," the observer added.

Former Iowa Gov. Tom Vilsack (D) is also rumored to be head of USDA, sources noted. Vilsack, who has spoken in support of lifting the ethanol import tariff, was one of the first Democratic presidential candidates for this year's election, but dropped out in February 2007 due to a lack of money.

"I think with respect to many other top posts and cabinet positions, you'll see the transition team balance the line between the desire to reinsert Clinton administration officials into leadership slots and the desire for some new blood and fresh ideas representative of the Obama campaign," the observer noted.

For EPA, several sources are hearing that Obama energy advisor Jason Grumet could be tapped to head the agency. Grumet, currently the executive director of the National Commission on Energy Policy, has been a longtime fixture on the energy/environment scene, previously heading the Northeast States for Coordinated Air Use Management. "Grumet has a complex understanding of environmental and energy policy, has enormous respect within a wide variety of constituencies and would be a solid pick for any job in the Obama White House," said the observer.

Other names floating around to head EPA include Kathleen McGuinty, former head of the Pennsylvania Department of Environmental Protection and Mary Nichols, assistant administrator for EPA's Air and Radiation division under the Clinton Administration.
To head DOE, some of the same names (Vilsack, Grumet) are being heard, as well as Pennsylvania Gov. Ed Rendell (D) and Dan Reicher, former Assistant Secretary of Energy for Energy Efficiency and Renewable Energy at DOE under the Clinton Administration, and now director of Climate Change and Energy Initiatives at Google.

Meanwhile, it is rumored that former Senate Majority Leader Tom Daschle (D), who has been an advisor to Obama, is in the running to be chief of staff.

Daschle has been a longtime biofuels supporter and appears to have Obama's ear on the topic. However, if Obama decides on another chief of staff -- current Rep. Rahm Emanuel (D-Ill.) is also in the running -- that would free up Daschle to be head of any of the energy/ag-related agencies, sources noted.

November 03 , 2008
EIA: US Ethanol Output Hits New Heights

Despite difficult margins, domestic ethanol plants had their most productive month on record in August, U.S. Energy Department's Energy Information Agency (EIA) reported late last week.

Ethanol plants in the U.S. averaged 647,000 b/d of fuel-grade ethanol production in August, according to EIA -- up 33,000 b/d from the previous month and 49% more than producers made at the same time last year. Total August ethanol production reached nearly 20.06 million bbl, or almost 1.02 million bbl more than in July and 6.6 million bbl more than a year ago.

Both daily and total production for August represented all-time ethanol output highs and, on an annualized basis, represented about 9.92 billion gal/yr of fuel ethanol production.

Regionally, the only area that pulled back on ethanol output was the Rockies, where 375,000 bbl of output for the month came in about 3,000 bbl less than July. Midwest producers added 845,000 bbl to output in August, up about 4.7% for the month. The West Coast also boosted its ethanol production, with 477,000 bbl made during August adding 142,000 bbl, or about 42%, more than in July. Compared to the same time last year, West Coast ethanol output more than doubled, according to EIA.

The recent bankruptcy of VeraSun underlines the tentative nature of ethanol production
in the current environment where ethanol market prices offer little or no margin to producers. Though VeraSun's troubles put the company's 15 ethanol plants and nearly 1.4 billion gal/yr of production capacity in jeopardy, a number of new plants have come on line since August.

Most recently, the 100-million gal/yr Cardinal Ethanol plant in Randolph County, Ind., began grinding corn with expectation of its first commercial volumes of ethanol production this week. A conservative estimate of new plant startups and restarts since August tops the equivalent of 645 million gal/yr.

Meantime, ethanol stockpiles also built over August. At 14.882 million bbl, fuel ethanol on hand nationwide added nearly 1.7 million bbl over the July level and swelled 44% -- about 4.57 million bbl -- over August 2007.

