Ethanol in your future
The Canadian energy scene is changing faster than anyone would have thought possible a year ago and investors need to prepare themselves to deal with some rapidly evolving dynamics.
Two events in particular are driving what could quickly become an energy revolution.
First, the soaring price of crude oil. As recently as early August I was saying that US$40 oil would likely be with us for the foreseeable future. Since then the price has climbed above US$50 a barrel and at the time this column was written was still trending higher. At this stage, a return to the US$40 level would be greeted with huge sighs of relief. The old highs are becoming the new lows!
Second, Russia’s decision to ratify Kyoto. This must come as a troublesome shock to the Martin government. Even though the Chretien administration pushed Kyoto through Parliament, it appeared Canada would never actually have to implement its onerous provisions. The United States had already rejected it and without Russia the whole deal would have collapsed. Now we’re stuck with a costly obligation and no one has a clue how we are going to handle it.
These two developments have resulted in some alteative energy initiatives being moved off the back burner, which has led to some intriguing new investment opportunities.
Don’t get carried away
Before I tell you about one of them, however, a word of warning. In many cases, we are entering new frontiers. As with the birth of the Internet, we will be inundated with fascinating stories, presented with the kind of evangelistic enthusiasm that inevitably accompanies exciting new ventures.
It will be only too easy to get caught up in the waves of optimism. So be cautious. Understand the risks involved before investing any money. And remember what happened to the high-tech boom. It only took about three years for it to become a high-tech bust. We could see something similar here.
With that, let’s look at what I think will be a significant development in the energy sector: Ontario’s decision to embrace ethanol.
Legislation on the horizon
No one thought much about Premier Dalton McGuinty’s campaign promise to require that cleaner-burning ethanol be added to gasoline sold in the province. After all, he had already broken numerous pledges so why would he stick to this one? Then, virtually out of the blue, Agriculture Minister Steve Peters started talking about the subject recently and word leaked out that the government would table legislation that would require that 5 per cent of gasoline content be ethanol by 2007, rising to 10 per cent by 2010.
Next page: Look for investment opportunities
This is the kind of initiative that would help Canada meet its Kyoto requirements. What is not known at this time is where we’re going to get the ethanol we need and what impact it may have the price of gasoline at the pumps.
Kory Teneycke, executive director of the Canadian Renewable Fuels Association (CRFA) estimates that it will require 750 million litres of ethanol to meet Ontario’s planned 2007 requirement of 5 per cent. In 2010, that will double to 1.5 billion litres. Right now, total Canadian production is only 238 million litres a year, less than one-third of what Ontario will need in just a little more than two years! This means we will either have to import supply or build some new plants in a big hurry.
If the Ontario government proceeds, look for ethanol investment opportunities to start springing up like mushrooms. As matters now stand, there is no way for people to get a piece of this action in Canada. The largest ethanol producer, Commercial Alcohols, is a private corporation.
It currently operates two plants in Ontario with a capacity of 173 million litres annually. It also has plans on the drawing board for a new plant in Varennes, Quebec and to double the size of one of the existing Ontario plants, in Chatham. However, even if those expansions are expedited, it will not be enough to meet Ontario’s proposed 2007 needs.
Mr. Teneycke says that all the technology and plans are in place and that new plants could be brought on stream in 12 to 18 months. “All we needed was a market, and now we will have one.”
He won’t speculate on who the players will be, but observes: “Any time you have a product demand that is fixed in law, you have a pretty good investment opportunity.”
He may be right. But let’s wait and see what kind of deals come to market and assess them carefully before making any decisions.