Feasibility Study for a Biodiesel Refining Facility in the Regional Municipality of Durham

Transcription

1 Feasibility Study for a Biodiesel Refining Facility in the Regional Municipality of Durham Prepared for: Regional Municipality of Durham 605 Rossland Road East Whitby, ON L1N 6A3 Final Report March, 2006 Principal Contact: Sigrid Villeneuve Report Prepared by: Bradley A. Saville BBI Biofuels Canada 81 Bruce Street, Unit C Kitchener, ON N2B 1Y

2 NOTICE This report was prepared as an account of work sponsored by the Regional Municipality of Durham, and was funded in part by Natural Resources Canada and Sunderland Coop. Neither BBI Biofuels Canada, nor any of their employees, makes any warranty, expressed or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of any information, apparatus, produce, or process disclosed, or represents that its use would not infringe privately owned rights. Reference herein to any specific commercial product, process, or service by trade name, trademark, manufacturer, or otherwise does not constitute or imply its endorsement, recommendation, or favoring by BBI Biofuels Canada. BBI BIOFUELS CANADA i 3/25/2006

3 TABLE OF CONTENTS I. EXECUTIVE SUMMARY Summary Discussion Recommendations II. PROJECT OVERVIEW Introduction Scope of Work Report Outline III. SITE ASSESSMENT Site Evaluation Criteria Study Area Candidate Site Descriptions Site Evaluation Results Site Recommendation IV. FEEDSTOCK AVAILABILITY AND PRICE Feedstock Requirements World Oilseed Industry Overview Summary of Oilseed Production in Canada Soybean Supply Analysis Soybean Availability Soybean Oil Availability Corn Oil Availability Regional Supply of Animal Fats, Oils and Greases Cost of Soybeans Cost of Soy Oil Cost of Corn Oil Cost of Animal Fat and Recycled Fats and Oils Conclusions for Feedstock V. REVIEW OF BIODIESEL MARKETS National Biodiesel Market Overview Biodiesel Production Capacity National Biodiesel Market Potential Regional Biodiesel Market Potential Regional Competition Local Biodiesel Market Potential Biodiesel Price Conclusions Regarding Biodiesel Markets VI. CO-PRODUCT MARKETS Co-Products: Volume of Production Glycerol Markets: Volume and Price Glycerol Price Section Summary BBI BIOFUELS CANADA ii 3/25/2006

4 VII. FACILITY DESIGN BASIS AND PROJECT STATISTICS Process Description Biox Process Summary of Production Statistics VIII. ESTIMATED CAPITAL & OPERATING COSTS Assumptions Made in the Financial Analysis Capital Construction Cost Estimates IX. FINANCIAL ANALYSIS Economic Modeling Results for Biodiesel Production Breakeven Analysis Sensitivity Analysis Comments on Profitability and Economic Forecasts X. SUMMARY AND RECOMMENDATIONS Summary Discussion Recommendations APPENDIX 1 Site Evaluation Matrices APPENDIX 2 Satellite Images and Photos of Proposed Sites APPENDIX 3 Pro Forma Results for a 38 MM L/y Biodiesel Production Plant BBI BIOFUELS CANADA iii 3/25/2006

5 LIST OF TABLES Table 1-1 Summary of Financial Analysis of 38 MM L/y Biodiesel Production 1-3 Scenarios Table 3-1 Results of Site Evaluations 3-13 Table 4-1 Yield of Major Oilseed Crops in Canada, Table 4-2 Typical Oilseed Yields in Canada 4-1 Table 4-3 Biodiesel Production Requirements from Various Feedstocks 4-2 Table 4-4 Feedstock Requirements for Biodiesel Production (Solvent Extraction) 4-2 Table 4-5 Feedstock Requirements for Biodiesel Production (Mechanical Extraction) 4-2 Table 4-6 Major Oilseed Producing Nations in Table 4-7 Canadian Soybean Supply and Distribution 4-5 Table 4-8 Soybean Production in Ontario 4-6 Table 4-9 Ontario Soybean 2004 Production Statistics 4-7 Table 4-10 Average Local Soybean Production by County ( ) 4-9 Table 4-11 Average Soybean Harvest by County ( ) 4-9 Table 4-12 Crude Corn Oil Availability From Dry Mill Ethanol Plants 4-12 Table 4-13 Soybean Price in Ontario ( ) Table 5-1 World Petrodiesel Consumption, Table 5-2 Canadian and Regional Diesel Fuel Consumption: Transportation Uses 5-5 Table 5-3 Estimated Wholesale Price of Diesel Fuel in Southern Ontario and Quebec 5-8 Municipalities Table 6-1 Biodiesel Production Parameters 6-1 Table 7-1 Project Statistics for Biodiesel Production Plant 7-5 Table 7-2 Personnel Requirements for 38 MMLY Biodiesel Plant 7-6 Table 8-1 Project Assumptions for Biodiesel Production 8-4 Table MM L/Y Biodiesel Production Plant Capital Costs 8-6 Table 9-1 Modeling Results for Biodiesel Production:Effect of Plant Scale on ROI with 9-2 Corn Oil Table 9-2 Modeling Results for Biodiesel Production 38 MM L/y Scenarios 9-2 Table 9-3 Year 2 Income Statement for Oil Extraction and Biodiesel Production 9-4 Table 9-4 Breakeven Analysis for the 38 MM L/Y Biodiesel Production Plant Based on 9-6 Crude Corn Oil Table 9-5 Breakeven Analysis for the 38 MM L/Y Biodiesel Production Plant Based on 9-7 Crude Corn Oil + FOG: Effect of FOG Price Table 9-6 Breakeven Analysis for the 38 MM L/Y Biodiesel Production Plant Based on Crude Corn Oil + FOG: Effect of Corn Oil Price 9-8 BBI BIOFUELS CANADA iv 3/25/2006

6 LIST OF FIGURES Figure 1-1 Projected ROI for a 38 MM L/y Biodiesel Plant based on Corn Oil 1-3 Figure 3-1 Study Location 3-5 Figure 3-2 Map of Durham and Surrounding Municipalities and Regions 3-6 Figure 3-3 Potential Plant Sites 3-7 Figure 3-4 Clarington Energy Business Park 3-7 Figure 3-5 CN Oshawa Site 3-10 Figure 3-6 LaFarge Site 3-11 Figure 4-1 Worldwide Production of Vegetable Oils 4-3 Figure 4-2 Local Feedstock Collection Zone for Durham Region Sites 4-7 Figure 4-3 Canadian Soybean Oil Production and Exports 4-10 Figure 4-4 Biofuels Facilities in Ontario and Quebec 4-11 Figure 4-5 Historical Basis for Soybeans in Ontario 4-15 Figure 4-6 Soybean Production and Transport Costs 4-16 Figure 4-7 Historical Price of Crude Soy Oil, Corn Oil and Tallow, Figure 4-8 Historical CBOT Prices for Soy Products 4-17 Figure 4-9 Correlation between CBOT Crude Soy Oil and Soybean Prices, 2000-Present 4-18 Figure 4-10 Correlation between Actual and Predicted Price of Crude Soy Oil 4-18 Figure 4-11 Historical Corn Oil Cost 4-20 Figure 4-12 Historical Pricing of Animal Fats 4-20 Figure 4-13 Historic Price Trend for Inedible Tallow, Figure 5-1 Historical Use of Biodiesel in Canada, by Province 5-4 Figure 5-2 Forecast of Canadian Diesel Fuel Demand 5-4 Figure 5-3 Regional Markets for a Plant in Durham 5-5 Figure 5-4 Map of Commercial Scale Biodiesel Plants in Ontario and Quebec. 5-7 Figure 5-5 Historical Diesel Fuel Prices for Selected Canadian Municipalities 5-8 Figure 5-6 Historical Diesel Fuel Prices for Selected Ontario Municipalities 5-9 Figure 5-7 Statistics Canada s Consumer Price Index for Energy 5-9 Figure 6-1 US Glycerol Production 6-2 Figure 6-2 US Production and Demand of Refined Glycerine 6-3 Figure 6-3 US Refined Glycerine Prices 6-4 Figure 6-4 Historical Prices of Refined Glycerine in the U.S. and Europe 6-5 Figure 6-5 Near-Term Price Trends for Vegetable-Oil based Glycerol 6-5 Figure 7-1 Conventional Biodiesel Production Process 7-2 Figure 8-1 Recent Natural Gas Price Trends in Ontario 8-2 Figure 8-2 Recent Wholesale Electricity Price Trends in Ontario 8-3 Figure 9-1 Projected Annual ROI for the 38 MM L/y Biodiesel Production Plant Based on Purchased Corn Oil 9-4 Figure 9-2 Sensitivity to the Price of Corn (or other purchased) Oil 9-10 Figure 9-3 Sensitivity to the Price of Recycled Oils and Greases 9-10 Figure 9-4 Project Sensitivity to the Selling Price of Biodiesel 9-11 Figure 9-5 Project Sensitivity to the Selling Price of Glycerol 9-11 Figure 9-6 Project Sensitivity to the Capital Cost Estimate 9-12 BBI BIOFUELS CANADA v 3/25/2006

7 Summary Discussion I. EXECUTIVE SUMMARY The Regional Municipality of Durham has retained BBI BIOFUELS CANADA (BBI) to conduct a study assessing the feasibility of establishing a biodiesel production facility in the Region of Durham, in the Province of Ontario (the Project ). Based on extensive research and financial analysis, BBI recommends the further development of a biodiesel production facility in the Region of Durham, Ontario. The projected feedstock resource base and the projected product markets in the Region of Durham could potentially support a biodiesel production facility that produces up to 38 million litres per year of biodiesel from crude corn oil extracted from corn-to-ethanol processing facilities, supplemented by recycled fats, oils and greases (FOG). At $325/tonne for crude corn oil, the projected average annual pre-tax return on investment (ROI) for a 38 MM L/y biodiesel plant using 100% corn oil is 39%, sufficient for BBI BIOFUELS CANADA to recommend the project. Results of Site Evaluation BBI evaluated six sites in the Region of Durham. Overall, there was very little difference between sites, and all would be suitable for a biodiesel production facility. The St. Mary s and Port Oshawa sites both have access to feedstocks brought in by boat, but these sites are also among the furthest from existing rail lines, which increases overall site development costs. The St. Lawrence Grains site is limited by access to utilities particularly water and wastewater, but is otherwise a very good site. The Clarington Energy Park and CN are excellent sites, with excellent access to utilities, along with highway and rail transport. A sensitivity analysis performed to examine the effect of land and site development costs on ROI demonstrated that a $2MM difference in these costs affects the ROI by 3 to 4%, but not enough to severely affect the viability of a biodiesel plant in the region. Thus, intangibles such as access to infrastructure and community and political acceptance may ultimately dictate plant location in the region. Results of Feedstock Assessment Historic soybean production trends in the Region of Durham and adjacent counties surrounding Durham were evaluated to project the potential feedstock base and the associated scale of biodiesel production. For the 5-year period , the average annual soybean production in the counties and regions within 80 km of the proposed urban plant sites is 100,000 tonnes, increasing to 178,000 tonnes for the rural sites. The local demand for soybeans is relatively strong. A substantial fraction goes to regional crush facilities, 4% is used on farm, 40% is exported, and 8% is carry over for the next BBI Biofuels Canada 1-1 3/25/2006

8 year. A biodiesel facility located in Durham could acquire soy oil from the existing crush facilities in Winchester or Hamilton. The Winchester facility is currently operating below its design capacity, and could accommodate increased production for a biodiesel plant. The crush facilities are also well positioned to import beans from outside the region, but the cost of soy oil is sufficiently high that this is likely not desirable. Current uses and known competition are expected to limit the quantity of soybeans available to a plant in Durham to ~28 to 41 thousand tonnes per year, depending upon whether an urban or rural site is selected. This would be sufficient to produce about 3 to 4 MM L/y of soy oil for biodiesel production. The feasibility of biodiesel production based entirely on purchased soy oil has been evaluated, and found to be economically non-viable. The price of soy oil used in the financial analysis was C$650/tonne. Crude corn oil is expected to be an important feedstock for the Durham biodiesel facility. Locally available supply is expected to be ~ 18 to 20 thousand tonnes per year, and acquisition of crude corn oil from other ethanol plants in Ontario and Quebec under construction could easily expand the available supply beyond 20,000 tonnes per year. Based on discussions with representatives from ethanol plants in the region, BBI projects that crude corn oil would be available at a price of C$325/tonne, much less than the price of food grade corn oil. There is insufficient animal-derived material available locally to support a biodiesel production facility on recycled fats and oils alone. Based on a review of locally available rendered materials and an estimate of recycled cooking fats and oils, BBI estimates that locally-available animal-derived materials could support 15 to 20 MM L/y of biodiesel production. Results of Financial Projections Preliminary financial analyses were conducted on scenarios based on different plant scales from 19 to 38 MMLY, using the least expensive feedstock (crude non-food grade corn oil). The 11 year average annual return on investment (ROI) was 13.2% for a 19 MMLY plant based on corn oil, indicating that a plant of this scale would not be viable. A 25 MMLY plant has an ROI of 22% - a marginally successful outcome. Increasing the scale to 38 MMLY leads to an ROI near 39%, which surpasses the threshold ROI of 25% needed to be classified as an excellent project. Using more expensive feedstocks clearly reduces the ROI, and thus, use of FOG or soy oil would not be viable at either a 19 MMLY or 25 MMLY scale. However, at 38 MMLY scale, FOG or soy oil could be blended with corn oil while still delivering an acceptable return on investment. Detailed financial projections were subsequently made for 38 million litres per year of biodiesel production, based on three feedstock scenarios crude corn oil only, FOG only, and a 70:30 mix of crude corn oil and FOG. The results of the financial analysis for the three production configurations are shown in the following table. BBI Biofuels Canada 1-2 3/25/2006

9 The results show that for a crude corn oil feedstock cost of C$325/tonne, a 38 MM L/y biodiesel production facility has an ROI of 39% (Figure 1-1), which merits serious consideration. It is also apparent from Table 1-1 that the profitability of a 38 MM L/y facility decreases substantially as the proportion of FOG in the feedstock increases. This is due to the higher price of FOG compared to crude corn oil (C$470/tonne vs. $325/tonne). A facility using 30% FOG as its feedstock has a projected 11 yr average annual ROI of 27%, which is also a viable outcome. However, using 100% FOG is not viable, leading to a negative ROI (-4%). A substantial increase in the price of biodiesel or a decrease in the price of the FOG feedstock is needed before this option is economically viable. While the former is possible, the latter is unlikely. A 38 MMLY with 100% FOG, could achieve an ROI of ~22% if biodiesel prices increased to 66 cents/l from the current price of 58.5 cents/l used as the baseline in the financial analyses. However, even with higher biodiesel prices, such a facility would be highly sensitive to adverse market events, such as an increase in feedstock costs or a decrease in the glycerine selling price. Table Summary of Financial Analysis of 38 MM L/y Biodiesel Production Scenarios Summary of Biodiesel Production Plant Financial Projections Crude Corn 70% Corn Oil, Performance Metric Oil Only 30% FOG FOG Only 11-Year Average ROI 38.8% 26.6% -4.1% Average Annual Net Earnings 4,313,000 2,958,000 (450,000) Installed Capital Cost per Gallon of Capacity Plant Capital Cost $21,286,000 $21,286,000 $21,286,000 Owner's Costs $6,280,910 $6,318,910 $6,405,910 Total Project Investment $27,566,910 $27,604,910 $27,691,910 40% Equity $11,026,764 $11,041,964 $11,076,764 Figure Projected ROI for a 38 MM L/y Biodiesel Plant based on Crude Corn Oil Pre-Tax ROI (%) 60% 50% 40% 30% 20% 10% -10% Projected Annual Return on Investment 0% Year Avg. BBI Biofuels Canada 1-3 3/25/2006

10 Recommendations Based on the results of the feasibility study, BBI recommends that Durham proceed with development of a 38 MM L/y biodiesel production facility. To maximize returns, the primary objective should be to secure a firm supply commitment for 20,000 to 38,000 tonnes of crude corn oil, acquired from dry grind ethanol plants in the region. Alternatively, if Durham can identify and obtain a firm supply commitment for a minimum of 15,000 tonnes/y of locally-available high free fatty acid (FFA) feedstocks at a low price (< $400/tonne), some feedstock diversification and hedging of feedstock prices can be achieved. The following recommendations are made regarding the next steps in project development. BBI is ready and available to assist Durham through the project development phase, which would begin by addressing these recommendations. 1. Durham should seek to generate seed financing to take the project to the next level of development: the development of the business plan. 2. Durham should have the preferred site evaluated by a process design company from an engineering and construction perspective. There should be no cost for this second opinion. 3. Durham should obtain the expertise of a permitting specialist early on, to further define permit requirements and the length of time required to obtain the required permits. 4. Durham should seek to identify and secure firm supply commitments for at least 20,000 tonnes per year of regionally-available corn oil, to ensure viable returns from the 38 MM L/y production scenario. Securing additional supply of this lowcost feedstock would be advantageous. 5. Durham should seek to identify and secure firm supply commitments for 10,000 to 20,000 tonnes per year of locally-available high FFA feedstocks. Such feedstocks would permit some hedging of feedstock price, but are only beneficial if the price of these recycled fat resources is less than $400/tonne. 6. Durham should assess its ability to attract the equity component of the project cost. 7. Driving the project forward will require certain activities that Durham should begin to consider to confirm and improve the opportunity: Complete a business plan Hire a project coordinator or general manager Verify the ability to obtain contingent grower production contracts Negotiate the required contingent marketing relationships for biodiesel, soybean meal and glycerol BBI Biofuels Canada 1-4 3/25/2006

11 Negotiate a lower natural gas rate than that used in the projections Begin to negotiate for candidate sites and obtain a commitment for the preferred project site Verify the feasibility results for the actual site and actual plant configuration, should it differ significantly from the proposed model facility Ascertain the acceptance of the project by the local community Identify and address community issues for the recommended site Select a biodiesel process design company and begin preliminary engineering work Complete a prospectus for a private placement or stock offering; begin discussions with lenders Apply for/obtain required permits Secure equity and debt financing Begin construction BBI BIOFUELS CANADA thanks The Regional Municipality of Durham for selecting BBI BIOFUELS CANADA to perform this feasibility study on establishing a biodiesel production facility in the Region of Durham. Should the decision be made to move forward with this project, BBI would welcome the opportunity to work with Durham to make this project a reality. BBI Biofuels Canada 1-5 3/25/2006

12 Introduction II. PROJECT OVERVIEW The biodiesel industry in North America is at a crossroads, and the next decade will determine if the biodiesel industry will embark on a major expansion that will allow it to make significant contributions to rural economic development, improvements in urban air quality, and the energy security of our country. Public support for renewable fuels has never been stronger. Political support for renewable biofuels is also growing. The Regional Municipality of Durham has retained BBI Biofuels Canada (BBI) to conduct a study assessing the feasibility of establishing a biodiesel production facility in the Region of Durham, Ontario (the Project ). The Feasibility Study includes an assessment of candidate sites, feedstock assessments, biodiesel and co-product market analyses, preliminary cost estimates, and financial analysis. The goal of the Feasibility Study is to establish which feedstocks and technology options are viable and to document the underlying assumptions with historical data, cost estimates, projections and market analyses. Scope of Work The feasibility study is designed to determine the viability of biodiesel production in the Durham area. The study addresses the following tasks and assesses the feasibility and potential profitability of the proposed project; the final report follows the attached outline. A Project kickoff meeting was held with the client in Durham, Ontario on January 5, BBI presented an overview of the Project and inspected several candidate sites. Compare 3-4 potential sites for the project and make recommendations regarding the most suitable site for the project s development. The site assessment includes: transportation, utilities, water, roads, wastewater treatment options, and proximity to communities. A numerical ranking system that considers the attributes of each site was used to establish the best candidate site overall. Potential community concerns and environmental issues for the recommended site are also discussed. Identify, quantify, and evaluate recycled fats, oils and grease sources, as well as residual or virgin agricultural sources, along with secondary feedstocks and other applicable commercial/industrial waste streams in the region. The assessment of local oilseed crops includes and evaluation of the number of acres needed for sustainable production for likely facility sizes, as well as past, present, and potential future demands and competition for the recommended oilseed feedstocks. Recommendation of the best feedstock plan for the Project. Document federal, provincial, and local incentives relevant to the proposed biodiesel facility and related biodiesel ventures that pertain to the implementation of a viable plant. BBI Biofuels Canada 2-1 3/25/2006