Regionally, the largest build in supply came in the East Coast, where storage tanks added more than 1.09 million bbl month-to-month, to 5.424 million bbl -- more than 1.9 million bbl ahead of year-ago stockpiles in the East. Midwest ethanol stores built 566,000 bbl versus July, to 5.799 million bbl and 2.09 million bbl more than the same month last year. The only region to draw stockpiles was the Gulf Coast, where 1.456 million bbl of August ethanol storage was 82,000 bbl less than in July.

Along with production, it is possible that ethanol supply will also continue to fatten into fall. The big slide in gasoline prices over the last month started to squeeze ethanol blending economics closer to neutral territory, enough that marketers outside the Midwest are starting to turn a cold shoulder to discretionary blending.

EIA also released its final import figures for August, confirming its earlier preliminary report that fuel-grade imports jumped nearly 42% over July to reach the highest level of the year at 81.1 million gal. Despite what looked like a squeeze on arbitrage economics for material from Brazil in latter summer, that nation remained by far the top source for ethanol imports -- a factor that could be driven by the end of duty drawback provisions. Many importers used duty drawback to mitigate most of the hefty U.S. tariff on imported ethanol and may have rushed imports to beat its end-of-September expiration.

MTBE production dropped in August, with captive plant production slipping near non-existence. Altogether, U.S.-based MTBE producers made 1.549 million bbl for the month, down 122,000 bbl from July output and 436,000 bbl less than year-ago production. Daily MTBE output averaging 50,000 b/d was off 7.4% for the month and 22% for the year, according to EIA.

Merchant producers, all in the Gulf Coast, cut MTBE output about 3,000 b/d from July
to August. At the same time, the dwindling number of captive MTBE units slashed production 16,000 bbl over the same period, making just 3,000 total bbl for the month
of August.

Still, MTBE stockpiles built over the last full month of summer. Storage reported at 1.415 million bbl climbed 163,000 bbl over July and even nosed 33,000 bbl higher than the same time last year. That put U.S. MTBE stockpiles up about 2.4% year-on-year.

October 29, 2008
AG Professors Urge EPA to Delay Indirect Land GHG Regs Under RFS

EPA is poised in the near future, possibly as soon as Friday, to issue its long-anticipated proposed rule for the expanded renewable fuels standard (RFS). But in the second such warning this month, a group of agricultural academic professors and technology developers is urging EPA to delay the indirect land use requirement that is likely to be included in the proposed rule, saying the provision is "premature."

The Energy Independence and Security Act of 2007 (EISA) included an expanded RFS, requiring 36 billion gallons of biofuels by 2022, and contained four carve- outs. Under the bill, conventional biofuels (i.e., corn-based ethanol) would be required to emit 20% fewer lifecycle greenhouse gas emissions compared to gasoline, while "advanced biofuels" (i.e., cellulosic ethanol) would be required to emit 50% fewer lifecycle greenhouse gas emissions.

EPA officials have not publicly stated how they will tackle the lifecycle greenhouse gas reduction component, but various sources familiar with the process have previously confirmed the agency will likely compile a greenhouse gas reduction scorecard for each type of biofuel -- including how the plant is powered -- as guidelines for biofuel producers. Ethanol plants that "commenced construction" prior to Dec. 19, 2007 -- when President George W. Bush signed the energy bill into law -- are grandfathered into the lifecycle greenhouse gas program and automatically will meet the 20% reduction threshold. However, EPA still has to define what "commenced construction" means.

But what has most concerned biofuel groups, OPIS previously reported, is how EPA will address emissions from indirect land use changes. Most lifecycle greenhouse gas reduction (GHG) analyses show that ethanol reduces greenhouse gases compared to gasoline -- anywhere from 28%-40% -- "but if you apply the indirect land use impacts, that number can be cut in half or more," said one source following the issue. There are "big swings involved," depending on what model and data is used, the source added.

"We strongly believe that a requirement to account for ILUC [indirect land use changes] in the legislation was premature, as there are no generally accepted methods for determining indirect land use change, or for that matter, any indirect (market-driven) change, and there is no way to apply even current methods in any meaningful way to the choices a farmer makes," the group wrote in an Oct. 23 letter to EPA Administrator Stephen Johnson. "We are not aware of a single published paper in the lifecycle literature using indirect effects, and the International Standards Organization has published no standards for analyzing indirect (market-driven) effects. In short, what the legislation requires is currently impossible," the letter continued.

