You rapeseed what you sow, or What’s with biodiesel in Ukraine?

Ivan Kilhan, a farmer from the Lviv region, in western Ukraine, is perhaps the only biodiesel ‘tycoon’ in the country.

His diesel plant produces about 20 tonnes of biofuel per day from vegetable oil—mostly rapeseed oil.

"Every day, a large 27-cubic metre diesel tanker is ready for shipment," says Mr Kilhan.

He is wary of speaking about how much he earns, but a simple calculation shows that this season’s profitability of biodiesel production is very pleasing to the Lviv farmer.

The economics of an optimist

Biodiesel is a fuel for vehicles with diesel engines, made from vegetable oils or animal fats. It is not to be confused with bioethanol, which is a fuel for vehicles with petrol engines, made from ethyl alcohol.

The cost of biodiesel production, about UAH 20 (USD 0.55) per litre, is almost three times lower than retail prices at petrol stations. The reason is the reduction in the cost of raw materials this autumn. Rapeseed oil prices have halved compared to last year, with the average price of UAH 18 thousand per tonne. Sunflower oil has also fallen in price, to UAH 25 thousand per tonne.

Svyatoslav Polovkovych, a professor of chemistry at Lviv Polytechnic University, says a tonne of biodiesel is made from a tonne of vegetable oil plus another 100 litres of bioethanol and 10 kilograms of catalyst. And, by the way, bioethanol has also fallen in price this year.  

"If the yield of biodiesel is lower with such input proportions, then something in the chemical reaction has gone wrong. So, there must be questions about the quality of raw materials or technology," says Mr Polovkovych.

Despite the unique market conditions, there is currently only one biodiesel plant officially operating in Ukraine. Its owner, Ivan Kilhan, is therefore a biodiesel tycoon.

The design capacity of his plant is 25,000 tonnes of diesel. In fact, if the current processing rates are maintained, Mr Kilhan’s production will provide up to 10,000 tonnes of fuel per year—that is, 40 percent of the possible output.

Why is the production not at full capacity? Mr Kilhan says there is a problem with sales, which require long-term, fixed-price contracts. And last year, the prices for raw materials were so high that the cost of biodiesel was only 10-15 percent lower than the retail price of fuel.

The cost of biodiesel must also be added to the mandatory excise duty of EUR 106 per 1,000 litres, provided for in the Ukrainian tax code. The only profit from biodiesel production would therefore be only if it were used for personal needs.

Unlike bioethanol, which is limited to a 10-percent blend with petrol, biodiesel can be used purely without being mixed with ‘oil’ diesel fuel—which, however, is only appropriate for new cars.

If an engine and fuel system have been working on ‘traditional’ fuel for some time, the recommended share of biodiesel in the mixture is 50 percent. What is the difference in the economics of producing two types of biofuels?     

Different bio

The productivity of a hectare of rapeseed field for biodiesel is almost three times less than that of corn for bioethanol.

This year, the rapeseed yield reached four tonnes per hectare. The usual oil yield from rapeseed is 35 percent. In this case, a hectare of the field provides 1400 litres of diesel fuel. A hectare of corn produces 3800 litres of bioethanol.

But there are several advantages that keep the prospects for biodiesel afloat.

Firstly, one's own raw material base always ensures profitability of biodiesel production. For instance, the cost of growing rapeseed is UAH 25 to 30,000 per hectare. With the current yield, a hectare produces 1400 litres of biodiesel. The result: the cost of green fuel at current market prices is UAH 20 to 22 per litre.

For sunflower, the figure is slightly higher, but does not exceed UAH 30 per litre. Moreover, if fuel prices fall and oil prices rise, as was the case last year, it will be more profitable to sell them without processing them into biofuels.

Secondly, export prospects. Taras Mykolaienko, executive director of the Ukrbioethanol Association, says that biodiesel prices are always higher in Europe due to mandatory quotas and subsidies for this fuel, which support its presence on the market.

"There is a constant demand for biodiesel in European countries," says Taras Mykolayenko.

Exports of biodiesel would be very useful now. This year, Ukraine will likely a record rapeseed harvest: According to APK-Inform, a Ukrainian news agency focusing on agriculture, it will increase by 17 percent year-on-year, to 4.2 million tonnes.

However, there are sales issues: Rapeseed is one of the agricultural commodities banned from import by neighbouring European countries.

Given that, biodiesel production is beneficial for Ukraine. The country retains the added value created during the processing of raw materials; in addition, logistical problems are simplified, since one tonne of biodiesel is, figuratively speaking, a ‘concentrate’ of three tonnes of rapeseed.