13 Identify and quantify various production factors, including labor resources, hydro resources including preliminary cost estimates, natural gas and transportation, including truck and rail. In consultation with stakeholders and potential marketers of biodiesel, determine the market demand and assess the potential for direct competition for that market. Based on this analysis, project to the extent possible a realistic market value for the biodiesel and the glycerine coproduct. The market analysis shall include the following: Market Definition The potential markets for biodiesel and glycerine that can be competitively served by the Project are defined. Local biodiesel markets are typically within 250 km of the Project with the regional market up to 750 km away. Specific biodiesel markets within these general areas are identified. Current and Historical Biodiesel Market The market analysis documents the current and historical use of biodiesel in local and regional markets. Historical pricing for diesel is documented, as a benchmark for the biodiesel selling price. Biodiesel Market Potential Estimates of the local, regional and national market potential for biodiesel are provided. Current and Historical Co-product Markets The market analysis documents the current and historical use of potentially profitable key co-products and byproducts, primarily glycerine, in local, regional, and national markets. Historical pricing for these products will also be documented when available. The future potential markets and prices will be researched and estimated. Co-product Market Potential Estimates of the local, regional and national market potential for the key products and byproducts will be documented. Glycerine Market Potential Estimates of the regional and national market potential for the Project s glycerine will be made. Conduct a review of the various technologies available for biodiesel production and make recommendations to the Client regarding the technology that is best suited for the available feedstock and end market. Provide a financial analysis/proforma, based on the findings of this report and other similar projects. This section will include a brief review of the potential economic impacts created by the plant as well as an evaluation of the potential impact that plant size could have on the economies of scale. Develop a financial model, including a construction budget, interim funding schedule and a tenyear operating forecast. Run the financial model for those manufacturing scenarios that have potential for reasonable profits. The financial assumptions will be based on the conclusions of the feasibility study and on BBI s assumptions as to the performance of certain commodity markets affecting feedstock and product prices in the future. The 10-year operating forecast will BBI Biofuels Canada 2-2 3/25/2006

14 be accompanied by a summary of the significant assumptions as to the operation of the plant and cost associated with that operation. A sensitivity study will be performed for key Project variables. Provide a Project summary and recommendations. Include recommendations on plant size, manufacturing technologies, location, products and co-products, and other items relevant to the Project goals. Meet with the client upon completion of the Feasibility Study. BBI will discuss the results and answer any questions. Should the Regional Municipality of Durham wish to organize a larger community meeting at the same time, BBI will present the findings of the study to the larger group. Report Outline This feasibility study is organized according to the following outline: Project Summary Site Assessment Review of Candidate Sites Site Evaluations Potential Environmental Impacts, Community Concerns Site Recommendation Feedstock Assessment Review of Candidate Oilseed Feedstocks Historical Production Regional Production Biodiesel Production Potential Feedstock Pricing Review of Candidate Fat, Oil and Grease Feedstocks Historical Production Regional Production Biodiesel Production Potential Feedstock Pricing Overall Summary of Feedstock Assessment Market Assessments Biodiesel Market Assessment, including Federal and Provincial incentives. Glycerin Co-product Market Assessment Market Strategy Recommendation Technology Assessment Conventional Process for Waste Fats, Oils and Greases BIOX Process for Waste Fats, Oils and Greases Production from Virgin Oils Production from mixed feedstocks BBI Biofuels Canada 2-3 3/25/2006

15 Capital and Construction Cost Estimates Project Assumptions Capital and Operating Cost Estimates Financial Analysis Results 10-Year Pro Forma Sensitivity Analyses Summary Conclusions and Recommendations BBI Biofuels Canada 2-4 3/25/2006

16 III. SITE ASSESSMENT The criteria for a good biofuels plant site encompass many factors including proximity of feedstocks, good road and rail access, and access to required utilities. Other considerations include a qualified and/or trainable labor force, access to an airport, and the presence of essential community services like medical facilities. Site Evaluation Criteria The BBI Site Evaluation Matrix was used to compare the candidate sites identified by the Regional Municipality of Durham. The Site Evaluation Matrix assigns weighted scores for desirable site attributes including: Feedstock availability Road and rail transportation infrastructure at the site Utilities including electricity, natural gas, water supply and wastewater treatment Biodiesel and co-product market proximity Labor availability Community services such as welding, electrical shop, plumbing, schools, fire protection, hospital and airport Zoning and proximity to communities Scores were assigned to each of the key site attributes and the results are presented in the section following the discussion below. The inputs and outputs discussed below are based on a processing capacity of ~38 million litres per year (MMLPY) of biodiesel, depending on oil type, seed oil content and process efficiencies. Feedstock Proximity The proximity of feedstock is a crucial component of the site evaluation and feasibility for a biodiesel plant. In general, a smaller feedstock collection radius is reflected in a higher score on the site evaluation matrix. A 38 MMLPY biodiesel plant will utilize approximately 35 to 36 million litres of degummed feedstock oil per year. Of this, approximately 3 to 4 million litres of oil could be supplied by tonnes of soybeans. Assuming an average oilseed yield of 2.26 tonnes/ha (0.98 tonnes/acre), approximately 12,500 ha/year (31,000 acres/year) of harvested acreage would be required. Based on historical production, acres in cultivation, and the feedstock requirements for oilseed production, adequate acreage is estimated to be available within 80 km to supply over about 15 to 20 MMLPY of refined biodiesel, if all other existing soybean markets are ignored. As discussed in Section VI, current uses of soybeans will limit the actual amount of soybeans available to a biodiesel facility in Durham. Proximity to Communities Biofuels plants bring numerous benefits to communities including job creation, adding value to local crops with diversified products, increased local tax revenues and significant economic development across the community. There are, however, potential negative impacts associated BBI Biofuels Canada 3-1 3/25/2006

17 with such facilities as well, such as increased traffic volume, visual impacts, noise, and, in some cases, odors. While noise and odors from modern processing facilities are routinely dealt with using engineering controls and operating procedures, issues such as traffic and visual impacts on the community must be considered during site selection. In the context of site evaluation, a site in close proximity to a community or residential area will achieve a lower score than a site located in a more isolated area or with a buffer of undeveloped land between it and its neighbors. Transportation Access to Class A roads is a primary requirement for a biodiesel plant because feedstock is often delivered by truck and the product or co-products may be shipped to market by truck. Access to rail provides a second mode of transportation for receiving feedstock and shipping product to more distant markets. Access to rail is a distinct advantage over plant sites without rail access just as a site on a mainline rail line is better than a location on a short line rail line. Access to two mainlines is a great advantage when it comes to negotiating transportation rates. Similarly, barge access is another advantage, providing a third option for transportation logistics. However, the plant must be large enough to justify barge shipments. These considerations are factored into the site evaluation matrix and are reflected in the scoring for each site. Electrical Service Based on an average electrical energy input requirement of kwh per million litres of biodiesel production, a 38 MM litre per year operation will demand approximately ~2,000,000 kwh of energy per year. Access to sufficient line voltage is required; an existing substation located close to the site is an advantage over a long interconnect or the need to build a new substation. Sites are scored based on access to an adequate source of electricity. Natural Gas Biodiesel production operations use natural gas to generate process steam and to power the evaporation and distillation operations for refining the value-added products. Natural gas use is typically about ~1350 BTUs of thermal energy for each litre of biofuel produced. A 38 MM litre operation will require about six thousand cubic feet of natural gas per hour. A site with an existing gas supply or an adjacent distribution main has an advantage over a greenfield site located far from an existing gas main. Each site receives a score based on the availability of natural gas and the distance to the closest point to tie-in. Water There are three basic sources of water used for biofuels plants: well water, municipal water and surface or river water. Most plants use well water because of their rural location. Over the long term, well water is often less expensive. Cost of drilling, water quality and long-term supply are important considerations when considering a new well. The second option as a water source is city water, which is considered a more reliable option for consistent supply and quality. With municipal or city water supply, special water conditioning systems are usually not required, BBI Biofuels Canada 3-2 3/25/2006

18 reducing capital cost. Water requirements for a biodiesel plant include process water, steam makeup and cooling water, totaling about 370,000 cubic metres per year in a 38 MM litre per year facility. Each site receives a score for water supply based on the availability of a municipal main or a dedicated well. Wastewater Modern biofuels plants can be designed to be zero or near-zero wastewater effluent facilities. The availability of low-cost water discharge and treatment options must be considered in the plant design to optimize water usage within the plant and overall wastewater treatment costs for the project. By incorporating recycling and reuse, a biodiesel plant should produce no more than ~ 2 litres of process wastewater per litre of biodiesel product, although this number can vary considerably between plant designs. For a 38 MM litre per year biodiesel facility, this amounts to 225 m 3 /day. The estimated annual process wastewater generated is on the order of 79,000 m 3 /year. Almost all of the water to be discharged from a biodiesel plant is utility water from evaporative losses and blowdown operations. The blowdown water is typically very similar to the makeup water, but with an increase in the hardness. Cooling tower and boiler blowdown is typically discharged to a local sewer, to surface water with appropriate permits, or to an evaporation pond. For discharge to surface water or an evaporation pond, a permit for cooling tower and boiler blowdown discharge would be required. Proximity to Primary Market A large local biodiesel market can provide a distinct advantage for a biofuels plant through lower transportation costs. The primary biodiesel markets for the project are discussed in detail later in this report. For purposes of the site evaluation, the biodiesel market proximity is reviewed briefly here. The target markets for biodiesel would be fleet (including buses), railroad, and barge operators throughout the region. Access to local blending/refining facilities is also considered. Each site receives a score for market proximity based on the distance to primary product markets. Co-product Market Proximity Approximately 20% of the incoming oil tonnage is converted into glycerol and soapstock. A 38 MM litre per year plant will therefore generate about 4000 tonnes of crude glycerol and 2900 tonnes of soapstock annually. Each site receives a score for proximity to co-product markets. Labor Availability A 38 MM litre per year biodiesel operation will require 12 employees. The exact number of employees can vary depending upon the plant design and operating plan. The area within 50 km of the site should easily be able to supply the labor for the biodiesel plant operations. Specialty BBI Biofuels Canada 3-3 3/25/2006

19 positions such as the plant manager or lab supervisor may have to be recruited from greater distances. Community Services Community services within 15 km of the processing plant site are important to provide quick response to the needs of the plant and to attract and retain top employees. Desirable community services include electrical maintenance, machine shop, welding, plumbing, hospital, airport, good schools and fire protection. Study Area and Candidate Sites The proposed study area is in the Region of Durham, encompassing the communities of Ajax, Brock, Clarington, Oshawa, Pickering, Scugog, Uxbridge, and Whitby, Ontario. The region is immediately east of Toronto, part of the Greater Toronto Area. Depending upon the site, the proposed growing region would also encompass, within 80km, parts of the regions of Northumberland, York, Victoria, Peterborough, Peel, Simcoe, Halton, and Dufferin. Figure 3-1 depicts the Region of Durham, and Figure 3-2 shows its relative proximity to Toronto and surrounding regional municipalities. During the initial kick-off meeting, 6 prospective sites were identified by the Regional Municipality of Durham for inclusion in the feasibility study. These sites are numbered 1 through 6 on the Site Matrices (Appendix I), corresponding to: St. Mary s Cement Clarington Energy Business Park CN Oshawa Port Oshawa LaFarge St. Lawrence Grains All of the sites examined by BBI are within the Regional Municipality of Durham. Sites (1) to (4) are urban sites, while sites (5) and (6) are more rural, although still close to major municipalities. Because of their close proximity, many of the site evaluation criteria, such as nearness to markets and community services, will be effectively equivalent. The distinguishing factors that will determine the preferred site(s) will necessarily be site-specific characteristics like proximity to rail lines or land costs. Figure 3-3 is an overall map of the area, showing the locations of the six sites, including the Clarington Energy Business Park, the CN Site near General Motors in Oshawa, the LaFarge Site north of Ajax, the Port Oshawa Site, the St. Lawrence Grains Site, in Stouffville, and the St. Mary s Cement site, on the Clarington/Bowmanville border. Additional site photographs, including satellite images, are included in Appendix II. BBI Biofuels Canada 3-4 3/25/2006

20 Figure 3-1: Study Location BBI Biofuels Canada 3-5 3/25/2006

21 Figure 3-2: Map of Durham and Surrounding Municipalities and Regions BBI Biofuels Canada 3-6 3/25/2006

22 Figure 3-3: Potential Plant Sites BBI Biofuels Canada 3-7 3/25/2006

23 Candidate Site Descriptions Site 1 St. Mary s Cement Location: 400 Waverly Rd South, Bowmanville, ON St. Mary s operates a large cement and ready-mix production facility just south of the 401 and CN rail line on Waverly Road in Bowmanville. The plant owners are developing ~ 40 acres at the southern end of the site, described as the Bowmanville Dock, which is the proposed location for the biodiesel facility. The dock plan includes provisions for a marginal wharf and a 90m wide slip, with sufficient space to provide unhindered access for two ships. Concrete dock pads, a cargo storage area, pipelines, tanks and warehouses will be provided as required. The site will also include an access road suitable for commercial traffic. Power, water, lighting, specific environmental controls, and fire-fighting equipment will also be provided. A site plan and photos of the dock/site are included in Appendix II. St. Mary s has its own wastewater treatment facility on-site; it is not clear if it has sufficient additional capacity to process wastewater from the biodiesel plant. The CN mainline forms the northern boundary of the cement plant; a rail spur would have to be extended to the proposed plant site, a distance of approximately 1 to 1.5 km. The cement plant is about 250m south of Highway 401, approximately 80km from downtown Toronto. The proposed biodiesel plant is a further 1.5km south of the Waverly road access to the cement plant. The Bowmanville Harbour Conservation area is ~ 1.4 km east of the site, and the adjoining community is very vocal. A plant located at this site (like all of the urban sites) would have ready access to tradespeople (welders, fabricators, millwrights, electricians, etc.) and personnel for plant operations. Ancillary community infrastructure such as schools, hospitals, and utilities are readily available. Like all of the urban sites, the St. Mary s site is somewhat further removed from the local supply of oilseed feedstocks that would be grown in the area. However, feedstocks can be easily brought in by rail and water. Site 2 Clarington Energy Business Park: The Clarington Energy Business Park is aimed at attracting businesses involved in energy manufacture or research of environmental or energy-related processes, such as renewable energy. The Energy Park is approximately 70 km from downtown Toronto. A site map is shown in Figure 3-4. The park is a 318 acre (129 Ha) parcel of land located immediately south of Highway 401 in Courtice, between and including Solina Road and Courtice Road. Osbourne Road bisects the business park. The CN (dual-track) mainline forms the southern boundary of the business park. The rail line is elevated to traverse a creek and an overpass over Courtice road, the park s western boundary, but is level with the land at ~300m west of Osbourne. A wildlife corridor and waterfront trail are planned for the area south of the CN mainline, along with the Clarington wastewater treatment facility, to be completed in Immediately east of the site is the Darlington Nuclear Facility, and Darlington Provincial Park is about 1km west of Courtice Road. The site is level and will be zoned for industrial development light industrial (type 1) in the area nearest the 401, and light industrial (type 2) in the area nearest the rail line. There are BBI Biofuels Canada 3-8 3/25/2006

24 BIODIESEL PRODUCTION FEASIBILITY STUDY FOR DURHAM restrictions on outside storage at the Energy Park limited to 50% of the lot size in the areas designated as Light Industrial 2. The biodiesel facility would ideally be located in either the parcel owned by the region, just west of Osbourne, or on a privately owned parcel east of Osbourne on Solina Road (the Craigell farm). Figure 3-4: Clarington Energy Business Park Site 3 CN-Oshawa This is a 41 acre site on the NE corner of Wentworth Street W and Thornton Rd S, near GM s Oshawa facility. Pival has recently acquired the site, and plans to develop the 20 acre parcel fronting onto Wentworth and Thornton Roads. The remaining 21 acres at the north end of Thornton Rd S are available for other uses, such as a biodiesel facility. Thornton Road deadends at the CN line, an area with multiple (~20) sidings (see Figure 3-5). The site is approximately 3.5 km (driving distance) from the 401 Thickson Road exit, and approximately 60 km from downtown Toronto. The site is level, but otherwise undeveloped, and is thus essentially a Greenfield site. BBI Biofuels Canada 3-9 3/25/2006

25 Figure 3-5: CN Oshawa Site Site 4 Port-Oshawa The Port Oshawa site is located at 1050 Farewell Avenue in Oshawa, approximately 60 km from downtown Toronto. The Port comprises East and West wharves, capable of handling full seaway sized vessels. The south end of the East Wharf has four conical storage structures, each capable of storing ~ 10,000 metric tonnes of dry bulk product. A pipeline is present connecting the south end of the East Wharf to the East Wharf proper. As a Brownfield site, the Harbour Commission plans to rehabilitate the site to enable import of bulk product. Land would be available at the Port site for a biodiesel facility. The harbour is ~ 2.2 km from Highway 401, and about 2km south of the rail line. There are plans to bring in a rail spur to the adjacent asphalt facility. Land at the east side of the port is quite hilly, and unsuitable for a biodiesel facility. BBI Biofuels Canada /25/2006

26 Site 5 LaFarge Gravel Pit LaFarge previously owned a gravel pit immediately south of the Brock Road landfill site (now closed). The site is bounded to the north by 5 th Concession Rd, and falls between Church Street N and Sideline 16 (see Figure 3-6). As shown on the map, the site is 2.5 km from the Eastern Terminus of Highway 407, and is about 8 km north of Highway 401 via Brock Road. Owing to the 407, the site is only 50 km from downtown Toronto. The land, having previously been excavated, is well below road grade, and would have to be filled and brought to grade. Otherwise, the site is level. There is no sewage treatment or water on site, but a major hydro corridor is only ~1.5 km south. A rail line runs near the southern boundary of the site, just north of Taunton Rd, and 2 km south of 5 th Concession. A rail spur would need to be constructed, approximately 1 km in length. A 20 inch natural gas line runs adjacent to Sideline 16, and could be readily accessed for a biodiesel facility located on site. There are no nearby residential properties. Two major issues surrounding this site surround its availability for purchase from the landowner, and the willingness of the municipality (Ajax) to permit development/construction in the area. At this point, Ajax does not want any development north of Taunton Road. Figure 3-6: LaFarge Site BBI Biofuels Canada /25/2006

27 Site 6 St. Lawrence Grains, Stouffville St. Lawrence Grains currently operates a large grain elevator on 59 acres of land near the boundary between Uxbridge and Stouffville. The site, close to the intersection of Bloomington Road and York-Durham Road 30, is adjacent to the CN rail line that runs from North Toronto to the northern municipal limits of Uxbridge. The site is 55 km from downtown Toronto via Highway 407. They have 46 acres of vacant land available. Although it is zoned industrial, it is also on the Oak Ridges Moraine. Natural gas is available on site to power their grain dryers. However, the site does not have direct access to sufficient water or wastewater treatment for a biodiesel facility. A prime advantage of the site is that it has better and more direct access to soybeans grown in the area, while maintaining excellent access to imported grain and other feedstocks via rail and by road. Currently, the site can process about 3,000 bushels per hour of grain via their dryers, and can handle about 5,000 bushels per hour in their receiving pits. If mechanical pressing of soybeans was used to produce soy oil, about 1,300 bu/h of grain would need to be processed to supply a 40 MM L/y biodiesel plant. Thus, St. Lawrence certainly has sufficient total capacity for this purpose. Site Evaluation Results Each potential site was examined by BBI and rated according to the BBI Site Evaluation Matrix; the following table summarizes the results. A score greater than or equal to 115 is considered excellent, between 90 and 114 points indicates a good site, and less than 90 indicates a marginal site. A preliminary site evaluation for a plant near Beaverton was also performed. However, owing to the lack of access to utilities, plus the greater distance from feedstock and local product markets, the score for this site was <90, markedly less than those for the other six sites that are more fully described in this section. The site evaluation matrix for each site can be found in Appendix I. The site evaluation indicates that any of the sites would be acceptable for a biodiesel facility, with five of the sites ranked as excellent. These five sites have slightly different site-specific attributes that contribute to their scores, but their overall scores are essentially equivalent. All are essentially Greenfield sites, except Port Oshawa, which is a Brownfield site. Site #1 St. Mary s, has the advantage of a dock and access to transport by water. However, among all of the sites, it is furthest from all sources of feedstock, and from its likely product/byproduct market - Toronto. Site #4 Port Oshawa also has access to transport by water, but will provide less flexibility for site development, due to existing operations on the site. The LaFarge site, #5, would require some development to bring the site up to grade, and to deal with water/wastewater. However, it has very good access to all sources of feedstock, and excellent access to highway and rail transport. Site #6 St Lawrence Grains, has the best infrastructure to handle oilseed grains and has the transportation infrastructure to readily access other feedstocks by rail or truck. Its main limitation is on-site water. If this could be addressed, this site would also rank in the excellent category. BBI Biofuels Canada /25/2006