The letter was sent by agriculture-related professors from Michigan State University, Iowa State University and Auburn University, as well as the president and CEOs of technology developers Mendel and Ceres.

"We believe that the GHG lifecycle benefits of 2nd generation biofuels, in particular, are very positive. However, if flawed assumptions and methods are used to determine GHG lifecycle emissions reduction, then the GHG emissions benefits of biofuels produced from perennial grasses, such as switchgrass and Miscanthus, may be underestimated substantially," the letter warned.

"In summary, the science and appropriate methodologies for ILUC analysis are just beginning to be done. EPA should delay rulemaking until the science is ready," the letter concluded.

The National Corn Growers Association (NCGA) issued a statement agreeing with the points in the letter. "These distinguished academics recognize that the science is just not quite there yet," said NCGA President Bob Dickey. "Given what is at stake in our weakened global economy, it is important that the EPA allow more time for new, more realistic land use models to be developed so we can truly get an honest picture of the impacts of biofuels production," he added.

Similar concerns were expressed earlier this month at a meeting hosted by the White House's Office of Management and Budget. Among those at the meeting were representatives from DuPont Danisco, GM, Biotechnology Industry Organization, Archer Daniels Midland, the Advanced Biofuels Coalition (ABC), EPA and DOE. "We want to make certain that the science is defensible, clear and has been peer reviewed," ABC's Executive Director Michael McAdams, who was in attendance at the hour-long OMB meeting, said earlier this month. "We don't want to have unintended consequences of regulating a nascent industry right out of the box," he said, noting there are concerns that emissions calculations "are not ready for prime time."

EPA did not return requests for comment by presstime, so it's unclear how the increased attention on ILUC will be addressed in the proposed rule for the expanded RFS. However, one source following the issue said he is assuming "EPA will move forward [with ILUC] and allow the comment process to work." Once the proposed rule has been published
in the Federal Register, EPA will likely have a 60- or 90-day comment period. If enough adverse comment to the ILUC is received, it's possible EPA could then hold off on
the provision.

Concerns surrounding indirect land use changes aren't just limited to EPA. The California Air Resources Board (CARB) is also adopting lifecycle GHG emission regs and could account for indirect land use changes in their provision. "There is no model today that comes close to capturing the interplay of economic, institutional, technological, cultural and demographic variables inherent with quantifying the indirect impact of any fuel," said a letter, sent Oct. 23 to CARB from 30 biofuel and agriculture representatives.

The letter was spearheaded by the New Fuels Alliance. The proposed CARB low carbon fuel standard (LCFS) regulation "would be the first in history to enforce indirect, market-mediated effects against any product in the world, and that to date, the regulation only applies indirect effects against biofuels," the Alliance noted.

"The biofuels industry is firm in its commitment to produce sustainable fuels," said New Fuels Alliance Executive Director Brooke Coleman. "But we are equally adamant that renewable fuels be subjected to the same regulatory standard as other fuels participating in the LCFS. As it stands today, biofuels are held to a higher standard than all other fuels, including oil," he added.

"We have a very difficult situation emerging here in which the author of the GREET model on which the LCFS is based -- Dr. Michael Wang -- says that today's biofuels are not causing indirect land use change in other countries, while [C] ARB staff is proposing to penalize today's and tomorrow's biofuels for indirect land use change in other countries. And while we debate who's right, we are nowhere with regard to analyzing and discussing the indirect effect of other fuel pathways," he added.

Among signatories to the CARB letter included representatives from Pacific Ethanol, Verenuim, Mascoma, BlueFire Ethanol, Range Fuels, VeraSun, Iogen and Renewable Energy Group. Dr. Bruce Dale of Michigan State University was the only official to sign both the CARB and EPA letters.