Selling coals to Newcastle: How the Europeans conquered the US diesel market

Sales people the world over have their own idioms, in-jokes or phrases to describe that ultimate sale. In Victorian Britain, so the story goes, a US businessman once succeeded in selling coal to Newcastle, one of the UK’s more mineral-rich regions. The incident has passed into the language as the definition of just such a situation.

Flash forward to the 21st century, and a press release from Finland’s oil company Neste, published Thursday, seems to provide the modern equivalent of achieving that impossible sale.

Neste has sold renewable diesel to the United States.

The first batch (the word batch is used in the press release instead of any confirmed volume) was produced from waste fats at the company’s Porvoo refinery just outside Helsinki, and has made the long journey from there to the US, the company confirmed.

In so doing, the company gains access to what it calls the “major market for premium-quality fuels” and says, perhaps unsurprisingly, “we are very pleased to see that legislation on renewable fuel and our ability to meet the import regulations for these types of fuels are progressing.”

And well they might be. Neste has been one of the champions of biofuels, pumping billions of euros into renewable production facilities in Porvoo, Rotterdam and further afield in Singapore, with the specific aim of targeting the burgeoning bio markets of North America and Europe. And in that goal, legislation has been vital.

The glory of selling diesel of any shade to the US is that the country itself isn’t short of the middle distillate. Thanks to investment in refining capacity, undertaken with one eye on the growing European thirst for diesel, and a diesel car pool that accounts for a minuscule proportion of the total more than 250 million US car fleet in 2010, the country is awash with diesel.

Diesel cars, starting from a lowly 0.1% of cars in 1998, have fought their way to take some 3% of the new car sales in the US in 2012. Platts sister company J.D. Power has forecast a share of 3.5% by 2015.

That still pales in significance when compared to the vast inroads that hybrid cars are expected to make though, which could see hybrids account for almost one in ten of new cars in the US by 2015, also according to JD Power.

It is that sort of combination, monster refining capacity and limited domestic demand, that drove the US to register energy as its biggest export through 2011. And yet still middle distillate inventories stand at eye popping proportions: 129 million barrels currently held in tank,  according to recent EIA estimates. And that’s relatively low by recent standards that have seen inventories of diesel swell to nearly 150 million barrels at the same point last year.

Against that distillate tsunami, the arrival of estimated 10,000 to 20,000 mt of European biodiesel is small change, but stands as another example of the absurdities that government-backed legislative requirements can throw up in oil markets.

The impact of the mandated presence of bio requirements in modern road fuels is already well documented. They range from the headaches facing car manufacturers, who often go unconsulted by politicians and are asked to design cars that can accommodate ephemeral bio requirements that could change on a whim or a vote, to the complex accreditation system underpinned by the Renewable Fuel Standard that rewards companies for importing a grade they already have in surplus.

Key to the whole process is the securement of Renewable Information Numbers, which accompany the biofuel throughout its life, up to the point of blending, and the possession of which allows companies holding a Renewable Volume Obligation to meet their mandate. Those who exceed their mandate are able to trade their surplus RINs with those who have fallen short of their obligation, thus giving parties the option to go fully bio, or buy RINs on the market, according to whichever is cheaper.

Neste, among others, has put its money where the politician’s mouths are in investing in the capacity to produce the flows. And the ambitious requirements of the US Renewable Fuel Standard means it could very well stand the company in good stead in the long run. By 2022, under current legislation, 36 billion gallons of renewable fuel should be employed in the US road fuel pool, or some 86 million barrels for the year.

And that could amount to an awful lot of coal to Newcastle.

Platts