28 The site evaluation score is an indication of the suitability of a site; it is not a measure of the overall feasibility of the proposed project Table Results of Site Evaluations Site Rank Site # - Location/Description Score 1 #3 CN Oshawa #1 - St. Mary s Cement #2 Clarington Energy Business Park #4 - Port Oshawa #5 LaFarge #6 - St. Lawrence Grain 112 Site Recommendation Based on the results of the BBI site evaluations, BBI feels that any of the top 5 sites St. Mary s, CN, Clarington, Port Oshawa, and LaFarge would be excellent sites for a biodiesel plant in the region. Final site selection will thus be dictated by other factors, such as land costs, timing and restrictions on site development, and partnerships between landowners and the potential owners of a biodiesel facility. If water access issues can be resolved at St. Lawrence Grains, it would also be an excellent candidate for a biodiesel facility. For the purposes of the economic analysis, a sensitivity analysis will be performed to show the extent to which land and site development costs play a role in the overall profitability of the facility. Such information may be helpful when negotiating with landowners. BBI Biofuels Canada /25/2006

29 REGION IV. FEEDSTOCK AVAILABILITY AND PRICE This section summarizes the availability, cost, current production and potential future production of the principal oilseed in the region within and surrounding the Region of Durham, and the proposed oilseed feedstock for biodiesel production: soybeans. For the purpose of this analysis, the six sites described in section III have been subdivided into two classes: (1) rural sites, including St. Lawrence Grains and LaFarge, and (2) urban sites, including St. Mary s cement, Port Oshawa, Clarington Energy Park, and CN-Oshawa. Such a classification allows the oilseed access by sites in each class to be readily compared. Owing to the fact that the urban sites are further removed from the farming community, it is apparent that these sites will have access to less locally produced grain. In this analysis, the magnitude of this difference will be quantified. Feedstock Requirements To evaluate the feedstock supply requirements for the proposed plant project, the production requirements must be established. There are two basic production units to consider: crushing and oil extraction, and crude oil refining into biodiesel. Oilseed crops generate a yield of oilseeds per acre, usually reported as pounds, tons or bushels/acre. Average yields of the major oilseeds in Canada over the last 5 years are shown in Table 4-1. Table 4-1 Yield of Major Oilseed Crops in Canada, Oilseed Crop harvested area 000 ha t/ha Canola Seed Flax Seed Soybeans Total Oilseeds (Source: Agriculture and Agri-Food Canada) Table 4-2 presents typical yields of oil per hectare for Canadian oilseed crops. Table Typical Oilseed Yields in Canada Crop t/ha t oil/ha L/ha Canola Seed Flax Seed Soybeans Total Oilseeds (Source: Agriculture and Agri-Food Canada) BBI Biofuels Canada 4-1 3/25/2006

30 REGION In addition to the oilseed crop yield, there is a process yield for the refined value-added product. In the case of crude oil from oilseeds, the yield of biodiesel is about 90% of the crude feedstock oil, depending on the process design. Table 4-3 shows the approximate requirements for biodiesel production from several different types of feedstock oil. Table 4-3 Biodiesel Production Requirements from Various Feedstocks Feedstock MM L/y Soybeans mechanical press tonnes (000s) Soybeans solvent extracted tonnes (000s) Crude soy oil or corn oil Liters (millions) tonnes (000s) Recycled fats & greases tonnes (000s) Table 4-4 shows the production parameters for several scales of biodiesel production from soybeans and degummed soy oil obtained via solvent extraction, assuming an average oil content of 20%. Table 4-5 shows similar data for biodiesel production from soybeans and degummed soy oil obtained via mechanical extraction. Table 4-4 Feedstock Requirements for Biodiesel Production (Solvent Extraction) Biodiesel Capacity (MM L/yr) Soy Oil Required (MM L/yr) Soy Oil Required (000 tonnes/yr) Soybeans required (000 tonnes/yr) Soybeans required (MM bu/yr) Harvested Area Required (000 ha/yr) Table Feedstock Requirements for Biodiesel Production (Mechanical Extraction) Biodiesel Capacity MM LPY Soy Oil Required (MM L/yr) Soy Oil Required (000 tonnes/yr) Soybeans required (000 tonnes/yr) Soybeans required (MM bu/yr) Harvested Area Required (000 ha/yr) BBI Biofuels Canada 4-2 3/25/2006

31 REGION World Oilseed Industry Overview World oilseed production in 2003 was 350 million metric tons. Forecast production for is 380 million tonnes, with soybeans contributing 217 million tonnes to the total (Agriculture and Agri-Food Canada, vol 19(1), 2006). In recent years, soybeans have represented over 57% of total world oilseed production, followed by cottonseed, peanuts, sunflowerseed and rapeseed, each representing about 10% of the world total. (World rapeseed data includes canola.) Oilseed production is dominated by the US, China and Brazil. Other major producers include Argentina, the EU, the states of the former Soviet Union, and India. Minor producers are Canada, Eastern Europe, Paraguay, and South Africa. Table 4-6 shows the distribution of major oilseed crop production around the world for 2003, and Figure 4-1 shows the historical worldwide production of vegetable oils, with projections up to Table 4-6 Major Oilseed Producing Nations in 2003 (Data in Millions of tonnes) Crop China EU Brazil India FSU-12 Argentina Canada USA Rape & Canola Sunflower Soy Flax Cottonseeds Peanuts (Source: 2004 Soya & Oilseed Yearbook, Figure 4-1 Worldwide Production of Vegetable Oils BBI Biofuels Canada 4-3 3/25/2006

32 REGION Summary of Oilseed Production in Canada. Canola is the primary oilseed crop in Canada, representing about 85% of the total oilseed production (mass basis). Soybeans and flax represent about 9% and 6% of the total Canadian oilseed production, respectively. Almost all of the canola production is located in western Canada, whereas almost all of the soybean production is in Eastern Canada, mainly in Ontario. Thus, soybeans are the predominant oilseed crop in Durham Region, and soy oil would the predominant oilseed feedstock for biodiesel production. Although not an oilseed, corn and corn oil may represent a future opportunity for biodiesel production. Corn contains about 4 to 5% oil (wt basis), and the growth of cornbased ethanol plants in Ontario and Quebec may provide an opportunity to tap into this source of oil, with mutual benefits for both a biodiesel plant and the ethanol producer. Soybean Supply Analysis BBI feels that soybean oil will, at best, provide only a small portion of the feedstock for a biodiesel plant in Durham Region. This is based both on soybean availability and the cost of soy oil. The rationale for this conclusion is developed in detail within this section, which describes the availability of soybeans within the region. Historic field crop production trends for the region were assessed based on data obtained from Agriculture and Agri-Food Canada. Local soybean availability is determined by three factors: production, disappearance, and carry over. Production is the amount of soybeans produced each year. These data are readily available from Agriculture and Agri-Food Canada. Disappearance is an expression of soybean use. For soybeans, there are three major categories for disappearance, crush (production of meal and oil), seed and residual, and export. The local soybeans that are not crushed or used on farm as seed and residual are known as exportable soybeans. Exportable soybeans are generally considered available for new uses in the local area. Carry over is the amount of soybeans from the previous year that remains at the start of the new crop year. Carry over stocks are determined by both on farm and off farm storage, and the demand for the soybeans. Canadian soybean supply and distribution is summarized in Table 4-7. National Production In , a record 1,178,000 Ha of soybeans were harvested in Canada, producing a record 3.05 million tonnes, a 33% increase compared to the previous year. Of this, 2.48 million tonnes were produced in Ontario, 0.54 million tonnes were produced in Quebec, and 45,000 tonnes were produced in Manitoba. Production was forecast to drop slightly in BBI Biofuels Canada 4-4 3/25/2006

33 REGION The Agriculture and Agri-Food Canada April 2005 report on the 2004 soybean harvest indicates that the number of hectares planted and harvested has remained relatively constant over the past 5 years. The record area harvested, coupled with a higher than average yield, led to the record overall production for soybeans in As with all crops, it is best not to focus on one year s information because of the volatility in weather, pathogens, and pests. For example, while had a higher than average per hectare yield, in , the lowest per acre yield since the 1990 growing season was observed. This variability is the reason why averages are used for crop production data. For the feasibility analysis, a 5-year average will be used for production information. The 5-year average removes some of the variability created by weather and encompasses a period of time with consistent federal agriculture policy. Table 4-7: Canadian soybean supply and distribution Crop year / / / / / /04 6-year average SOYBEAN SUPPLY Hectares harvested, 000s ,031 Beginning stocks Production 2,737 2,781 2,703 1,635 2,336 2,268 2,410 Imports Total supply 3,178 3,451 3,386 2,802 3,159 3,000 3,163 SOYBEAN USAGE Crush 1,516 1,714 1,648 1,664 1,675 1,700 1,653 Exports Seed Other Total usage 2,934 3,195 3,207 2,617 2,907 2,959 2,970 Carry-out stocks Stock and supply data are in thousands of tonnes 1. Crop year is September through August 2. Includes food, waste, and dockage Source: Statistics Canada and Agriculture and Agrifoods Canada On a national level, the annual areas planted and harvested are fairly stable. Variability in annual production is primarily a result of variability in per hectare yield. This variability is generally weather or disease related. Nonetheless, the annual production of soybeans is more than adequate to meet Canadian needs for high protein animal feed and vegetable oils, evidenced by the fact that exports outpaced imports by a significant margin (except ). BBI Biofuels Canada 4-5 3/25/2006

34 REGION National Disappearance A majority of the soybeans in Canada are crushed to produce high protein animal feed and oil. The 6-year average crush for soybeans is 1.65 million tonnes or around 69% of the annual production. Export is the next major market for soybeans. For the past 6 years, annual exports have averaged 774 thousand tonnes of soybeans. This represents about 32% of production. On farm use as seed and residual is the smallest contributor to disappearance at 101 thousand tonnes, or 4%. National Carry Over The remaining annual soybean production is classified as carried over to the next year. The national 6-year average for soybeans carry over has been 185,000 tonnes, about 8% of production, or 5% of total supply). Carry over for is expected to be higher than the historical average due to the record harvest and overall depression of prices in the U.S. The relatively low carry over typically observed for soybeans indicates the existence of strong domestic and international markets. Storage or carry over of soybeans is the only recourse for producers when prices are low and demand is soft. Regional Production Historically, Ontario has been the primary producer of soybeans in Canada, accounting for about 75 to 80% of the soybeans produced in Canada. The 5-year production average in Ontario is 2.0 million tonnes with a high of 2.59 million tonnes produced last year (Table 4-8). Table 4-8: Soybean Production in Ontario Year Hectares Seeded Hectares Harvested Yield (tonnes/hectare) Production (MM tonnes) , , , , , , , , , , , , , , yr average 888, , The most recent county-by-county production statistics for soybeans were published in 2005, for the 2004 crop year. Soybean production data in the various regions of Ontario in 2004 are shown in Table 4-9. Of the Ontario soybean production, approximately 85% originates from the Southern and Western Ontario regions. Only about 6% of Ontario s soybeans are produced in the Central Ontario Region, which includes the Regional Municipality of Durham. Table 4-10 further breaks down the soybean production in BBI Biofuels Canada 4-6 3/25/2006

35 REGION Central Ontario on a county by county basis. In 2004, Durham Region produced about 26% of the soybeans grown in Central Ontario, representing about 1.3% of the provincial total. Table 4-9: Ontario Soybean 2004 Production Statistics Area Area Yield Production Production Region ('000 seeded harvested (bu/ac) ('000 bu) tonnes) (acres) (acres) Southern Ontario 1,326,800 1,316, ,654 1,460 Western Ontario 602, , , Central Ontario 163, , , Eastern Ontario 228, , , Northern Ontario 4,300 3, Ontario 2,325,000 2,300, ,000 2,477 Source: Statistics Canada and OMAF. Local Production The local area is defined as an 80 km radius around each site. For the urban sites, this includes the some or all of the Regions of Durham, York, Peel, Northumberland, Victoria and Peterborough. For the rural sites, this list expands to include parts of the Regions of Simcoe, Halton, and Dufferin. The areas enclosed within this 80km radius are shown in (Figure 4-2). 5-year average soybean production data by county in Central Ontario are presented in Table The regions within 80km of the proposed urban plant sites have produced an average of 100,000 tonnes of soybeans over the past five years, while the annual soybean production in regions surrounding the rural sites has averaged 178,000 tonnes. Within 160km of these sites, soybean production has averaged between 425,000 tonnes (urban sites) and 570,000 tonnes (rural sites). The harvest to planted ratio in the area averages almost 99%, so either variable can be used to examine changes in planted area. OMAF data indicate that the planted area has ranged between 120,000 and 163,000 acres over the past five years, generally varying in concert with anticipated grain prices at the beginning of the crop year. Local Disappearance There are no crush facilities in Durham Region. Soybean processing facilities are located in Winchester (Tri-Pro) and Hamilton (CanAmera). The Ontario average for on-farm use of soybeans for seed and residual (4%) was used to estimate local use by farmers in the feedstock zone surrounding the proposed plant. On this basis, BBI expects that, within the 80 km feedstock zone, about 4,000 to 7,000 tonnes will be used locally by farmers for seed and other purposes. About 40% of soybeans are either exported or subject to carry BBI Biofuels Canada 4-7 3/25/2006

36 REGION over, an amount ranging from about 40,000 to 71,000 tonnes (urban versus rural sites). This is the anticipated available oilseed feedstock base for a biodiesel facility in the Region of Durham. There is the opportunity to import soybeans into the local area. For example, St. Lawrence Grains near Uxbridge has 15 concrete silos, twin receiving pits capable of handling 5,000 bu/h (135 tonnes/h) and a grain drying operation capable of processing 3,000 bu/h (80 tonnes/h) of grain. Their grain facility is located on the CN rail line, and is also easily accessed via Highway 407. Other sites would have to build grain storage facilities, except perhaps the Port Oshawa site, which could convert one or more of its conical dome structures to grain storage. Each of these structures has a capacity of 10,000 tonnes, or about 11 days of inventory for a 40 MMLY biodiesel facility. Figure Local Feedstock Collection Zones for Durham Region Sites BBI Biofuels Canada 4-8 3/25/2006

37 REGION Table 4-10 Average Local Soybean Production by County ( ) 5 year average, County Area Area Yield Production seeded harvested acres acres bu/ac '000 bu '000 tonnes Durham Regional Municipality 38,070 37, , Haliburton County Hastings County 8,950 8, Kawartha Lakes Division 20,610 20, Muskoka District Municipality Northumberland County 31,470 31, Parry Sound District Peterborough County 8,920 8, Prince Edward Division 14,770 14, York Regional Municipality 24,140 23, Central Ontario Region 146, , , (Source: Ontario Ministry of Agriculture and Food) Local Carry Over For the feasibility study, it is assumed that local soybeans carried over to the next year will be the same as the National average of 8%. This corresponds to 8 to 14 thousand tonnes of soybeans for the urban and rural sites, respectively. Approximately 70% of the carry over is normally used early in the following year by regional crush facilities. Soybean Availability The local demand for soybeans is relatively strong. A biodiesel facility located in Durham Region would have to acquire oil from existing crush facilities, or would have to build a crush facility to process soybeans. If a crush facility is constructed, the local basis would need to be expanded to draw beans out of surrounding regions. A reasonable approach for determining available soybeans is to assume that a Durham area facility will capture about 80% of the beans produced in Durham proper (~31 thousand tonnes), and 20% of the beans from the adjoining regions. For a plant located at an urban site, this adds up to 38 thousand tonnes of soybeans, while for a rural site, this amounts to 54 thousand tonnes of soybeans. Many lending institutions feel that 50% or less of the exportable and carried over grain is available for new uses. Using this guideline, the amount of soybeans that might be available in the local area for a facility on an urban site is approximately 28 thousand tonnes. This rises to 41 thousand tonnes for a rural site. BBI Biofuels Canada 4-9 3/25/2006

38 REGION Soybean Oil Availability The highest value market for soybean oil is human consumption. Recent Canadian Soybean Oil production and export data are shown in Figure 4-3. This figure shows that Canadian demand exceeds production, reflected by the fact that imports substantially exceed exports. Consequently, access to soybean oil may be limited, or it may be necessary to import oil. Encouraging existing producers to crush more soybeans will be contingent on their ability to sell soybean meal, although there continues to be heavy demand for soybean meal as well, so this is not anticipated to pose a problem. One current producer, Tri-Pro, is currently operating at about half its nameplate capacity; this is a possible domestic source of soybean oil if they agree to increase their production. The total amount of soybean oil that could be available via this route is about 3 million litres annually. Supplementing this local supply with imported soybean oil is not expected to pose a problem - the US has exported about 600 thousand tonnes of soybean oil annually over the past several years, ~20% of which has been imported by Canada. There are two biodiesel plants within Ontario and Quebec: Biox in Hamilton and Rothsay, near Montreal (Figure 4-4). The proposed Durham site is shown in Figure 4-4 as a dark blue triangle; the Biox and Rothsay biodiesel plants are in light blue. These plants are based on waste fats oils and greases, and thus, do not provide a market for soybean oil not sold into the food market. Figure 4-3 Canadian Soybean Oil Production and Exports BBI Biofuels Canada /25/2006

39 REGION Based on the information on existing and planned crushing capacity, BBI estimates approximately 3 thousand tonnes of soy oil would be locally available to a biodiesel project in Durham, under the assumption that TriPro can process another 25,000 tonnes of soybeans. As will be discussed later, this quantity of soy oil alone is insufficient to support an economically viable biodiesel facility. Additional soy oil would need to be imported, or the domestic soy oil could be part of a mixture of feedstocks used by the biodiesel facility. Figure Biofuels Facilities in Ontario and Quebec. Existing biodiesel plants are shown with light blue triangles; ethanol plants (existing, proposed and under construction) are shown with green triangles, near Chatham, Sarnia, Barrie, Collingwood, Cornwall, Varennes, and Brantford. The Durham site shown with a dark blue triangle Corn Oil Availability Highly purified and refined corn oil is of significant value for human consumption, and corn wet-milling facilities have been developed to meet this demand. However, there is a trend in corn dry-milling facilities (i.e., ethanol plants) to extract crude corn oil as a value-added co-product, rather than allowing the oil to exit the plant as a low-value component of dried distillers grains and solubles. Due to economics, it is likely that these dry-mill facilities would extract the oil at the back-end of the plant, which means that the oil would not be food grade, and would not command food-grade oil prices. It would, however, be suitable for biodiesel production, and would be a valuable feedstock provided it could be secured at a reasonable price. BBI Biofuels Canada /25/2006

40 REGION A 120 MM L/y dry mill ethanol plant is under construction in Varennes, Quebec, and Seaway Valley has a proposed 60 MM L/y plant slated for Cornwall (see Figure 4-4). If constructed, the Seaway Valley facility could supply enough corn oil for a facility to produce about 6.7 million L/y of biodiesel. Combined with Commercial Alcohols plant in Varennes, there could be sufficient corn oil to support about 20 million L/y in biodiesel production. Additional corn oil could be available from Suncor s new 200 MM L/y plant being constructed in Sarnia, or from Commercial Alcohols existing 150 MM L/y plant in Chatham. If constructed, proposed plants in Barrie, Collingwood and Brantford could also contribute to the supply of crude corn oil. Table 4-12 illustrates likely corn oil availability from dry mill ethanol plants, as a function of plant size. Table 4-12: Crude Corn Oil Availability From Dry Mill Ethanol Plants Plant size, MM L/y Corn, 000s tonnes/y Corn Oil, 000s tonnes/y Regional Supply of Animal Fats, Oils and Greases In addition to virgin vegetable oils like soy oil, biodiesel can be produced from animal fats, oils and greases. In this category are lipids derived from processing livestock and poultry, known as first-use materials, and recycled feedstocks, which are used fats, oils and greases from food preparation and cooking applications. Animal fats are generated by processors of cattle, swine and poultry. Most of this material is collected and reprocessed by renderers. In the case of poultry fat, the bulk is reused within the poultry industry as a feed ingredient and might not be available for biodiesel production. The primary use of inedible tallow is as a feed ingredient for animals, with the remainder used in various industrial applications or exported. With increasing concern over using animal by-products as feed ingredients, interest in the use of animal fats for biodiesel production has increased, demonstrated by the growing involvement of the rendering industry. Ontario and Quebec produce large quantities of animal fats and yellow grease. Riley, in a study completed for the Biodiesel Association of Canada, estimated that about 500,000 tonnes of animal fats are produced annually in Canada, and a report commissioned by Natural Resources Canada (NRCan) concluded that 250,000 tonnes of animal fats are produced Canada-wide, with about 40 to 45% of the total produced in Ontario and Quebec. BIOCAP reported that about 290,000 tonnes of tallow and grease are produced BBI Biofuels Canada /25/2006