"It is indeed important for us to sell biodiesel for export. Prices are higher and more stable there. But so far it is not possible," says Ivan Kilhan. "The reason is that no government agency in Ukraine issues a certificate of conformity for biofuels. Therefore, I cannot fulfil the contract with the Czechs."

"So, our production is not at full capacity. At the same time, wagons with rapeseed are being shipped abroad and processed there."

Thirdly, biodiesel production produces derivatives that cover part of the costs of its production.

"With an integrated approach, the use of these derivatives compensates for the costs of additional production components such as alcohols and catalysts," says Sviatoslav Polovkovych from Lviv Polytechnic University. "There are farms in Ukraine that use crude glycerin for biomethane production."

And fourthly, biodiesel producers pay a small fee to enter the market and can use it for their own needs without looking for buyers.

There are, however, some pitfalls that, if ignored, could lead to issues with law enforcement.

Who is on the market

According to the UABIO association, there are 14 biodiesel plants in Ukraine, almost all of which are idle. While their total capacity is 300,000 tonnes per year, in fact, no more than 11,000 tonnes are used.

These plants are designed for a streaming method of operation, using cavitation reactors, ensuring high processing depth and efficiency. The downside is that such production requires a stable, daily load.

If such a plant has stable sales channels and is also ‘multi-fuel’, that is, produces both biodiesel and bioethanol, it is like an ‘Eldorado’. No wonder that some petrol station chains are already designing similar facilities.

Vasyl Danyliak, CEO of OKKO Group, does not doubt that once Ukraine joins the European Union, the addition of bioethanol to petrol will become mandatory. Similarly, Ukraine will inevitably use biodiesel.

Additional investments are needed to equip technological processes for adding bioethanol to petrol at petrol stations or oil depots, and to build additional storage facilities for bioethanol additives and the so-called Eurobob, or petrol ready for ethanol addition, Mr Danyliak notes.

Also, it is important to create effective quality control systems to prevent counterfeit petrol from flooding the market under the guise of bioethanol.

"Our company has already thought this through. Together with our international partners, we are already designing a bioethanol plant, which we plan to start building next spring," CEO of OKKO says.

"Since the cycle of such construction is approximately two years, we plan to put the plant into operation in 2026. With the same partners, we are still only considering the possibility of building a biodiesel plant."

Mr Danyliak adds that the company’s specialists have already got acquainted with the experience of such plants in neighbouring countries. 

"We are talking about, for example, Polish companies Komagra, Bio-Agra, or Bulgarian Bulmarket, which is the largest producer of biodiesel in the European Union. They are successfully operating. So we are also moving in this direction," he says.

Another option is small production facilities that use the barrel method.

"They can be operated periodically, launched for a profitable batch of raw materials or for the own needs of a particular agricultural enterprise," says Sviatoslav Polovkovych.

Yet another segment is so-called ‘barrel’ biofuel production, of which about 50 companies are officially registered, with a total capacity of up to 25,000 tonnes of biodiesel per year, according to UABIO.

Of course, there is also a ‘grey’ segment of biodiesel production. There are no official figures, but a source in the market tells LIGA.net there may be "up to a hundred" such producers.

Some of them recycle oil that was used in cafes and restaurants. Others cooperate with large oil extraction plants.

"They always have waste, out of condition. But this is suitable for processing into biodiesel," says Ivan Kilhan.

There is a downside to using low-quality raw materials as well. "Low-quality raw materials require more expensive catalysts. Therefore, you need a clear calculation to balance the costs," Mr Polovkovych

Entry price and risks

Mr Kilhan’s plant, which has a powerful Italian line, required an investment of USD 450,000. In turn, a 300-litre-per-day barrel biodiesel production facility also needs UAH 450,000, enough to ensure the fuel autonomy of an average farm.

The problem is that such ‘craft’ industries are subject to pressure from tax authorities. Usually, such producers do not pay excise duty because the fuel is not produced for sale. However, there have been cases where the sale of even small volumes of biodiesel has caused problems with the state tax service.    

The fourth advantage

Finally, the prospects of biodiesel are linked to the fact that it is a fuel for diesel engines, for which bioethanol cannot be used. Those two types of biofuels are not competitors and have different markets.

The potential sales of biodiesel are several times higher than bioethanol. Firstly, sales of diesel fuel are three times higher than petrol. Secondly, the share of biodiesel in a mixture with oil fuel can easily reach 50 percent; for bioethanol, this figure is 5 to 10 percent.

So, if the excise tax on biodiesel is lifted, in the absence of abnormally high rapeseed prices, similar to last year's, this will be enough to stimulate its production in Ukraine.

If current rapeseed production continues, its capacity could reach up to 1.4 million tonnes of environmentally friendly diesel. This is not only a productive alternative to imported diesel, but also a way to strengthen energy security, create additional refining capacity, and move away from raw material exports.