41 REGION annually in Canada, with 85% of that production destined for export. The disparity in fat production estimates could be due to different bases for establishing the numbers the NRCan study was based on animal slaughter data, using assumed values for fat content and animal weight at slaughter. On the other hand, higher production values are often given by renderers, who may also include recycled grease in their production data. BBI therefore independently surveyed renderers and waste haulers, collected data on animal fat production, and assessed local recycled grease resources. Renderers in Ontario and Quebec reported annually processing of 350,000 tonnes of fats. Data on animal slaughter for 2004 established that 150,000 tonnes of fats were produced at Federally and Provincially inspected abattoirs in Ontario and Quebec, somewhat higher than the amounts cited in the NRCan report, but much less than the amounts cited by renderers. The difference, about 200,000 tonnes per annum, is likely comprised of recycled fats (yellow and grey greases), contaminants (mainly water), and may also include some overly optimistic production data from the renderers surveyed. In order to substantiate this conclusion, BBI examined another candidate feedstock for biodiesel production: recycled fats and oils. These materials are collected regionally from the restaurant industry, and consist primarily of yellow grease (recycled cooking oil) and grease trap waste. This feedstock base can only be estimated, as regional data from the rendering industry, which dominates the collection and processing for used oils and fats, is not generally available. For that reason, the US DOE sponsored a study to estimate the volume of these resources. The landmark study by George Wiltsee, conducted in 1998 for the National Renewable Energy Laboratory, collected and analyzed data on the supply of yellow grease and grease trap waste from 30 metropolitan areas. This study established per capita estimates of urban grease stocks on an annual basis. The results showed that on average, restaurants in metropolitan areas generate a surprisingly consistent volume of yellow grease and grease trap waste. Across the US, urban areas average ~1.4 restaurants per 1000 people. These restaurants generate approximately 4.0 kg of yellow grease and 12.5 kg of waste grease per person per year. Similar studies by the USDA and the US Department of Commerce also concluded that the per capita annual production of yellow grease was in the range of 4.0 to 4.4 kg. BBI s survey of recycled grease sources primarily restaurants in the Ottawa-Montreal area was conducted to validate these prior U.S. studies. This survey revealed that, on average, about 4200 kg of waste fats are generated per restaurant, or about 3.0 to 3.6 kg of waste grease per person per year, slightly less than the values developed by Wiltsee. Using the per-capita grease production data from BBI s restaurant study in the Ottawa- Montreal area leads to an estimated supply of waste fats from the Greater Toronto Area of about 18,000 tonnes per year. Expanding the feedstock collection to include the population in Southern Ontario, essentially from Windsor to Ottawa, the available waste grease increases to about 28,000 tonnes. Although sizeable, this waste grease resource BBI Biofuels Canada /25/2006

42 REGION would have a high free-fatty acid content, and would have to be cleaned up significantly before it could be used for production of biodiesel. Accepting the renderers data as accurate, we can develop an upper bound on the amount of fats, oils and greases available for biodiesel production. Due to typical impurities, we estimate that only 40% of the total rendered feedstock is suitable for biodiesel production. This amounts to 140,000 tonnes per year, equivalent to about 140 MM L/y of biodiesel. If all of the animal fats in Ontario and Quebec were used for biodiesel, approximately 150 MM L/y could be produced. As it stands, Rothsay and Biox may already be using a large portion of this supply, with planned production in the range of 90 to 100 MM L/y of biodiesel from waste fats and oils. Rothsay is unwilling to enter into a long term contract to supply waste fats and oils to a biodiesel plant, but would be willing to provide feedstock on a short-term basis, depending upon current availability. Consequently, it is likely that only 10 to 15% of the waste fats in Ontario and Quebec would be available to a plant in the Durham region. This amount, about 15 to 20 thousand tonnes, is sufficient to produce about 15 to 20 MM L/y of biodiesel. An alternative would be to secure a supply source in the U.S., and ship the feedstock to the Durham site. This would allow a larger plant to be constructed, while increasing the percentage of waste fats oils, and grease that make up the overall feedstock supply. Cost of Soybeans The five year average cost for a bushel of soybeans in Ontario is $8.08, or $297/tonne (Table 4-13). The cost ranged from a low of $6.75/bu ($248/tonne) in 2005 to a high of $9.87/bu ($363/tonne) in The price for soybeans in 2005/06 is forecast to be in the range of $210 $250 per tonne (Chatham basis), dropping to $205 - $245 per tonne in 2006/07, under pressure from U.S. prices (Agriculture and Agri-Food Canada Bi-weekly Bulletin, Vol 19(1), January 20, 2006). Figure 4-5 shows the basis for soybeans across Ontario. Basis is the difference between the local price and some standard price. In this case, the standard price is based on the price paid by the Chicago Board of Trade. For , the basis between Chicago-cash and Chatham soybeans trended between minus $10 to minus $20 a tonne. The basis had flipped late in when the tight domestic supplies sent Ontario prices soaring. For , the basis was forecast to average C$10 to $20 a tonne under the Chicago cash due to burdensome supplies. BBI estimates that expanding the current soybean processing at the crush facility in Hamilton or in Winchester, ON could increase the basis by approximately $10 - $20 per tonne. The production cost and transportation costs encountered by Canadian soybean producers relative to producers in the US, Argentina and Brazil is shown in Figure 4-6. This figure shows that overall, Canadian producers, owing to lower production costs, can still be profitable in spite of the current low prices of soybeans. BBI Biofuels Canada /25/2006

43 REGION Table 4-13 Soybean Price in Ontario ( ). Year $/tonne $/bu yr avg (Source: OMAF and Ontario Soybean Growers Association) Using the 5-year historical average for soybeans in Ontario, plus a basis increase of ~$15 per tonne, the projected cost of soybeans used in the financial analysis is C$310 per tonne. The relatively lower production costs incurred by Canadian producers (Figure 4-6) may also facilitate bringing in soybeans from other regions of Ontario, albeit with a marginally higher soybean cost. A sensitivity analysis is provided later in the report that demonstrates the effect of higher and lower feedstock prices on project economic performance. Figure 4-5 Historical Basis for Soybeans in Ontario BBI Biofuels Canada /25/2006

44 REGION Figure 4-6: Soybean Production and Transport Costs Cost of Soy Oil The price of oilseed products is largely dictated by pricing on Chicago Board of Trade (CBOT) or similar US regional pricing. The USDA Economic Research Service (ERS) data (Figure 4-7) show that for the period 1995 through 2005, crude soy oil prices FOB Decatur ranged from a low of US$312/tonne to a high of almost $660/tonne. The 10-year average price of crude soy oil in the US, based on Decatur prices, for the period was US$465/tonne. The 5-year average price of crude soy oil in the US, based on Decatur prices, for the period was US$498/tonne. Figure 4-7 Historical Price of Crude Soy Oil, Corn Oil and Tallow, $700 US Price of Tallow and Oil FOB Illinois $600 $500 Price, US$/tonne $400 $300 $200 $100 Soybean Oil Tallow Corn Oil $0 1995/ / / / / / / / / / /06 (Source: USDA ERS) BBI Biofuels Canada /25/2006

45 REGION Historical monthly CBOT pricing data for crude soy oil, soybeans and soybean meal over are shown in Figure 4-8. Based on these data, the average price of crude soy oil was $443/tonne, which agrees well with the average crude soy oil price supplied by the ERS. Current crude soy oil prices on the CBOT have been averaging US$498/tonne (C$580/tonne) for the last three months. Historical CBOT prices for soybeans are also shown in Figure 4-8 for comparison s sake. As demonstrated by the data, the price of soy oil and soybean meal tracks extremely closely with the price of soybeans. Regional data on soy oil prices is largely unavailable. In order to establish the price of crude soy oil in the vicinity of Durham, BBI examined the correlation between historic soybean prices and the historic price of crude soy oil. BBI first plotted the actual historical CBOT data for crude soy oil and soybeans against each other to generate a linear trend line and correlation coefficient (see Figure 4-9). As can be seen in the chart, the correlation between the actual historic price of crude soy oil and the actual historical soybean price is relatively good, with a correlation coefficient of BBI then tested the performance of the predictive equation by projecting the price of crude soy oil from the historic CBOT price of soybeans over the period 2000-present, and comparing the resulting estimates to the actual historic prices reported CBOT price for soy oil. The results are shown in Figure As can be seen in Figure 4-10, the correlation between the actual historic price of crude soy oil and the predicted price of soy oil based on the actual historical soybean price is very good, maintaining the correlation coefficient of (the dashed line in the figure indicates a correlation coefficient of 1.000). Figure 4-8 Historical CBOT Prices for Soy Products BBI Biofuels Canada /25/2006

46 REGION Figure 4-9 Correlation between CBOT Crude Soy Oil and Soybean Prices, 2000-Present Correlation Between CBOT Soybean Prices and Soy Oil Prices 40 y = x R 2 = Soy Oil Price (cents/lb) Soybean Price (cents/bu) Figure 4-10 Correlation between Actual and Predicted Price of Crude Soy Oil 40 Correlation Between Actual and Estimated Soy Oil Price (CBOT Basis) R 2 = Calculated Oil Price (cents/lb) Actual Oil Price (cents/lb) The average price of crude soy oil predicted from the soybean data is $0.2012/lb (443 US$/tonne); the average price of crude soy oil based on the actual CBOT data over the same period was $0.2013/lb, a difference of only 0.05%. As shown in the figure, the predominance of data points has ranged from $0.14 to $.23/lb ($308 to $506/tonne). BBI Biofuels Canada /25/2006

47 REGION The excellent agreement between the predicted average soy oil price and the actual average soy oil price indicates that this methodology can be used to predict the price of crude soy oil based on the bushel price of beans. BBI applied the linear trend equation to calculate the projected cost of crude soy oil in Durham based on the projected soybean price of C$310/tonne (including a local basis increase): Crude soy oil price = *265 US$/tonne = 555 US$/tonne = C$650/tonne The predicted price of crude soy oil in the vicinity of Durham based on this methodology is C$650/tonne. Based on the demonstrated agreement between the actual and predicted prices of crude soy oil using this methodology, the price of crude soy oil used in the financial analysis is C$650/tonne. A sensitivity analysis is provided later in the report that demonstrates the effect of higher and lower feedstock prices on project economic performance. Cost of Corn Oil The cost of corn oil recovered from a dry mill ethanol plant for use in a biodiesel facility is not well established, because of the very recent adoption of this practise. However, the price is bounded at the lower limit by its value in DDGS (approximately US$100/tonne), with an upper bound dictated by the price of food grade corn oil produced by wet-milling facilities. As shown in Figure 4-11, the current cost of food grade oil is approximately US$580/tonne ($C670/tonne), with a six-year average of $US488/tonne. These data are consistent with the USDA data shown in Figure 4-7. Based on the economics of the corn oil recovery process, and very short-term pricing information, BBI expects that the price charged by dry mill ethanol plants for non-food grade oil will be in the range of US$250 to $300/tonne (C$295 - $355/tonne). Thus, a value of C$325/tonne has been used in the financial analysis, and a sensitivity analysis has been performed to demonstrate the impact of corn oil price on plant economics. Cost of Animal Fat and Recycled Fats and Oils Figure 4-12 shows the historic pricing trends for various grades of animal fats over the seven year period from These data show that pricing of the various grades of animal fat track together, with the edible products, lard and edible tallow, commanding the highest value. Yellow grease, consisting largely of recycled cooking fats and oils, is the least expensive and most appropriate grade of rendered product for biodiesel production. Over the past 5 years, the average price for edible tallow has been US$397/tonne (C$470/tonne); over the past three months, the price for tallow has been US$424/tonne (C$500/tonne). Recent developments in the rendering industry (primarily the onset of Bovine Spongiform Encephalitis or BSE) have reduced the markets available for certain animal byproducts, most particularly for the tallow products derived from beef. For this reason, inedible tallow that may previously been exported or used in animal feed may now be available for biodiesel production. BBI Biofuels Canada /25/2006

48 REGION Figure 4-11: Historical Corn Oil Cost Crude Corn Oil (CBOT) FOB Chicago $700 $600 Corn Oil Price, US$/tonne $500 $400 $300 $200 $100 $- 1980/ / / / / / / / / / / / /05 Figure 4-12 Historical Pricing of Animal Fats Pricing of Animal Fats and Greases, $0.250 $0.200 Price ($/lb) $0.150 $0.100 $0.050 $ yr Avg. Lard Choice White Yellow Greas e Edible Tallow Inedible Tallow (Source: Render Magazine; All prices in US $) BBI Biofuels Canada /25/2006

49 REGION Figure 4-13 shows the historic pricing trend for inedible tallow over the 12-year period from from various sources. These data show that the price of inedible tallow has seen very large swings in price, from a low of 10 /lb (C$415/tonne) to a high of 22 /lb (C$596/tonne), demonstrating a susceptibility to large changes in price based on the dynamics of supply and demand in domestic and world markets. Figure 4-13 Historic Price Trend for Inedible Tallow, $0.250 $0.200 Price of Inedible Tallow by Various Estimates, Price ($/lb) $0.150 $0.100 $0.050 $ Chicago (ERS) Exports (ERS) Chicago (Render Mag) Conclusions for Feedstock The feedstock supply assessment indicates there are sufficient local and regional feedstocks to support a biodiesel production facility in the Region of Durham. The feedstock evaluation also indicates insufficient supplies of soy oil in the region to wholly support biodiesel production, but combination of soy oil with supplies of corn oil, animal fat, rendered materials, and recycled fat, oil and grease provides sufficient feedstock to support a significant volume of biodiesel production. Biodiesel production in Durham Region would therefore be likely based on a mixture of feedstocks. At the 25 MM L/y scale of biodiesel production, no more than 12 to 16% of the total feedstock could come from soy oil, whereas corn oil from regional dry mill ethanol plants could potentially comprise upwards of 85% of the total feedstock supply. Similarly, 60 to 80% of the feedstock could potentially come from regional supplies of rendered material. Alternatively, additional feedstocks could be acquired from outside the region, which would allow economic operation of a 38 MM L/y plant. Examples of remote acquisition of feedstocks include the purchase of rendered materials from U.S. sources, and the purchase of crude corn oil extracted from ethanol plants in Quebec and Southwestern Ontario. In such a scenario, a 38 MM L/y plant could operate using 100% purchased oils (mainly corn oil), 100% FOG, or combinations in between, but could not operate profitably using 100% soy oil. As noted in section IX, profitable operation of a plant BBI Biofuels Canada /25/2006

50 REGION based on 100% FOG is contingent on biodiesel prices exceeding their historical average, and/or FOG prices falling below their historical average. The quantity of soybeans locally available to a plant in Durham is expected to be on the order of 28,000 to 41,000 tonnes per year, depending upon whether an urban or rural site is selected. This amount of soybeans would generate approximately 3500 to 5000 tonnes of soy oil for biodiesel production. To compete with the existing uses and grain exports, the estimated cost of soy oil for biodiesel production is projected to be C$650 per tonne, based on a soybean price of C8.08/bu, or $297/tonne. The quantity of crude corn oil regionally available to a plant in Durham is expected to be on the order of 18,000 to 20,000 tonnes per year initially; the price from the crude corn oil is expected to be on the order of C$295 to C$355/tonne. Acquisition of corn oil from other ethanol plants in Ontario could easily expand the available supply beyond 20,000 tonnes per year. The quantity of locally waste fats, oils and greases (FOG) available to a plant in Durham is expected to be on the order of 15,000 to 20,000 tonnes per year; the estimated cost of FOG for biodiesel production is projected to be C$470 per tonne. Expanding this supply would require the purchase of FOG from U.S. sources. BBI Biofuels Canada /25/2006

51 REGION V. REVIEW OF BIODIESEL MARKETS This section of the feasibility analysis provides an assessment of biodiesel markets for a biodiesel production facility located in the Regional Municipality of Durham. National Biodiesel Market Overview The emergence of the biodiesel market in the North America is subject to three principal drivers: Economic & National Security Environmental & Regulatory Legislative Economically, the drivers pushing the growing interest in biodiesel are the rising cost of petroleum diesel, the desire to stimulate rural economic development through valueadded agricultural applications, and the desire to reduce our dependence on fossil fuels. Environmentally, the benefits of biodiesel as an oxygenate and for pollution reduction are significant and well-documented. In addition, biodiesel is a value-added ag-based product that is appropriate and available to meet the low-sulfur diesel requirements established by the Canadian Government. The Federal Government s Alternative Fuels Act (1995) specifies aggressive legislative targets for the use of alternative fuel vehicles by all federal government departments and agencies. Under the Act, federal government, departments and Crown Corporations must purchase alternative fuel vehicles, where they are cost-effective and operationally feasible. Although not a mandate, it does provide a clear market for alternative fuels if there is a demonstrable supply at competitive prices. A further legislative initiative arising from the Federal Government Climate Change Action Plan includes a production target of 500 million liters of biodiesel by Funds have been allocated to support research and biodiesel pilot tests/demonstrations. The Federal Government has also provided capital funding to support construction of selected commercial biodiesel plants in Canada. Historically, diesel fuel in Canada has had a comparatively high sulfur content, which precludes the use of catalytic converters for control of emissions. The regulatory changes mandating the introduction of ultra-low sulfur petroleum diesel by 2006 will have several effects on the Canadian diesel market. First, low-sulfur petroleum diesel will have to be treated to enhance lubricity, already an issue with a large fraction of Canadian diesel fuel. Second, the process steps needed to remove the sulfur will increase production costs. Owing to the fact that biodiesel has a naturally high lubricity, it can serve as the lubricity additive necessary to compensate for the loss of lubricity when the sulfur is removed. Furthermore, the inevitable increase in production costs for low-sulfur diesel will help to make biodiesel more cost-competitive with petroleum diesel. BBI Biofuels Canada 5-1 3/25/2006

52 REGION Ultimately, these drivers have succeeded in elevating the interest in biodiesel across the country, as demonstrated by the current feasibility study. Biodiesel Production Capacity There are currently two commercial scale biodiesel plants operating in Canada, and there are several small pilot scale facilities in operation. The pilot scale facilities include the Innovation Place Bioprocessing Centre in Saskatoon, SK (30,000 L/day on a batch basis), Milligan Biotech (4.5 MM L/y) in Foam Lake, SK, and Ocean Nutrition Canada in Mulgrave, NS (6 MM L/y). Commercial scale plants include Biox in Hamilton, ON (60 million L/y) and Rothsay in Montreal (35 million L/y). National Biodiesel Use Biodiesel use in Canada is fairly limited, primarily based on production from the existing pilot scale facilities, along with B100 fuel imported by rail tank car from the U.S. midwest and blended with conventional diesel (usually as B10 or B20). Canadian biodiesel distributors include UPI (Guelph, ON), Canada Clean Fuels (Toronto, ON), West Coast Reduction (Vancouver, BC), and Bio-Diesel Canada Inc (Toronto, ON) As reviewed earlier, biodiesel use to date has been driven by legislation and environmental compliance. Until recent provincial budgets in Ontario and Quebec granted exemptions from road taxes (14.3 cents/l and 16.2 cents/l, respectively) and the Canadian Government introduced an excise tax credit of 4 cents/l, there was a significant cost disadvantage to biodiesel relative to conventional petroleum diesel. National Biodiesel Market Potential In terms of market potential for biodiesel, the domestic market for biodiesel has barely begun to be tapped. As shown in Table 5-1, over 23 megatonnes of petroleum diesel fuel was consumed in Canada in 2003; of this, transportation uses represented 46% of the total diesel consumption. A breakdown of the historical consumption of diesel fuel consumption by province is shown on a volumetric basis in Figure 5-1. In 2004, the last complete year for which data are available, total diesel consumption in Canada reached 25.1 billion litres, an increase of 6% over 2003, and a 13% increase since Current federal incentive programs for biodiesel are focused almost exclusively on use as a motor fuel; as such, the short term market potential will be evaluated based on consumption trends in the On-Highway Sector. While this discussion ignores the potential markets available in the other sectors, the markets available to biodiesel over the long-term, such as residential and commercial heating oil, diesel-powered standby stationary engines, farm uses, and rail and maritime applications, are substantial. BBI Biofuels Canada 5-2 3/25/2006

53 REGION Country/Region Table 5-1 World Petrodiesel Consumption, 2003 Petroleum Diesel Consumption, MT/yr Diesel used for Transportation, MT/yr % used for Transportation World US EU Canada (Source: IEA) The commercial scale plants currently in Canada have the capacity to produce about 95 million L/y of biodiesel, bringing the total Canadian production to 100 million L/y. With the transportation sector currently consuming over 14 billion litres of conventional diesel, current/planned biodiesel production represents less than 1% of the total potential market in the on-highway motor fuel sector alone. Conservatively assuming a B2 blend across the transportation sector alone, the available national market would be ~300 million L/y; with current and planned production estimated at 100 million L/y, more than 60 % of the potential national market for a B2 blend remains untapped. Looking toward the future, North American use of distillate fuel for transportation is projected to increase by an average annual rate of 2.4% over the next 20 years, primarily driven by freight trucks and light duty vehicles (pickups). Although much of this is driven by U.S. demand, usage in Canada, Ontario, and the Durham study area are expected to mirror this trend (Figure 5-2). Regional Biodiesel Market Potential Typically, a regional market is one that is outside of the immediate local market, but usually, within the same province and possibly neighboring provinces or U.S. states. This market will likely be serviced by truck or rail, and is within a 700 km radius of the plant (see Figure 5-3). However, interprovincial trade barriers may need to be overcome if the biodiesel is shipped into the Quebec market. Generally, the regional market is good business to develop. The freight is reasonable, the competition, while aggressive, is not too severe, and the turn-around time on the rail cars is an advantage. In addition, it is often easier to obtain letters of intent to purchase product from regional buyers than from national buyers. These letters, while not generally binding, do tend to raise the comfort level of the financial lending institutions. Not surprisingly, in a regional market, letters of intent to purchase are taken quite seriously by the buyer. BBI Biofuels Canada 5-3 3/25/2006

54 REGION Occasionally there are opportunities to obtain backhaul rates from local trucking companies. These are rates that are reduced since the truck is loaded both ways. Normally the trucks drive to the refined fuels terminals empty and load gasoline product for delivery. A backhaul is the opportunity to load the truck with biodiesel to drive to the terminal. Figure 5-1: Historical Use of Diesel Fuel in Canada, by Province 8000 Canadian Diesel Consumption from 1989 to Thousands of Cubic Meters Figure 5-2: Forecast of Canadian Diesel Fuel Demand Atlantic Provinces Québec Ontario Manitoba Saskatchewan Alberta British Columbia BBI Biofuels Canada 5-4 3/25/2006

55 REGION Figure 5-3 Regional Markets for a Plant in Durham As shown in Figure 5-1 and Table 5-2, diesel fuel consumption by the transportation sectors in Ontario and Quebec comprise a substantial portion of the diesel fuel consumed in Canada, exceeding 8 billion liters per year in Due to the relatively close proximity of the proposed Durham facility to the U.S. border, there may also be an opportunity to export biodiesel into adjacent states, given the fuel s tariff-free status under NAFTA. Table 5-2 Canadian and Regional Diesel Fuel Consumption: Transportation Uses (Values in billions of litres per year) yr average Ontario Quebec Canada n/a (Source: Statistics Canada) BBI Biofuels Canada 5-5 3/25/2006

56 REGION Assuming a B2 blend in the On-Highway (motor fuel) sector, the Ontario and Quebec (near-term) market would be greater than 160 million L/y. This calculation is based on diesel fuel consumption for all of Ontario and Quebec, which therefore includes some distant regions of these provinces that would be outside the 700 km radius around the proposed plant. However, it does not include potential nearby markets in nearby U.S. states, such as New York, Pennsylvania, Ohio and Vermont, nor does it include the anticipated 2.4% annual growth in diesel fuel consumption projected over the next 20 years. Based on the same assumptions, at a 5% blending rate, the regional On-Highway market potential is over 400 million L/y and for a B20 blend, the On-Highway sector of the regional market represents a potential 1.6 billion L/y market. Regional Competition With more than 8 billion liters of diesel being consumed annually in the regional On- Highway market, and a potential market of over 160 million liters based on a B2 blend, it would appear that the regional market is more than adequate to absorb the output of the biodiesel production facility proposed for Durham. However, as shown in Figure 5-4, below, the biodiesel plants are located within, and seek to address, the same regional markets as a project in Durham. These facilities are expected to produce 95 million liters of biodiesel annually, covering about 60% of the market for a B2 blend in Ontario and Quebec. For a biodiesel plant in Durham, the regional market is sizeable but with significant nearby competition. For this reason, a biodiesel production facility in Durham should utilize a reputable biodiesel marketing firm that can address national distribution while reducing the risk of product marketing for the ownership group. BBI has had discussions with UPI, and they have expressed interest in acquiring biodiesel produced by a facility in Durham. Local Biodiesel Market Potential The local biodiesel market for a plant in Durham would be limited to primarily to those major markets within ~400 km from the biodiesel plant site (an 8-hr roundtrip by truck). For the proposed Durham project, this would include Toronto, Hamilton, Ottawa, Kitchener-Waterloo, London, Sarnia, and Buffalo. These markets (except Ottawa) would also be within Biox s local market area. Three other major markets Windsor/Detroit and Montreal - are located just outside the 400 km radius, although the latter (along with Ottawa) is within the market area served by Rothsay. Given that at least one biodiesel marketer in Toronto Canada Clean Fuels, is importing fuel from the U.S. Midwest, the Toronto market deserves significant attention. In addition, there are several nearby opportunities to market biodiesel. The City of Oshawa has a current annual contract for 400 thousand litres of B20. The Regional Municipality of Durham s recent tender for #1 clear diesel fuel totaled 3.8 million litres, BBI Biofuels Canada 5-6 3/25/2006

57 REGION to serve their Works and Regional Transit operations. On a 38 million litre per year biodiesel plant, these local uses would represent about 400 thousand litres of B100, assuming a B10 blend is used by the across the transit and works operations. Figure 5-4 Map of Commercial Scale Biodiesel Plants in Ontario and Quebec. Biodiesel plants shown with light blue triangles; Durham site shown with a dark blue triangle; green triangles represent ethanol plants (operating, planned and under construction) that could supply corn oil to biodiesel facilities Biodiesel Price Historical data on the price of diesel fuel in Canada were obtained from the Energy Statistics Handbook published by Statistics Canada. Data on diesel fuel prices in Ontario were obtained from the Ontario Energy Ministry. Data on historical diesel prices are available for sales through retail outlets and include all taxes. Figure 5-5 shows the average annual price of diesel fuel in several major Canadian municipalities, over the period from 1989 through the 3 rd Quarter of The period from was relatively stable, but prices have risen dramatically since Figure 5-6 provides recent data on diesel fuel prices in southern Ontario, demonstrating again the significant run-up in prices over the past 3 4 years. BBI Biofuels Canada 5-7 3/25/2006

58 REGION Figure 5-5: Historical Diesel Fuel Prices for Selected Canadian Municipalities 110 Canadian Diesel Gas Prices from 1989 to 2005 Retail Price Cents Per Litre Q St. John's Halifax Québec Montréal Ottawa-Gatineau Toronto Winnipeg Regina Edmonton Vancouver Normally, a three to five year running average is appropriate for estimating the market price of fuel. However, as shown in Figure 5-7, the Consumer Price Index for Energy has risen 28% since 2000, and is forecast to increase significantly into the foreseeable future. Based on the data in Figures 5-5 and 5-6, the average price of diesel to end-users through retail outlets (including taxes) in southern Ontario over the past three years was 72.5 cents per litre. The price in Montreal and Quebec over the same period averaged 79.8 cents per litre. The Federal excise tax is 4 cents per liter, and currently, the provincial governments in Ontario and Quebec impose a road tax on fuel of 14.3 cents/l and 16.2 cents/l respectively. GST at 7% is also included. According to MJ Ervin Fuel Facts Price Monitor Vol 5(19) Oct 12, 2004, Canadian refining and marketing margins are 12 to 14 cents/l. Thus, the wholesale price of diesel in the regional market can be estimated, as shown in Table 5-3. Table 5-3: Estimated Wholesale Price of Diesel Fuel in Southern Ontario and Quebec Municipalities (prices in cents per litre) Date West Toronto East Toronto London Ottawa Montreal Windsor Avg BBI Biofuels Canada 5-8 3/25/2006

59 REGION 95 Figure 5-6: Historical Diesel Fuel Prices for Selected Ontario Municipalities Historical Southern Ontario Diesel Prices Retail Price Cents Per Litre Ottawa West Toronto East Toronto London Figure 5-7: Statistics Canada s Consumer Price Index for Energy Consumer Price Index: Energy Energy Index (1997 = 100) (Source: Statistics Canada January 2006, and Energy Statistics Handbook, November, 2005) BBI Biofuels Canada 5-9 3/25/2006

60 REGION Based on the 3-yr average price of diesel in Southern Ontario, the projected wholesale selling price of diesel would be 36 cents per litre. Alternatively, if one uses the 2004 diesel fuel price, and applied the 5.0% average annual increase in energy prices since 2001 (based on Figure 5-7), we would project an average price of 45.2 cents per litre in Obviously, the prices in 2005 have already surpassed this projection (Table 5-3). Based on these wholesale prices, biodiesel could be sold at a price of 54 to 63 cents per litre, after accounting for the value of the Federal and Provincial tax exemptions. An ultra-conservative financial analysis would be based on the three year average - a wholesale biodiesel price of 54 cents per litre (36 cents per litre plus 18 cents per litre tax), while a price of 63 cents per litre is probably more realistic, and may itself also be conservative, given that the current wholesale diesel price is approximately 53 cents per litre, equivalent to a wholesale price of 71 cents per litre for biodiesel, once the Provincial and Federal tax exemptions are taken into account. The financial analysis will be based on the midpoint between these two prices, 58.5 cents per litre, and will include a sensitivity analysis to the wholesale price of biodiesel. Conclusions Regarding Biodiesel Markets A biodiesel production facility in Durham would need to focus on marketing biodiesel into the regional and national markets, due to competition for local outlets for the product. Based on a B2 blend, the transportation market in Ontario and Quebec is projected to be 160 million L/y. For B5, the regional On-Highway market is over 400 million L/y. Based on the current review, BBI expects that a biodiesel production facility in Durham would market 30% of the biodiesel locally (within 400km), 50% regionally (within 700km), and 20% into select national or U.S. markets. Such a distribution is primarily owing to competition from other biodiesel facilities in the area. BBI Biofuels Canada /25/2006

61 REGION SECTION VI: CO-PRODUCT MARKETS This section of the study provides an assessment of co-product markets for a biodiesel production facility in the vicinity of the Regional Municipality of Durham. Co-Products: Volume of Production The products generated by a biodiesel production facility will be fatty acid methyl ester (a.k.a. biodiesel or FAME) and glycerol. The feedstock requirements and production outputs for several plant scales and feedstock scenarios are shown in Table 6-1. Plant Scale (gal/yr) Table 6-4 Biodiesel Production Parameters 38 MM L/y 25 MM L/y 60% Corn Oil, 40% FOG Feedstock Inputs 38 MM L/y 100% Corn oil Corn Oil 7.2 million litres 23.3 million litres 38.9 million litres Crude soy oil 3.1 million litres 0 0 Recycled fats & greases 15.6 million litres 15.6 million litres 0 Production Outputs Biodiesel 25 million litres 38 million litres 38 million litres Crude Glycerol (80% basis) 2675 tonnes 4045 tonnes 4045 tonnes Glycerol Markets: Volume and Price This section deals with the market volume and potential value of glycerol. The information presented here was obtained from a variety of sources, including the Chemical Market Reporter, and the Quarterly Glycerine Market Report, volume 65, published by Oleoline. Glycerol Market Volume Glycerol is synonymous with glycerine and glycerin. Glycerol comes in various forms but the most common are kosher (99.7% pure) and non-kosher (99.5%) food grade glycerol, and USP glycerol at 99.5% or 99.7% pure. The major uses of glycerol are for personal care products, food and drugs. There are very few producers/processors of glycerine in Canada AkzoNobel in Saskatoon and Cognis in Mississauga are two recognized players in the Canadian market. Furthermore, Banner Pharmaceuticals has expressed interest in acquiring crude glycerine for their gelcaps. BBI Biofuels Canada 6-1 3/25/2006

62 REGION Much of the Canadian market is served by imports from the U.S. In 2002, the last year for which data are available, imports outpaced exports by a ratio in excess of 450:1. Although higher than usual, the average ratio for the 3 year period ending in 2002 was nearly 200:1. This outcome has two key implications: (1) there is clearly a Canadian demand that is not being met by existing producers, and (2) glycerol prices in the Canadian market will be dictated entirely by production and prices in the U.S. market. Therefore, much of the market discussion in this section will focus on the U.S. marketplace. Even though the import ratio into Canada is substantial, the actual quantity imported is rather small. For example, a 38 MM L/y biodiesel facility would produce approximately 4060 tonnes of glycerol, which represents more than half of the glycerol annually imported into Canada, and ~2% of the total average U.S. demand for refined glycerol. Given the fact that two other commercial scale biodiesel facilities have recently begun operation in Canada, it is apparent that the Canadian marketplace will be quickly saturated, and much of the glycerine produced by biodiesel facilities in Canada will be destined for export. As shown in Figure 6-3, total glycerol production in the US has been consistent, averaging over 350,000 tonnes per year from 1998 to The annual US domestic demand for refined glycerin has averaged over 210,000 tonnes since 2000, but has declined significantly from , while domestic production of refined glycerine remained relatively constant (Figure 6-2). Figure 6-3 US Glycerol Production tonnes Glycerol Production in the US yr avg refined crude (Source: US Census Bureau) BBI Biofuels Canada 6-2 3/25/2006

63 REGION Figure 6-2 US Production and Demand of Refined Glycerine tonnes US Production and Demand of Refined Glycerine yr avg Production Demand Current glycerol production capacity in the US is dominated by 11 firms, who produce about 250,000 tonnes per year, which is nearly 80% of the total U.S. production. Dow Chemical and Procter and Gamble together each generate about 68,000 tonnes per year; these two firms alone generate over 40% of the total U.S. production. Dow Chemical is the only producer of synthetic glycerol, but they will close their plant in Freeport, TX due to a glut of glycerol from biodiesel production (Chemical and Engineering News, 84(6), 2006). In terms of uses for glycerol, food products account for approximately 24 percent. Personal care products, including skin and hair and soap products account for 23 percent; oral care products, toothpaste and mouthwash, 17 percent; tobacco, 11 percent; uses in manufacturing plastics, 11 percent; drugs, 7 percent; miscellaneous, including cellophane, explosives and miscellaneous plasticizer, humectants and lubricant uses, 7 percent. The market sector for personal care products is growing at 3.5 percent annually. Good solubility and taste give glycerol an edge on sorbitol in toothpastes and mouth washes, and the oral care sector is growing at approximately 1.5 percent annually. The best performing sector, however, is in food products. The food products sector uses glycerol directly or as one of its derivatives, such as glycerol mono-stearate (GMS). Glycerol in the food sector is growing at better than 4 percent annually as a result of the continuing trend towards lowering the fat content in foods, particularly baked goods. These three sectors together represent 64 percent of glycerol s applications. Glycerol Price The glycerol market experienced major swings in market conditions from the mid-1990s to the present time, based primarily on oilseed crop yields and biodiesel production. It is not so much a declining demand but more of an increase in supply caused by the increase BBI Biofuels Canada 6-3 3/25/2006

64 REGION in biodiesel production. Due to concerns over bovine spongiform encephalitis, a distinction is now being made between vegetable oil-based glycerine and tallow-derived glycerine. Historical prices for refined glycerol for the period are shown in Figure 6-3. Figure 6-3 US Refined Glycerine Prices Historical Prices of Refined Glycerine: US Market $2,500 $2,000 USD/tonne $1,500 $1,000 $500 $ yr avg (Source: Oleoline: Glycerine Market Report, Volume 65) 5 yr avg For the 10-year period from , the average price of USP glycerol in the US was US$1440/tonne, and the 5-yr average price from was US$1330/tonne. The price of crude glycerol (at 84% pure) averages approximately 50-60% of the USP price. However, in Europe, where many more biodiesel facilities are operating, the price of crude glycerol is only about 40% of the refined glycerine price. This may be an indicator of a future North American trend as biodiesel production ramps up here. Over the past 12 to 18 months, European producers have exported an ever increasing quantity of their product to the U.S., to capitalize on higher prices in the North American market. This has led to downward pressure on North American glycerol prices, although they have not decreased to levels seen in Europe. Nonetheless, U.S. and European prices have correlated well over the past 10 years, as shown in Figure 6-4. According to information available from glycerol contract prices in January, 2005 were between US$970 and $1124 per tonne and $1080 and $1235 per tonne for tallow and vegetable grades respectively. Prices had declined further by August 2005: US$794 - $US992 for tallow-derived glycerol, and US$926 US$1168 for vegetable oil based glycerol. HB International and Oleoline list Q US contract prices of US$1079/tonne and $858/tonne for Kosher- and tallow-grade glycerol, BBI Biofuels Canada 6-4 3/25/2006

65 REGION respectively, based on bulk shipment in tank cars. A Canadian glycerol processor, who wishes to remain anonymous, has cited a current price of US$440 to $660/tonne for crude glycerol, depending upon impurities. Recent-term price trends for vegetable-oil grade glycerol are shown in Figure 6-5. Figure 6-4: Historical Prices of Refined Glycerine in the U.S. and Europe. Source: HBI/Oleoline Figure 6-5: Near-Term Price Trends for Vegetable-Oil based Glycerol Source: Chemical Marketing Reporter, 268(3) BBI Biofuels Canada 6-5 3/25/2006

66 REGION The large drop in glycerol prices since 2000 indicates an over-supply situation. Pricing in the glycerol market is not driven by demand, as existing markets are fairly mature, but rather by supply, which is driven up by the global surge in biodiesel production. Prices have also declined as outlets for tallow-derived glycerol have shrunk due to concerns over BSE. Demand is described as acceptable, but growing at a slow pace. Inventories are deemed on the high side with over 45,000 tonnes of inventory in the U.S. at the end of Sellers believe that the market may have now bottomed out and most do not expect any further erosion in price. However, HBI/Oleoline project a further 20% reduction in price by 2008, primarily due to increased supply from biodiesel facilities. On the other side of the equation is a reduction in synthetic glycerol production as its precursor, epichlorohydrin, is more profitably converted into epoxy resins. Furthermore, due to the increased cost of conventional petrochemicals, glycerol is finding new markets as a lower cost alternative to propylene glycol and ethylene glycol, which are currently about 30 to 80% more expensive than glycerol (Chemical Market Reporter, 268(3), 29, 2005). Solvay plans to open an epichlorohydrin plant in France in 2007 that will use glycerol, rather than propylene, as its raw material. Archer Daniels Midland has announced plans to make propylene glycol from glycerol rather than propylene oxide, using new advanced catalysts (Chemical and Engineering News, 84(6), 2006). It is widely reported that large contract buyers are keen to agree to more long-term agreements because glycerol prices are close to a minimum level. Producers confirm that customers are hoping to secure annual contracts next year; however, they say that they would prefer to settle business on a quarterly to six-month contract basis. For Durham, the over-riding question relating to glycerol production is the ability to market the proposed plant s crude glycerol. Based on information from glycerol refining company (who wishes to remain anonymous), in order to sell crude glycerol from biodiesel production to a glycerol refiner, even the crude material must meet rigorous specifications to be acceptable as feedstock for the post-production refining operation. In addition, due to the erosion in price, the group must seriously consider the adverse cost and market implications of incorporating glycerol refining into the proposed plant. Based on published market data, the current price for refined glycerine is from US$794 to US$992/tonne for tallow-derived products. Personal communication with a glycerol refining company indicates prices for crude glycerine of $US440 - $660/tonne. There are conflicting predictions for the future, whether the current market price is bottoming out, or will continue to decline. Based on the current market assessment, a price of C$900/tonne for the refined glycerol and a price of C$495/tonne for crude glycerol will be used in the financial analysis. The price for refined glycerine is a conservative price that accounts for a forecast 25% drop in future glycerine prices. The price for crude glycerine is set at 55% of the refined glycerine price, based on historical norms, but this price also is at the low end of the price range cited by a Canadian glycerol processor. These low prices also account for likely transportation costs as the glycerine is exported to foreign markets. Based on current market prices and future market trends for glycerol, BBI Biofuels Canada 6-6 3/25/2006

67 REGION BBI recommends that Durham not attempt to include glycerol refining in the proposed facility, and focus solely on the sale of crude glycerol. This eliminates capital and operating costs associated with glycerol refining. Section Summary Information in this section has established the potential production volume and pricing of the co-products generated by the proposed biodiesel production facility. A 38 MM L/y biodiesel plant would generate over 4,000 tonnes of pure glycerin, representing more than 50% of the Canadian market for glycerol, and about 2% of the historical market for refined glycerine in the US. Based on the number of proposed biodiesel projects in Ontario and Quebec, Durham must be aware of the risk involved in glycerol production and marketing, which will undoubtedly require export. The large drop in glycerol prices since 2000 indicates an over-supply situation. By mid-2005, food grade tallow-derived refined glycerol was valued at C$910-$1150/tonne and food grade vegetable-derived glycerol was valued at C$1050-$1350/tonne. Based on the current market assessment, a price of $495/tonne for the crude glycerol is used in the financial analysis. Based on current market prices for glycerol, BBI recommends that Durham not attempt to include glycerol refining in the proposed facility, and focus solely on the sale of crude glycerol. BBI Biofuels Canada 6-7 3/25/2006

68 VII. FACILITY DESIGN BASIS AND PROJECT STATISTICS This section provides the design basis and project statistics for the financial analysis. The process scenario is for biodiesel production from three possible feedstocks: purchased degummed soy oil, recycled fats and oils, and, potentially, crude (non-food grade) corn oil from the nearby ethanol plants. Several plant scales/scenarios were evaluated: (a) a 19 million L/y plant (b) a 25 million L/y plant (c) a 38 million L/y plant based on crude corn oil and/or recycled FOG, including scenarios based on crude corn oil alone, recycled FOG alone, and a combination of crude corn oil and FOG. Preliminary analyses explored the feasibility of a facility based on 100% soy oil, either by importing soy oil from outside the region, or by importing soybeans for use in a crush facility. However, the relatively high cost of soy oil, and the need to import significant quantities of soybeans from outside the region preclude an economically viable project based on these options. Process Description A description of the biodiesel production process is provided here. A simplified block flow diagram for a conventional process, such as that adopted by Lurgi/PSI, is shown below in Figure 7-1. In addition to the basic biodiesel process unit operations, there are two additional process alternatives that can be incorporated into the biodiesel process. One is glycerol refining and the other is colloquially known as the Flexible Front-End. These two process adders are shown using dashed lines in Figure 7-1. The Flexible Front-End is not required for any scenario based on soy oil only, or if very clean corn oil is used. However, as a worst-case scenario, capital costs for a flexible front end have been included in financial analyses based on corn-oil alone, to account for the possibility that pretreatment of corn oil may be required. The production unit operations are summarized below. Transesterification The degummed, crude oil feedstock generated by the extraction facility, or purchased soy oil, is sent to the transesterification unit. Transesterification is a base-catalyzed chemical reaction in which triglycerides (oil or fat) react with an alcohol (methanol), in the presence of an alkaline catalyst, (lye) to form the methyl ester and liberate glycerol from the triglycerides. Depending on the process conditions and equipment, the transesterification reaction can take anywhere from 10 minutes to 8 hours to achieve >99% conversion. Phase Separation The products of the transesterification reaction form two distinct phases: a lighter, hydrophobic or solvent phase containing the methyl esters and a heavier, hydrophilic or BBI Biofuels Canada 7-1 3/25/2006

69 water-based phase. These separated via conventional processes, either coalescing and decanting, or centrifugation. Methyl Ester Washing Following phase separation, the ester-rich phase still contains a small amount of methanol, traces of glycerol, and traces of soaps, catalyst, and high boiling components. In order to remove the water-soluble substances, the ester phase is washed. To avoid the formation of emulsions, any soaps that may be present are split before washing by adding a small amount of acid. Figure 7-1 Conventional Biodiesel Production Process Methyl Ester Drying and Methanol Recovery The washed ester is still considered wet, with trace amounts of moisture remaining. The washed ester is dried via vacuum in a dryer circuit to adjust the allowable water content. The dried methyl ester is continuously delivered by pump to the methyl ester storage tank in the tank farm. BBI Biofuels Canada 7-2 3/25/2006

70 The glycerol phase is collected in a pump tank together with the methyl ester wash water. In this process, the catalyst decomposes into caustic soda solution and methanol in the presence of water. The methanol-bearing aqueous phase is fed to a rectification column. The overhead product has a methanol content of > 99.9% and is condensed and recycled to the transesterification process via the methanol pump tank. Glycerol Water Pretreatment and Evaporation Esterification The glycerol-water mixture proceeding from the methanol recovery stage is dried in a 2-stage evaporation system (optional 3-stages) up to a minimum glycerol concentration of 80%. The evaporator system has two recirculating evaporation circuits (stages) maintained under vacuum; each recirculating evaporation circuit is composed of a heat exchanger and evaporator section. The vapors from the last evaporator stage are precipitated in a condenser. The concentrated glycerol solution is transferred to a storage tank for storage and sale. Certain biodiesel production processes incorporate a flexible front-end that allows for the use of additional feedstocks such as animal fats, recycled fats and oils, and tropical vegetable oils such as palm oil. Many fat and oil feedstocks, especially those derived from animals and oxidized materials like recycled cooking oils, have elevated levels of free fatty acids (from 2% to 20%). In the biodiesel production process, any free fatty acids that aren t removed or pre-processed will generate soaps in the presence of the alkaline catalyst, reducing the yield of biodiesel while generating an undesirable byproduct. The free fatty acids present in animal and recycled oil feedstocks are eliminated by converting them to biodiesel before introducing the oil into the primary transesterification step. This is done by incorporating an acid-catalyzed esterification reaction upstream of the transesterification reaction. The high-free-fatty acid feedstock is mixed with alcohol and acid in a separate reactor, converting all free fatty acids into methyl esters; the intact triglycerides (fat and oil) remain un-reacted, so no glycerol is produced. When the esterification reaction is complete, the free fatty acids are all converted into methyl ester; the methyl ester and triglyceride mixture is then sent to the transesterification reactor, where the alkaline-catalyst is added and the bulk of the oil feedstock is converted to biodiesel and glycerol. Glycerol Refining The glycerol refining operation increases the concentration, or purity, of the crude glycerol from 80% to pharmaceutical or kosher quality, generally 97.5% pure or higher. This operation is only required if the project is intent on capturing this additional value at the expense of significantly higher capital and operating costs. Once distilled, the purified glycerol is further refined by filtering and bleaching to remove any color contaminants. BBI Biofuels Canada 7-3 3/25/2006

71 BIOX Process The BIOX process is a proprietary, truly continuous, single-pass production system that generates no waste products, and produces ASTM-spec biodiesel and refined glycerol. The BIOX process increases the efficiency of both the esterification and transesterification reactions used in biodiesel production, reducing the esterification reaction time sufficiently to allow it to be matched up with the 5 minute reaction time for transesterification, making true continuous production possible. The BIOX process also minimizes soap production and generates no wastewater. The BIOX process has been specifically designed for high free fatty acid (FFA) feedstocks to capitalize on their lower cost compared to low FFA vegetable oil feedstocks. Conventional biodiesel production processes require additional capital and operating costs to process high FFA feedstocks, and their capital and economic projections reflect the higher feedstock cost of degummed vegetable oils or the additional capital equipment associated with cheaper animal fats and recycled fats and oils. Overall, the BIOX process should be more economical than a conventional biodiesel production process, having reduced unit operations and operating costs when compared to conventional biodiesel production processes, particularly if feedstocks with a high FFA content are used. Summary of Production Statistics As discussed previously, several biodiesel production scales/configurations were evaluated for feasibility. These include: (a) a 19 million L/y plant (b) a 25 million L/y plant (c) a 38 million L/y plant based on crude corn oil and/or recycled FOG, including scenarios based on crude corn oil alone, recycled FOG alone, and a combination of crude corn oil and FOG. The production statistics for the three of the 38 MM L/y plant configurations evaluated under (c) are provided in Tables 7-1 and 7-2. The tables show the production input requirements and outputs, the annual transportation requirements, and the staffing requirements for the facilities. Tables for scenarios (a), and (b) have not been included because they are not feasible unless biodiesel prices increase substantially, and/or feedstock prices decrease substantially. Tables 7-1 and 7-2 are based on a conventional biodiesel design, for two reasons: (1) There is limited information on the equivalent BIOX process at the scales anticipated at Durham (2) The conventional biodiesel design provides a worst case scenario with respect to production, wastewater treatment, utilities, byproducts and economics. If the BIOX technology can be secured for the Durham site, benefits in all of the aforementioned areas will be realized. BBI Biofuels Canada 7-4 3/25/2006

72 Table 7-5 Project Statistics for Biodiesel Production Plant Biodiesel Production Plant Statistics 38 MMLY 38 MMLY 38 MMLY Production Inputs 100% 70% Purchased Purchased Oils Oils, 30% FOG 100% FOG Purchased Oils (tonnes/yr) 36,000 25,200 0 Recycled Fats and Oils (tonnes/yr) 0 10,510 35,020 Water (cubic meters/yr) 368, , ,388 Electricity (kwh/yr) 2,002,430 2,002,430 2,002,430 Natural Gas (MMCF/yr) Chemicals & catalysts (tonnes/yr) 5,130 5,130 5,130 Production Outputs 38 MMLY 38 MMLY 38 MMLY Crude Glycerol (tonnes/yr) 4,060 4,060 4,060 FAME (Biodiesel) (MM L/yr) Soapstock (tonnes/yr) 2,933 2,933 2,933 Wastewater (MM L/yr) Incoming Transportation 38 MMLY 38 MMLY 38 MMLY Purchased Oils (Trucks/yr) Recycled Fats and Oils (Trucks/yr) Chemicals & catalysts (Trucks/yr) Total Trucks Inbound per Day Total Trucks Inbound per Year Outgoing Transportation 38 MMLY 38 MMLY 38 MMLY Biodiesel (trucks/yr) Glycerine (trucks/yr) Soapstock (trucks/yr) Total Trucks Outbound per Day Total Trucks Outbound per Year Total Transportation 38 MMLY 38 MMLY 38 MMLY Total Trucks per Day Total Trucks per Year Rail transport is a likely option for incoming feedstocks, outbound glycerine, and some of the outbound biodiesel. Each rail tanker used would replace approximately 5.5 tanker trucks, and could therefore substantially reduce truck traffic around the plant site, provided the costs are competitive. BBI Biofuels Canada 7-5 3/25/2006

73 Table 7-6 Personnel Requirements for 38 MMLY Biodiesel Plant Employees Number Administration/Management General Manager 0 Plant Manager 1 Quality Control Manager 1 Controller 0 Commodity Manager 0 Administrative Assistant 1 Production Labor 0 Microbiologist 0 Lab Technician 1 Shift Team Leader 2 Shift Operator 4 Yard/Commodities Labor 0 Maintenance 0 Maintenance Manager 0 Boiler Operator 0 Maintenance Worker 1 Welder 0 Electrician 1 Instrument Technician 0 Total Number of Employees 12 BBI Biofuels Canada 7-6 3/25/2006

74 VIII. ESTIMATED CAPITAL & OPERATING COSTS This section provides the key parameter assumptions and capital and operating cost estimates used in the financial analysis. Assumptions Made in the Financial Analysis The key project assumptions used in the financial projections for the production scenarios are reviewed here. These assumptions factor into the operating costs for the different production scenarios. Soybean Feedstock Cost: The cost of soybeans used in the financial analysis is based on the 5-year historical average in Ontario ($297/tonne), plus a typical basis increase of $$10-15/tonne. Thus, the cost of soybeans used in the financial analysis is $310/tonne. Crude Purchased Soy Oil Price: Local data on soy oil prices are largely unavailable. To project the price of crude soy oil in the vicinity of Durham, BBI correlated historic CBOT soybean prices with the historic CBOT prices of crude soy oil, and then used the projected price of soybeans in Ontario to project the crude oil price. Using the projected price of soybeans in Ontario of $310/tonne, the local crude soy oil price is projected to be $650/tonne. Corn Oil Purchase Price: Crude (non-food grade) corn oil as a byproduct from dry grind ethanol plants is a growing commodity. Based on surveys of producers marketing crude corn oil, a price of $325/tonne has been used in the feasibility analysis. Recycled Fats, Oils and Greases (FOG) Purchase Price: The price of FOG is highly variable. Based on current and historic pricing and a survey of local renderers, the price of FOG is projected to be $470/tonne. Biodiesel Price: The price of biodiesel used in the financial analysis will be $0.585/litre, based on the 3-yr average wholesale price of diesel plus the 18 cents per litre Federal excise tax and Provincial Road Tax exemption. Glycerine Price: Based on the current market assessment, a price of $495/ton for the crude glycerine is used in the financial analysis. BBI recommends that Durham not attempt to include glycerine refining in the proposed facility. Natural Gas Price: Historical Ontario prices for natural gas for the last five years are shown in Figure 8-1. The 5-yr average price is 33.6 cents per cubic meter ($9.33/MM BTU), excluding distribution charges and taxes. Including these charges brings the price to 45.1 cents per cubic meter ($12.51/MM BTU). Based on these data and anticipated future trends, the price of natural gas used in the analysis was $13.50/MM BTU. BBI Biofuels Canada 8-1 3/25/2006

75 Electricity Price: Historical Ontario wholesale prices for electricity since de-regulation in 2002 are shown in Figure 8-2. In Ontario, industrial customers pay the wholesale price for electricity, plus negotiated delivery, regulatory, and debt retirement charges, which may be as high as 4.7 cents/kwh. The average price of wholesale electricity to industrial customers over the last five years was 5.92 /kwh. The average cost for delivery, debt retirement and fixed costs has averaged 2.3 /kwh, and industrial users in Ontario are eligible for a Business Protection Plan Rebate, which has averaged about 1.06 /kwh over the past three years. The Provincial Government has announced that this rebate will be extended until 2009, but its status is uncertain beyond that date. Based on these data, a net price (tax included) of 8.5 /kwh has been used in the analysis. Figure 8-1 Recent Natural Gas Price Trends in Ontario Industrial Natural Gas Prices - Ontario cents per cubic meter Source: Statistics Canada and Natural Resources Canada BBI Biofuels Canada 8-2 3/25/2006

76 Figure 8-2 Recent Wholesale Electricity Price Trends in Ontario Wholesale Price of Electricity in Ontario Cents per kwh May-02 Jul-02 Sep-02 Nov-02 Jan-03 Mar-03 May-03 Jul-03 Sep-03 Nov-03 Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 (Source: IMO) The key assumptions incorporated into the financial analysis are summarized in the following table. The base cost for land purchase was assumed to be $80 thousand per acre, based on the anticipated price at the Clarington Energy Park. Lower land costs are anticipated at the rural sites, while the cost at the CN site was estimated at $200 per acre. The impact of land and site development costs will be discussed in Section IX of the report. BBI Biofuels Canada 8-3 3/25/2006

77 Table 8-1 Project Assumptions for Biodiesel Production Plant Model Input Biodiesel Production Plant Project Assumptions 38 MMLY 38 MMLY 100% 70% Purchased Purchased Oils Oils; 30% FOG 38 MMLY 100% FOG Installed capital cost per litre ($/litre) Biodiesel Yield (litre/litre) Biodiesel Selling Price ($/litre) Biodiesel Transport Cost ($/litre) Biodiesel Oil sales comm. 1.00% 1.00% 1.00% RF&O Feedstock price ($/kg) Purchased Oil Feedstock Price ($/kg) Oilseed meal yield (lb/bu) Oilseed meal price ($/ton) Oilseed meal sales commission 2.00% 2.00% 2.00% Glycerol yield (kg/litre) Glycerol price ($/tonne) Electricity use (kwh/litre) Electricity price ($/kwh) Natural gas use (BTU/litre) 1,347 1,347 1,347 Natural gas price ($/MMBTU) Makeup water use (litre/litre) Makeup water price ($/1000 litre) Wastewater effluent (litre/litre) Wastewater effluent cost ($/1000 litre) Chemicals & catalysts ($/litre) Number of employees Maintenance materials 1.50% 1.50% 1.50% Property tax and insurance 1.50% 1.50% 1.50% Debt/equity ratio 0.6/ / /0.4 Loan terms 0.08 for 10 years 0.08 for 10 years 0.08 for 10 years Land ($/acre) 80,000 80,000 80,000 BBI Biofuels Canada 8-4 3/25/2006

78 Capital Construction Cost Estimates The capital costs incurred for construction of a biodiesel plant are dependent upon the feedstock and intended byproducts. Use of recycled oils (FOG) adds to the capital costs, to cover costs for bleaching, filtration, pretreatment and initial esterification of the recycled oils. These process units (a so-called flexible front end ) may account for about 25% of the total capital cost of a biodiesel facility. Although corn oil is a cleaner feedstock than FOG, some grades of extracted corn oil may have a higher free fatty acid content, and pretreatment may be required. Similarly, a decision to sell refined glycerine adds capital costs for distillation and refining, along with ongoing operating costs, primarily utilities, to purify the crude glycerine. Based on current prices for crude and refined glycerine, the additional capital and operating costs for a glycerine refining operation cannot be justified. Therefore, the energy inputs and capital costs have been based on production of crude glycerine only. The financial models considered for Durham have therefore excluded costs for glycerine refining, because BBI s current recommendation is to proceed with the sale of crude glycerine only. The capital construction cost estimates used in the financial analysis are shown in the Table 8-2. The costs reflect actual capital equipment estimates obtained from leading vendors of biodiesel and oil extraction equipment. The capital costs used in the financial analysis have included a flexible front end, because use of soy oil alone is not financially viable. Thus, the design model adopted allows for a blend of feedstocks, including corn oil, FOG, and about 10 to 15% soy oil, if it can be procured at a competitive price. The rail improvement costs are based on requirements for the Clarington site, which would require a mainline switch, two yard switches, and about 250m of track on the plant site. Rail costs at the CN and St. Lawrence sites would be about $250K less, because a mainline switch would not be required. Conversely, the Port Oshawa and St. Mary s sites require extra trackage, because they are further from the rail line; this increases the rail cost by $450 to $650 thousand for these sites. It is expected that capital costs for a facility based on BIOX technology would be substantially less. However, there are no available data for a plant of this scale, and furthermore, BIOX may not be willing to license the technology. Therefore, the availability of the BIOX technology is uncertain, and may depend on the ownership structure adopted for the Durham facility. BBI Biofuels Canada 8-5 3/25/2006

79 Table MM L/Y Biodiesel Production Plant Capital Costs CO = Crude (Non-Food Grade) Oil; FOG = Fats, Oils and Greases Durham Biodiesel Feasibility Analysis Capital Cost Estimate CO FOG + CO FOG Biodiesel Production (gal/year) 10,000,000 10,000,000 10,000,000 Project Engineering & Construction Costs Biodiesel Plant Capital Cost $12,927,000 $12,927,000 $12,927,000 Degumming Capital Cost $2,399,080 $2,399,080 $2,399,080 Recycled Oil Pretreament and Esterification $5,959,540 $5,959,540 $5,959,540 Physical Refining to Edible Grade Oil $0 $0 $0 Refined Glycerine Distillation Capital Cost $0 $0 $0 Total Engineering and Construction Cost $21,286,000 $21,286,000 $21,286,000 Development Costs Inventory - Purchased Oils $305,000 $183,000 $0 Inventory - Recycled Oil Feedstocks $0 $172,000 $430,000 Inventory - Chemicals & Catalysts $143,000 $143,000 $143,000 Inventory - Biodiesel, Glycerin $556,000 $556,000 $556,000 Inventory - Spare Parts $396,911 $425,722 $425,722 Startup Costs $356,310 $334,338 $334,338 Land $960,000 $960,000 $960,000 Administration Building & Furnishing $450,000 $450,000 $450,000 Rail Improvements $490,000 $490,000 $490,000 Well & Process Water Treatment $0 $0 $0 Site Development Costs $231,334 $231,334 $231,334 Rolling Stock and Shop Equipment $111,755 $107,060 $107,060 Organizational Costs $515,306 $515,306 $515,306 Capitalized Fees and Interest $383,150 $383,150 $383,150 Contingency $1,290,000 $1,380,000 $1,380,000 Total Development Costs $6,188,766 $6,330,910 $6,405,910 Total Estimated Project Cost $27,474,766 $27,616,910 $27,691,910 BBI Biofuels Canada 8-6 3/25/2006

80 IX. FINANCIAL ANALYSIS This section presents the results of the economic evaluation of the proposed biodiesel production project. All references to corn oil imply crude (non-food grade) corn oil extracted post-fermentation from a dry-grind corn to ethanol plant. Economic Modeling Results for Biodiesel Production Several plant scales/scenarios were evaluated, using BBI s proprietary financial model. Plant scales ranging from 19 million to 38 million L/y were examined, with various feedstocks and feedstock combinations, including soy oil, corn oil, and waste fats, oils and greases (FOG). The financial analysis established that three major parameters influence the projected return on investment: feedstock cost, biodiesel selling price, and plant scale. The following specific cases were examined: (d) a 19 million L/y plant (e) a 25 million L/y plant (f) a 38 million L/y plant (g) 38 million L/y plants based on soy oil, crude corn oil, and recycled FOG, including scenarios based on crude corn oil alone, recycled FOG alone, and a combination of crude corn oil and FOG. Pre-tax Return on Investment (ROI) was used to measure the profitability of the proposed project. The results are summarized in the following table. Additional details are shown on the following pages and in the complete 10-year economic forecasts for the projects that are included in Appendix III. The ROI used here is the average annual pre-tax return on equity invested in the project over an 11-year period. The 11-year period includes 13 months of plant construction and startup-up followed by about 10 years of commercial operation. The equity investment is assumed to be 40% of the total project cost. Cases (a) (c) were initially evaluated based on the lowest cost feedstock corn oil. If a sufficient ROI (>25%) could not be achieved with the lowest-cost feedstock, other feedstock options were not considered. Table 9-1 summarizes the economic model results for cases (a), (b), and (c) based on a crude corn oil feedstock, while three scenarios for the 38 million L/y plant are shown in Table 9-2. BBI Biofuels Canada 9-1 3/25/2006

81 Table 9-7 Modeling Results for Biodiesel Production: Effect of Plant Scale on ROI with Corn Oil Summary of Biodiesel Production Plant Financial Projections Performance Metric 38 MMLY 25 MMLY 19 MMLY 11-Year Average ROI 38.8% 22.3% 13.2% Average Annual Net Earnings 4,313,000 2,094,000 1,109,000 Installed Capital Cost per Gallon of Capacity Plant Capital Cost $21,286,000 $17,789,000 $15,578,000 Owner's Costs $6,280,910 $5,470,206 $5,010,386 Total Project Investment $27,566,910 $23,259,206 $20,588,386 40% Equity $11,026,764 $9,303,683 $8,235,354 Table 9-2 Modeling Results for Biodiesel Production 38 MM L/y Scenarios Summary of Biodiesel Production Plant Financial Projections Crude Corn 70% Corn Oil, Performance Metric Oil Only 30% FOG FOG Only 11-Year Average ROI 38.8% 26.6% -4.1% Average Annual Net Earnings 4,313,000 2,958,000 (450,000) Installed Capital Cost per Gallon of Capacity Plant Capital Cost $21,286,000 $21,286,000 $21,286,000 Owner's Costs $6,280,910 $6,318,910 $6,405,910 Total Project Investment $27,566,910 $27,604,910 $27,691,910 40% Equity $11,026,764 $11,041,964 $11,076,764 As shown in Table 9-1, a 19 MMLY plant is wholly infeasible, in large part due to the very high installed capital cost per gallon of capacity. Some economy of scale is achieved at 25 MMLY, but the ROI is still below the target threshold of 25%. Further scale-up to 38 MMLY increases the projected ROI to about 39%, sufficient to merit further analysis with different feedstocks. The ROI was calculated for a 38 MMLY plant using different feedstocks, including soy oil, FOG, and combinations of these feedstocks with crude corn oil. As shown in Table 9-2, using 100% recycled fats oils and greases (FOG; C$470/tonne) is wholly infeasible, with a negative ROI. Thus, using 100% soy oil, which is even more expensive (C$650/tonne), is also impractical. Nonetheless, under the right pricing conditions, soy oil and FOG can comprise a portion of the total feedstock, and provide some flexibility in plant operation. As shown in Table 9-2, a 38 MMLY plant based on corn oil alone (C$325/tonne) has an ROI near 39%. A feedstock blend of 70% corn oil with 30% FOG also provides a reasonable return on investment, albeit a lower ROI than that with 100% corn oil. Similarly, a blend of 10% soy oil and 90% corn oil also provides an acceptable ROI, near 29%, but increasing the percentage of soy oil to 30% reduces the ROI to ~12%, and thus, this blend is not economically viable. BBI Biofuels Canada 9-2 3/25/2006

82 The ROIs for these cases are highly dependent on capital cost, feedstock costs, and the selling price of biodiesel. For example, the ROI for the 25 MM L/y case based on corn oil only improves from 22% to 40% if the biodiesel price increases from 58.5 cents/litre to 66 cents per litre, with all other factors remaining equal. Similarly, the 38MM L/y plant based on 100% FOG has an ROI of -4%, but with a biodiesel price of 66 cents per litre, the ROI increases to +22%, near the threshold for an economically viable project. The ROI for the 38 MM L/y biodiesel production facility depends significantly on the feedstock, and essentially, the feedstock cost. The projected average annual pre-tax ROI is ~39% for a plant based on crude (non-food grade) corn oil alone, assuming that a full pretreatment facility is installed, similar to that required for recycled FOG. However, if a clean supply of corn coil can be secured, a pre-treatment unit may not be required, which would reduce that capital cost by ~$6 MM. However, the savings on capital are likely to be offset by an increase in price for the cleaner corn oil. In this analysis, the capital savings and ongoing operating costs are balanced (i.e., the same ROI is obtained) if the price for the corn oil increases by 15% (i.e., from $325 to ~$375/tonne). The benefits of securing long-term access to a low-cost supply of oil are therefore evident, particularly if it is a relatively clean supply that does not require pretreatment and esterification before conventional biodiesel processing. As each progressively more expensive feedstock is contemplated, the biodiesel price required for a financially viable operation also increases. At a feedstock price of C$325/tonne, crude (non-food grade) corn oil is among the lowest cost feedstocks available to a plant in Durham, and at historical biodiesel prices, a financially viable plant can be constructed based on this feedstock alone. At a feedstock cost of C$470/tonne (e.g., for FOG), to achieve an ROI of 25%, the biodiesel selling price must exceed 67 cents per litre. Using soy oil, at a price of C$650/tonne, requires a biodiesel price of 82 cents per litre before the threshold ROI of 25% is met. The estimated total project investment is $27.6 MM for a 38 MM L/y plant. A minimum 40% equity investment, i.e., $11.0 MM, is recommended. The proforma income statement for year two of the 38 MM L/y operations is given in Table 9-3. BBI Biofuels Canada 9-3 3/25/2006

83 Table 9-3 Year 2 Income Statement for Oil Extraction and Biodiesel Production Proforma Income Statement for Year 2 Biodiesel Production (liter/yr) 100% Crude (non-food 70% Corn Oil; 30% grade) Corn Oil FOG 100% FOG Net Revenue $/Year $/liter $/Year $/liter $/Year $/liter Biodiesel $21,590,440 $0.570 $21,590,440 $0.570 $21,590,440 $0.570 Glycerin $2,207,460 $0.058 $2,207,460 $0.058 $2,207,460 $0.058 State Producer Payment $0 $0.000 $0 $0.000 $0 $0.000 Federal Biodiesel Incentive $0 $0.000 $0 $0.000 $0 $0.000 Total Revenue $23,797,900 $0.629 $23,797,900 $0.629 $23,797,900 $0.629 Production & Operating Expenses Feedstocks $11,763,403 $0.311 $13,208,584 $0.349 $16,580,672 $0.438 Chemicals & Catalysts $2,524,733 $0.067 $2,524,733 $0.067 $2,524,733 $0.067 Natural Gas $702,194 $0.019 $702,194 $0.019 $702,194 $0.019 Electricity $173,382 $0.005 $173,382 $0.005 $173,382 $0.005 Makeup Water $297,232 $0.008 $297,232 $0.008 $297,232 $0.008 Effluent Treatment & Disposal $63,997 $0.002 $63,997 $0.002 $63,997 $0.002 Direct Labor & Benefits $376,257 $0.010 $376,257 $0.010 $376,257 $0.010 Total Production Costs $15,901,198 $0.420 $17,346,378 $0.458 $20,718,467 $0.547 Gross Profit $7,896,702 $0.209 $6,451,521 $0.170 $3,079,433 $0.081 Administrative & Operating Expenses Land Lease (Annual) $0 $0.000 $0 $0.000 $0 $0.000 Maintenance Materials & Services $324,079 $0.009 $324,079 $0.009 $324,079 $0.009 Repairs & Maintenance, Wages & Benefits $106,088 $0.003 $106,088 $0.003 $106,088 $0.003 Property Taxes & Insurance $359,171 $0.009 $359,171 $0.009 $359,171 $0.009 Admin. Salaries, Wages & Benefits $224,906 $0.006 $224,906 $0.006 $224,906 $0.006 Office/Lab Supplies & Miscellaneous $137,874 $0.004 $137,874 $0.004 $137,874 $0.004 Total Administrative & Operating Expenses $1,152,117 $0.030 $1,152,117 $0.030 $1,152,117 $0.030 EBITDA $6,744,585 $0.178 $5,299,404 $0.140 $1,927,316 $0.051 Less: Interest - Operating Line of Credit $0 $0.000 $0 $0.000 $13,222 $0.000 Interest - Senior Debt $1,197,183 $0.032 $1,198,833 $0.032 $1,202,611 $0.032 Interest - Subordinated Debt $0 $0.000 $0 $0.000 $0 $0.000 Depreciation & Amortization $1,408,634 $0.037 $1,408,601 $0.037 $1,408,659 $0.037 Current Income Taxes $0 $0.000 $0 $0.000 $0 $0.000 $0 $0.000 $0 $0.000 $0 $0.000 Year 2 Annual Net Earnings Before Income Taxes $4,138,768 $0.109 $2,691,970 $0.071 ($697,176) ($0.018) 11-Year Average Annual Pre-Tax Income $4,313,000 $0.114 $2,958,000 $0.078 ($450,000) ($0.012) 11-Year Average Annual Pre-Tax ROI 38.8% 26.6% -4.1% Note - $/L figures are based on annual biodiesel production BBI Biofuels Canada 9-4 3/25/2006

84 Figure 9-4 shows the return on investment (ROI) for the 38 MM L/Y plant scenario based on crude corn oil, for each year of the project, beginning with construction of the plant in year 0 through the 10 th year of commercial operation. The ROI is the net earnings each year divided by the equity investment. The average annual pre-tax ROI for the 11 years shown in the chart is 39%. Figure 9-4 Projected Annual ROI for the 38 MM L/y Biodiesel Production Plant Based on Purchased Crude Corn Oil Pre-Tax ROI (%) 60% 50% 40% 30% 20% 10% 0% -10% Projected Annual Return on Investment Year Avg. Breakeven Analysis The variables that have the greatest impact on the project s profitability are related to the cost of the feedstock, the capital cost for the plant, and the selling price of the biodiesel and glycerol products. A series of breakeven analyses were run to determine the breakeven prices for feedstock and products. Pre-tax income varies from year-to-year in the financial projections due to depreciation and assumptions regarding inflation. The breakeven analysis results presented here are based on the average annual pre-tax income for the project in the ten years following construction and startup of the facility. The breakeven analysis for the 38 MM L/y biodiesel production plant based on corn oil is shown in Table 9-4. The breakeven analysis for the 38 MM L/y biodiesel production plant based on 70% crude corn oil and 30% FOG is shown in Table 9-5 and 9-6, examining sensitivity to the prices of FOG and crude corn oil, respectively. The breakeven analysis for the 38 MM L/y biodiesel production plant based on 100% FOG is not shown. BBI Biofuels Canada 9-5 3/25/2006

85 Table 9-4 Breakeven Analysis for the 38 MM L/Y Biodiesel Production Plant Based on Crude (Non-Food Grade) Corn Oil 38 MMLPY Plant CO RF&O Price and Biodiesel Price Sensitivity 10-Year Average Annual Pre-Tax Income Durham Biodiesel Feasibility Analysis Biodiesel ($/gallon) Feb 14/ ,198,674 7,223,312 8,247,950 9,272,588 10,297,226 11,321,864 12,346,529 13,371,167 14,395,805 15,420,443 16,445, ,380,041 6,404,679 7,429,317 8,453,955 9,478,593 10,503,231 11,527,896 12,552,534 13,577,172 14,601,810 15,626, ,561,408 5,586,046 6,610,684 7,635,322 8,659,961 9,684,599 10,709,263 11,733,901 12,758,539 13,783,177 14,807, ,742,802 4,767,440 5,792,078 6,816,716 7,841,354 8,865,992 9,890,657 10,915,295 11,939,933 12,964,571 13,989, ,924,169 3,948,807 4,973,445 5,998,083 7,022,721 8,047,359 9,072,024 10,096,662 11,121,300 12,145,938 13,170, ,105,536 3,130,174 4,154,812 5,179,451 6,204,089 7,228,727 8,253,391 9,278,029 10,302,667 11,327,305 12,351, ,286,888 2,311,542 3,336,180 4,360,818 5,385,456 6,410,094 7,434,758 8,459,396 9,484,034 10,508,672 11,533, ,251 1,492,917 2,517,573 3,542,211 4,566,849 5,591,487 6,616,152 7,640,790 8,665,428 9,690,066 10,714, (726,387) 674,254 1,698,920 2,723,579 3,748,217 4,772,855 5,797,519 6,822,157 7,846,795 8,871,433 9,896, (2,009,333) (407,028) 880,257 1,904,923 2,929,584 3,954,222 4,978,886 6,003,524 7,028,163 8,052,801 9,077, (3,293,352) (1,685,839) (87,669) 1,086,260 2,110,926 3,135,589 4,160,254 5,184,892 6,209,530 7,234,168 8,258, (4,577,432) (2,969,919) (1,362,405) 231,460 1,292,289 2,316,955 3,341,647 4,366,285 5,390,923 6,415,561 7,440, Corn Oil ($/kg) (5,861,451) (4,253,938) (2,646,424) (1,038,911) 473,626 1,498,292 2,522,984 3,547,650 4,572,291 5,596,929 6,621, (7,145,470) (5,537,956) (3,930,443) (2,322,930) (718,795) 679,629 1,704,322 2,728,987 3,753,653 4,778,296 5,802, (8,429,488) (6,821,975) (5,214,462) (3,606,948) (1,999,435) (399,436) 885,659 1,910,324 2,934,990 3,959,656 4,984, (9,713,568) (8,106,055) (6,498,542) (4,891,028) (3,283,515) (1,676,002) (80,159) 1,091,688 2,116,354 3,141,019 4,165, (10,997,587) (9,390,074) (7,782,561) (6,175,047) (4,567,534) (2,960,020) (1,352,568) 237,404 1,297,691 2,322,357 3,347, (12,281,606) (10,674,093) (9,066,579) (7,459,066) (5,851,553) (4,244,039) (2,636,587) (1,030,602) 479,028 1,503,694 2,528, Biodiesel ($/liter) BBI Biofuels Canada 9-6 3/25/2006

86 Table 9-5 Breakeven Analysis for the 38 MM L/Y Biodiesel Production Plant Based on Crude Corn Oil + FOG: Effect of FOG Price 38 MMLPY Plant FOG + CO RF&O Price and Biodiesel Price Sensitivity 10-Year Average Annual Pre-Tax Income Durham Biodiesel Feasibility Analysis Biodiesel ($/gallon) Feb 14/ ,439 1,158,421 2,183,087 3,207,729 4,232,367 5,257,005 6,281,670 7,306,308 8,330,946 9,355,584 10,380, (329,212) 913,092 1,937,757 2,962,409 3,987,047 5,011,685 6,036,349 7,060,987 8,085,625 9,110,263 10,134, (713,551) 667,762 1,692,428 2,717,088 3,741,726 4,766,364 5,791,029 6,815,667 7,840,305 8,864,943 9,889, (1,099,453) 422,433 1,447,098 2,471,764 3,496,405 4,521,043 5,545,708 6,570,346 7,594,984 8,619,622 9,644, (1,489,003) 106,487 1,201,769 2,226,435 3,251,085 4,275,723 5,300,387 6,325,025 7,349,663 8,374,301 9,398, (1,878,554) (277,408) 956,439 1,981,105 3,005,764 4,030,402 5,055,067 6,079,705 7,104,343 8,128,981 9,153, (2,268,104) (661,747) 711,110 1,735,776 2,760,442 3,785,081 4,809,746 5,834,384 6,859,022 7,883,660 8,908, (2,657,654) (1,050,141) 465,781 1,490,446 2,515,112 3,539,761 4,564,425 5,589,063 6,613,701 7,638,339 8,662, (3,047,204) (1,439,691) 158,735 1,245,117 2,269,783 3,294,440 4,319,105 5,343,743 6,368,381 7,393,019 8,417, (3,436,755) (1,829,241) (225,604) 999,787 2,024,453 3,049,119 4,073,784 5,098,422 6,123,060 7,147,698 8,172, (3,826,305) (2,218,792) (611,278) 754,458 1,779,124 2,803,790 3,828,463 4,853,101 5,877,739 6,902,377 7,927, (4,215,855) (2,608,342) (1,000,829) 509,129 1,533,794 2,558,460 3,583,143 4,607,781 5,632,419 6,657,057 7,681, RF&O ($/kg) (4,605,406) (2,997,892) (1,390,379) 210,539 1,288,465 2,313,131 3,337,822 4,362,460 5,387,098 6,411,736 7,436, (4,994,956) (3,387,443) (1,779,929) (173,801) 1,043,135 2,067,801 3,092,493 4,117,139 5,141,777 6,166,415 7,191, (5,384,506) (3,776,993) (2,169,479) (561,966) 797,806 1,822,472 2,847,164 3,871,819 4,896,457 5,921,095 6,945, (5,774,057) (4,166,543) (2,559,030) (951,516) 552,477 1,577,142 2,601,835 3,626,498 4,651,136 5,675,774 6,700, (6,163,607) (4,556,093) (2,948,580) (1,341,067) 262,343 1,331,813 2,356,505 3,381,171 4,405,815 5,430,454 6,455, (6,553,096) (4,945,582) (3,338,069) (1,730,556) (123,042) 1,086,457 2,111,149 3,135,815 4,160,468 5,185,106 6,209, Biodiesel ($/liter) BBI Biofuels Canada 9-7 3/25/2006

87 Table 9-6 Breakeven Analysis for the 38 MM L/Y Biodiesel Production Plant Based on Crude Corn Oil + FOG: Effect of Crude Corn Oil (CO) Price 38 MMLPY Plant FOG + CO RF&O Price and Biodiesel Price Sensitivity 10-Year Average Annual Pre-Tax Income Durham Biodiesel Feasibility Analysis Biodiesel ($/gallon) Feb 14/ ,755,578 3,780,216 4,804,854 5,829,492 6,854,130 7,878,768 8,903,432 9,928,070 10,952,708 11,977,347 13,001, ,182,527 3,207,165 4,231,803 5,256,441 6,281,079 7,305,717 8,330,381 9,355,020 10,379,658 11,404,296 12,428, ,609,499 2,634,140 3,658,778 4,683,416 5,708,054 6,732,693 7,757,357 8,781,995 9,806,633 10,831,271 11,855, ,036,427 2,061,089 3,085,728 4,110,366 5,135,004 6,159,642 7,184,306 8,208,944 9,233,582 10,258,220 11,282, ,381 1,488,047 2,512,703 3,537,341 4,561,979 5,586,617 6,611,282 7,635,920 8,660,558 9,685,196 10,709, (352,998) 914,975 1,939,641 2,964,290 3,988,928 5,013,566 6,038,231 7,062,869 8,087,507 9,112,145 10,136, (1,249,615) 341,929 1,366,595 2,391,261 3,415,904 4,440,542 5,465,206 6,489,844 7,514,482 8,539,121 9,563, (2,148,410) (541,577) 793,523 1,818,189 2,842,853 3,867,491 4,892,155 5,916,794 6,941,432 7,966,070 8,990, (3,047,204) (1,439,691) 158,735 1,245,117 2,269,783 3,294,440 4,319,105 5,343,743 6,368,381 7,393,019 8,417, (3,946,061) (2,338,547) (731,034) 672,071 1,696,737 2,721,403 3,746,080 4,770,718 5,795,356 6,819,994 7,844, (4,844,855) (3,237,342) (1,629,829) (29,843) 1,123,665 2,148,331 3,173,023 4,197,667 5,222,305 6,246,943 7,271, (5,743,711) (4,136,198) (2,528,685) (921,171) 550,620 1,575,285 2,599,978 3,624,643 4,649,281 5,673,919 6,698, Corn Oil ($/kg) (6,642,506) (5,034,993) (3,427,479) (1,819,966) (218,422) 1,002,213 2,026,906 3,051,571 4,076,230 5,100,868 6,125, (7,541,362) (5,933,849) (4,326,335) (2,718,822) (1,111,309) 429,168 1,453,860 2,478,526 3,503,192 4,527,844 5,552, (8,440,157) (6,832,643) (5,225,130) (3,617,617) (2,010,103) (407,000) 880,788 1,905,454 2,930,120 3,954,785 4,979, (9,339,013) (7,731,500) (6,123,986) (4,516,473) (2,908,959) (1,301,446) 290,239 1,332,408 2,357,074 3,381,740 4,406, (10,237,808) (8,630,294) (7,022,781) (5,415,268) (3,807,754) (2,200,241) (595,620) 759,336 1,784,002 2,808,668 3,833, (11,136,664) (9,529,150) (7,921,637) (6,314,124) (4,706,610) (3,099,097) (1,491,645) 104,651 1,210,957 2,235,622 3,260, Biodiesel ($/liter) BBI Biofuels Canada 9-8 3/25/2006

88 For the plant based on crude (non-food grade) corn oil alone (Table 9-4), the breakeven price for biodiesel is 46.5 cents/litre with crude corn oil at $0.324/kg. With biodiesel selling for 58.4 cents/litre, the crude corn-oil only plant will continue to be cashflow positive for a crude corn oil feedstock cost up to $0.448/kg. For the 38 MM L/y plant based on crude corn oil + FOG, two breakeven scenarios were examined (Tables 9-5 and 9-6). With crude corn oil at $0.324/kg and FOG priced at $0.47/kg, the breakeven price for biodiesel is 50.3 cents/litre. With biodiesel selling for 58.4 cents/litre and crude corn oil at $0.324/kg, the plant will continue to be cashflow positive for a FOG cost up to $0.75/kg. With FOG priced at $0.47/kg and biodiesel selling for 58.4 cents/litre, the plant will continue to be cashflow positive for a crude corn oil cost up to $0.445/kg A comparison of the results of the breakeven analyses shows that the facility based on crude corn oil alone is far more resilient and robust than the plant based on a combination of crude corn oil and FOG. The crude corn-oil based facility can tolerate a drop in biodiesel price of 11.9 cents/l, and still break even, whereas the plant based on 30% FOG and 70% crude corn oil stops flowing cash at a price of 50.3 cents/litre, a difference of 8.1 cents/litre from the base case. Similarly, the crude corn-oil based facility can tolerate an increase in feedstock price of ~38%, from $0.324/kg to $0.448/kg, whereas the plant based on FOG and crude corn oil can tolerate an increase in FOG cost of 60%, or an increase in crude corn oil price of 37%. The lesser sensitivity to the price of FOG is due to the fact that FOG only comprises 30% of the feedstock in this scenario. Based on the results of the ROI analysis and the breakeven analysis, the 38 MM L/y plant based on crude corn oil alone is the preferred option, while a facility based on mixed feedstocks, particularly crude corn oil and FOG, could be feasible at low feedstock prices and high biodiesel prices. Sensitivity Analysis Additional sensitivity analyses demonstrating the effect of key production parameters on the average annual pre-tax ROI were performed for the three biodiesel production configurations evaluated. As shown in the following figures, the project is most sensitive to the cost of the crude corn oil (Figure 9-2) and FOG (Figure 9-3) feedstocks and the selling prices of biodiesel and the glycerol co-product (Figures 9-4 and 9-5, respectively). The impact of the accuracy of the capital cost estimate on projected ROI is also shown in Figure 9-6. The cost of electricity has a relatively small impact the ROI varies by about 2 percentage points for an electricity price ranging from 0.04 up to 0.14 cents/kwh. Similarly, the cost of natural gas is not a significant factor the ROI changes by about 4.5 percentage points for a natural gas price ranging from $6.00 up to $14.00 per MM BTU. However, if refined glycerine were produced, a much greater sensitivity to natural gas prices would be observed. The cost of chemicals has a slightly greater impact a 30% change from the baseline can increase or decrease the ROI by about 7 percentage points. BBI Biofuels Canada 9-9 3/25/2006

89 Figure 9-5 Sensitivity to the Price of Corn (or other purchased) Oil 150.0% 100.0% Sensitivity to Purchased Oil Costs Pre-tax ROI 50.0% 0.0% -50.0% % % $0.110 $0.220 $0.330 $0.441 $0.551 $0.661 Cost of Purchased Oils ($/kg) 100% FOG 30:70 FOG + CO 100% CO Figure 9-6 Sensitivity to the Price of Recycled Oils and Greases Pre-Tax ROI 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% -20.0% -40.0% -60.0% -80.0% % Recycled Oil Price Sensitivity 100% FOG 30:70 FOG + CO 100% CO Fat & Oil Price ($/kg) BBI Biofuels Canada /25/2006

90 Figure 9-7 Project Sensitivity to the Selling Price of Biodiesel Pre-tax ROI 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% -20.0% -40.0% -60.0% -80.0% Biodiesel Price Sensitivity $0.449 $0.502 $0.555 $0.608 $0.660 $0.713 Biodiesel Price ($/litre) 100% FOG 30:70 FOG + CO 100% CO Figure 9-5 Project Sensitivity to the Selling Price of Glycerol Pre-tax ROI 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% Glycerol Price Sensitivity $220 $441 $661 $882 $1,102 $1,323 Glycerol Price ($/tonne) 100% FOG 30:70 FOG + CO 100% CO BBI Biofuels Canada /25/2006

91 Figure Project Sensitivity to the Capital Cost Estimate Pre-tax ROI 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% Sensitivity to Capital Cost Estimate 75% 100% 125% 150% 175% 200% Capital Cost Estimate Factor 100% FOG 30:70 FOG + CO 100% CO These figures demonstrate that the 38 MM L/y biodiesel production plant scenario based on crude corn oil alone is the most resilient opportunity, having a very low breakeven biodiesel selling price 46.5 cents/l). In addition, due to relatively small contribution of glycerol revenues, returns for the 38 MM L/y biodiesel production plant scenario based on crude corn oil alone are substantial enough to actually PAY to have the glycerol hauled away as a waste liability, and still have a positive, albeit smaller, cash flow position. In contrast, the sensitivity analyses show that the cases based in whole or in part on purchased fats oils and greases (FOG) are much less robust, and in the case of 100% FOG, is simply not competitive under almost all circumstances. An acceptable ROI could be achieved with 30% FOG and 70% crude corn oil under certain circumstances if the price of FOG is below C$430/tonne, if the price of biodiesel is greater than 60 cents per liter, or if the capital cost is at least 15% less than the base case capital cost projected for a conventional biodiesel facility. The latter could be achieved by adopting the BIOX technology. Financial returns are relatively insensitive to land and site development costs. The base financial analysis was developed assuming a land purchase price of $80,000 per acre, consistent with expectations for the Clarington Energy Park site. Land costs for a rural site are expected to be much less. However, reducing the land purchase price to $20,000 per acre only improves the ROI by 1 percentage point. Similarly, other urban sites (e.g., CN) may have a higher land acquisition cost, but increasing the land purchase price to $200,000 per acre only reduces the projected ROI by 2.5 percentage points. Thus, while one obviously aims to secure the best possible terms when negotiating the purchase of a BBI Biofuels Canada /25/2006

92 site, land purchase and site development costs should not be the overriding factor that governs site selection. Instead, infrastructure will be important parameters that guide site selection, including access to rail, highways, and utilities. Comments on Profitability and Economic Forecasts The word profitability is a general term for the measure of the amount of profit that can be obtained from a given situation. Total profit alone cannot be used as the deciding factor in determining if an investment should be made, however. Many factors must be considered when deciding if a return is acceptable, and it is not possible to give one figure that will apply for all investment situations. There are many methods for measuring or estimating profitability: return on investment, internal rate of return, net present value and payback period are just a few. In this report we have used return on investment, ROI, as the primary measure of the estimated project profitability. Return on investment does not take into account the time value of money. The time value of money is the concept that a dollar today is worth more than a dollar a year from now due to inflation. When dealing with common industrial operations, profits cannot be predicted with absolute accuracy. Risk factors must be given careful consideration and the degree of uncertainty in estimated returns on investments plays an important role in determining what returns are acceptable (higher risk should equal higher returns). Because of the inherent risk, a 15% return before income taxes is usually the minimum acceptable return for any type of business proposition, even if the economics appear to be completely sound and reliable. Some companies require a 30% pretax return before they will consider investing capital in a project. A 25% rate of return is considered the minimal acceptable return for a biofuels project by many investors. The economic forecasts and projected profitability presented in this report are estimates only. When dealing with commodities such as grains and transportation fuels (the two main drivers in the project s profitability), one can only make an educated guess as to what the future may hold. Additional project risk factors are discussed in the Summary and Recommendations section of this report. That said, BBI has used its experience and expertise to provide our best estimate as to the project s future profitability. The sensitivity studies provided in this report show the possible wide swings in the project s profitability when the economic forecast model input assumptions change. The impact of changes in feedstock costs, product revenues, energy costs and other project variables should be well understood by the project sponsor and investors. BBI Biofuels Canada /25/2006

93 X. SUMMARY AND RECOMMENDATIONS Summary Discussion Based on extensive research, financial analysis and economic projections, BBI recommends the further development of an integrated oil extraction and biodiesel production plant in the Regional Municipality of Durham. Based on the projected feedstock resource base and the projected product markets, the Durham region could potentially support a biodiesel production facility that produces 38 million litres per year of biodiesel. Such a plant is likely to be based on a mix of feedstocks, with crude (non-food grade) corn oil extracted from dry grind ethanol plants making up the lion s share of the feedstock supply. For a facility based on crude corn oil alone, with crude corn oil prices at $325/tonne, projected annual returns are near 40%, indicating a significant business opportunity. A plant based entirely (or largely) on locally available soy oil is not feasible, and not recommended. Regional availability of soybeans is insufficient to support a large scale plant, and the cost of soybeans is prohibitive. If desired, soy oil could be included as a small part of the feedstock mix in a 38 MM L/y facility, but their higher cost would adversely impact the ROI. Based on projections of locally available recycled fats, oils and greases (FOG, or high FFA feedstocks), there is only sufficient supply to support about 15 to 20 MM L/y of biodiesel production. On its own, this scale is too small to be economically viable. To improve the economy of scale, FOG could be combined with other feestocks, or FOG could be imported from outside the region, e.g., the U.S. However, even a 38 MM L/y plant based primarily on FOG would only be economically viable at high biodiesel prices (> 66 cents/l), and/or low FOG prices (< $400/tonne). While the former is possible, the latter is unlikely, except for relatively short periods of time. With FOG priced at $470/tonne, and corn oil projected to be sold at $325/tonne, the ROI for a 38 MM L/y facility is improved substantially as the percentage of corn oil in the feedstock increases. Thus, in choosing to build a 38 MM L/y facility, the objective should be to obtain a secure the largest possible supply of crude corn oil. Even if a slight premium has to be paid over the projected price of $325/tonne to secure sufficient supply, this will still be more economical than FOG priced at $470/tonne. Recommendations Based on the results of the feasibility study, BBI recommends that Durham proceed with development of a 38 MM L/y biodiesel production plant based primarily or entirely on crude (non-food grade) corn oils. Further, if Durham can identify and obtain a firm supply commitment for locally-available high FFA feedstocks at a low cost ($400/tonne or less), BBI recommends that Durham take advantage of the flexible front end into the BBI Biofuels Canada /25/2006

94 plant design, to process feedstocks with a high free fatty acid content, and allow for some hedging of feedstock costs. The following recommendations are made regarding the next steps in project development. BBI is ready and available to assist Durham through the project development phase, which would begin by addressing the following recommendations. 1) Durham should seek to generate seed financing to take the project to the next level of development: the development of the business plan. 2) Durham should have the preferred site evaluated by a process design company from an engineering and construction perspective. There should be no cost for this second opinion. 3) Durham should obtain the expertise of a permitting specialist early on, to further define permit requirements and the length of time required to obtain the required permits. 4) Durham should seek to identify and secure firm supply commitments for at least 20,000 tonnes per year of regionally-available crude corn oil, to ensure viable returns from the 38 MM L/y production scenario. A greater proportion of corn oil as feedstock improves the ROI, so it is advantageous to maximize the supply of corn oil, unless its price approaches that of recycled FOG. 5) Durham should seek to identify and secure firm supply commitments for 10,000 to 20,000 tonnes per year of locally-available high FFA feedstocks. Such feedstocks could permit some hedging of feedstock price, but are only beneficial if the price of these recycled fat resources is less than $400/tonne. 6) Durham should assess its ability to attract the equity component of the project cost. 7) Creating the business plan and driving the project forward will require certain activities that Durham should begin to consider to confirm and improve the opportunity: Complete a business plan Hire a project coordinator or general manager Verify the ability to obtain contingent feedstock supplier contracts Negotiate the required contingent marketing relationships for biodiesel and glycerol Negotiate lower natural gas and electricity rates than those used in the projections Begin to negotiate for candidate sites obtain a commitment for the preferred project site Verify the feasibility results for the actual site and actual plant configuration, should it differ significantly from the proposed model facility Ascertain the acceptance of the project by the local community BBI Biofuels Canada /25/2006

95 Identify and address community issues for the recommended site Select a biodiesel process design company and begin preliminary engineering work Complete a prospectus for a private placement or stock offering; begin discussions with lenders Apply for/obtain required permits Secure equity and debt financing Begin construction BBI BIOFUELS CANADA thanks the Regional Municipality of Durham for selecting BBI BIOFUELS CANADA to perform this feasibility study on establishing an integrated soybean extraction and biodiesel production facility in the Region of Durham. Should the decision be made to move forward with this project, BBI would welcome the opportunity to work with Durham to make this project a reality. APPENDIX I: SITE EVALUATION MATRICES BBI Biofuels Canada /25/2006

96 LOCATION: Clarington Energy Park RATING: 115 to 150 Excellent; 90 to 114 Good; Less than 90 Marginal to Poor Plant Criteria Available Yes/No 30 KM 50 KM 70 KM 90 KM 120 KM Potential Plant Site Feedstock Proximity Oilseed crops FOG Fresh Oils Prevailing Wind Direction Rail Existing Rail Siding Main line Rail Short line Rail Access to two Railroads Roads/Highways Class A Road Access Water/Dock Dock Access for shipment by water Electricity Phase Power Steam Host Available 8 Natural Gas (Existing) inch line inch line inch line Water Well Water City Water Lake/River 4 Wastewater Treatment City with sufficient capacity On Site Ability to land apply Coproduct Market Proximity Labor Availability Biodiesel Market Proximity Fire Protection Local Infrastructure Within 20 km Land Feedstock Handling Facilities Electrical Maintenance Machine Shop/Welding Pipe Fitting/Plumbing Hospital Airport Schools Misc Total Points 120 BBI Biofuels Canada A1-2 3/25/2006

97 LOCATION: CN Oshawa RATING: 115 to 150 Excellent; 90 to 114 Good; Less than 90 Marginal to Poor Plant Criteria Available Yes/No 30 KM 50 KM 70 KM 90 KM 120 KM Potential Plant Site Feedstock Proximity Oilseed crops FOG Fresh Oils Prevailing Wind Direction Rail Existing Rail Siding Main line Rail Short line Rail Access to two Railroads Roads/Highways Class A Road Access Water/Dock Dock Access for shipment by water Electricity Phase Power Steam Host Available 8 Natural Gas (Existing) inch line inch line inch line Water Well Water City Water Lake/River 4 Wastewater Treatment City with sufficient capacity On Site Ability to land apply Coproduct Market Proximity Labor Availability Biodiesel Market Proximity Fire Protection Local Infrastructure Within 20 km Land Feedstock Handling Facilities Electrical Maintenance Machine Shop/Welding Pipe Fitting/Plumbing Hospital Airport Schools Misc Total Points 123 BBI Biofuels Canada A1-3 3/25/2006

98 LOCATION: LaFarge RATING: 115 to 150 Excellent; 90 to 114 Good; Less than 90 Marginal to Poor Plant Criteria Available Yes/No 30 KM 50 KM 70 KM 90 KM 120 KM Potential Plant Site Feedstock Proximity Oilseed crops FOG Fresh Oils Prevailing Wind Direction Rail Existing Rail Siding Main line Rail Short line Rail Access to two Railroads Roads/Highways Class A Road Access Water/Dock Dock Access for shipment by water Electricity Phase Power Steam Host Available 8 Natural Gas (Existing) inch line inch line inch line Water Well Water City Water Lake/River 4 Wastewater Treatment City with sufficient capacity On Site Ability to land apply Coproduct Market Proximity Labor Availability Biodiesel Market Proximity Fire Protection Local Infrastructure Within 20 km Land Feedstock Handling Facilities Electrical Maintenance Machine Shop/Welding Pipe Fitting/Plumbing Hospital Airport Schools Misc Total Points 119 BBI Biofuels Canada A1-4 3/25/2006

99 LOCATION: Port Oshawa RATING: 115 to 150 Excellent; 90 to 114 Good; Less than 90 Marginal to Poor Plant Criteria Available Yes/No 30 KM 50 KM 70 KM 90 KM 120 KM Potential Plant Site Feedstock Proximity Oilseed crops FOG Fresh Oils Prevailing Wind Direction Rail Existing Rail Siding Main line Rail Short line Rail Access to two Railroads Roads/Highways Class A Road Access Water/Dock Dock Access for shipment by water Electricity Phase Power Steam Host Available 8 Natural Gas (Existing) inch line inch line inch line Water Well Water City Water Lake/River 4 4 Wastewater Treatment City with sufficient capacity On Site Ability to land apply Coproduct Market Proximity Labor Availability Biodiesel Market Proximity Fire Protection Local Infrastructure Within 20 km Land Feedstock Handling Facilities Electrical Maintenance Machine Shop/Welding Pipe Fitting/Plumbing Hospital Airport Schools Misc Total Points 119 BBI Biofuels Canada A1-5 3/25/2006

100 LOCATION: St. Lawrence Grains RATING: 115 to 150 Excellent; 90 to 114 Good; Less than 90 Marginal to Poor Plant Criteria Available Yes/No 30 KM 50 KM 70 KM 90 KM 120 KM Potential Plant Site Feedstock Proximity Oilseed crops FOG Fresh Oils Prevailing Wind Direction Rail Existing Rail Siding Main line Rail Short line Rail Access to two Railroads Roads/Highways Class A Road Access Water/Dock Dock Access for shipment by water Electricity Phase Power Steam Host Available 8 Natural Gas (Existing) inch line inch line inch line Water Well Water City Water Lake/River 4 Wastewater Treatment City with sufficient capacity On Site Ability to land apply Coproduct Market Proximity Labor Availability Biodiesel Market Proximity Fire Protection Local Infrastructure Within 20 km Land Feedstock Handling Facilities Electrical Maintenance Machine Shop/Welding Pipe Fitting/Plumbing Hospital Airport Schools Misc Total Points 112 BBI Biofuels Canada A1-6 3/25/2006

101 LOCATION: St. Mary s Cement RATING: 115 to 150 Excellent; 90 to 114 Good; Less than 90 Marginal to Poor Plant Criteria Available Yes/No 30 KM 50 KM 70 KM 90 KM 120 KM Potential Plant Site Feedstock Proximity Oilseed crops FOG Fresh Oils Prevailing Wind Direction Rail Existing Rail Siding Main line Rail Short line Rail Access to two Railroads Roads/Highways Class A Road Access Water/Dock Dock Access for shipment by water Electricity Phase Power Steam Host Available 8 8 Natural Gas (Existing) inch line inch line inch line Water Well Water City Water Lake/River 4 4 Wastewater Treatment City with sufficient capacity On Site Ability to land apply Coproduct Market Proximity Labor Availability Biodiesel Market Proximity Fire Protection Local Infrastructure Within 20 km Land FeedstockHandling Facilities Electrical Maintenance Machine Shop/Welding Pipe Fitting/Plumbing Hospital Airport Schools Misc Total Points 123 BBI Biofuels Canada A1-7 3/25/2006

102 LOCATION: Beaverton RATING: 115 to 150 Excellent; 90 to 114 Good; Less than 90 Marginal to Poor Plant Criteria Available Yes/No 30 KM 50 KM 70 KM 90 KM 120 KM Potential Plant Site Feedstock Proximity Oilseed crops FOG Fresh Oils Prevailing Wind Direction Rail Existing Rail Siding Main line Rail Short line Rail Access to two Railroads Roads/Highways Class A Road Access Water/Dock Dock Access for shipment by water Electricity Phase Power Steam Host Available 8 Natural Gas (Existing) inch line inch line inch line Water Well Water City Water Lake/River 4 Wastewater Treatment City with sufficient capacity On Site Ability to land apply Coproduct Market Proximity Labor Availability Biodiesel Market Proximity Fire Protection Local Infrastructure Within 20 km Land Feedstock Handling Facilities Electrical Maintenance Machine Shop/Welding Pipe Fitting/Plumbing Hospital Airport Schools Misc Total Points 88 BBI Biofuels Canada A1-8 3/25/2006

103 APPENDIX II: SATELLITE IMAGES AND PHOTOS OF PROPOSED SITES BBI Biofuels Canada A2-1 3/25/2006

104 Overhead View and Site Plan of Clarington Energy Park and Courtice Water Treatment Facility BBI Biofuels Canada A2-2 3/25/2006

105 Clarington Energy Park, Facing South Towards Lake Ontario BBI Biofuels Canada A2-3 3/25/2006

106 Satellite view of CN Site BBI Biofuels Canada A2-4 3/25/2006

107 CN Site BBI Biofuels Canada A2-5 3/25/2006

108 Satellite view of LaFarge Site BBI Biofuels Canada A2-6 3/25/2006

109 LaFarge Site, looking East BBI Biofuels Canada A2-7 3/25/2006

110 Satellite View of Port Oshawa Site BBI Biofuels Canada A2-8 3/25/2006

111 Satellite Photo of St. Lawrence Grains Site BBI Biofuels Canada A2-9 3/25/2006

112 St. Mary s Cement Site BBI Biofuels Canada A2-10 3/25/2006