Diesel Powered Pellets

New Zealand’s biomass strategy depends on diesel.

“Without diesel fuel — the lifeblood of transportation, agriculture, mining and construction — civilisation would grind to a halt.” – The Honest Sorcerer

There is a particular kind of policy irony that only reveals itself slowly, over time, as the real world asserts itself against a well-intentioned plan.

New Zealand is currently living through one of those moments.

As gas declines and coal faces political pressure, industry is increasingly being directed toward biomass, wood pellets in particular, as the transition fuel of choice. Fonterra, New Zealand’s largest company and one of the world’s largest dairy co-operatives, has committed $790 million towards a 50% reduction in emissions from its manufacturing sites by 2037, with wood pellets forming a key component of this strategy.

It is converting or has committed to converting five boiler units across the Te Awamutu, Hautapu and Clandeboye sites to wood pellets and has fuel-switched a sixth unit at Brightwater.

The problem, however, is that wood pellets depend on forestry. And forestry runs on diesel.

This is not a criticism of biomass. In truth, almost every component of the modern economy depends on diesel in some way. The difference is that biomass is often framed as a replacement for fossil fuels. That framing can obscure the extent to which the biomass supply chain itself remains dependent on them.

Diesel is not just another fuel. It is the fuel that powers much of the physical economy. It harvests forests, mines minerals, plants crops, moves freight and builds infrastructure. Electricity powers our devices. Diesel powers much of the machinery that sustains modern civilisation.

At a time when diesel is sitting above NZD $3 per litre and the structural forces behind that price show no sign of reversing, the supply chain underpinning one of New Zealand’s most high-profile industrial decarbonisation programmes deserves closer scrutiny.

Fonterra’s Waitoa biomass boiler - Source Aurecon

The Biomass Bet

Fonterra’s ambition to exit coal by 2037 is genuine and the investment is real. Since 2024, the co-operative has completed a series of coal-to-biomass conversions across its North Island sites. The Waitoa wood biomass boiler came online in October 2024, halving coal use at that site. The Hautapu conversion followed in August 2024. By November 2024, Fonterra had turned off the last coal boiler in its North Island operations, a genuine milestone that many other industries hope to emulate.

The South Island is next. The centrepiece is Clandeboye in South Canterbury, where a $64 million investment is converting two coal boilers to wood pellets. The project attracted co-funding from the since-disestablished GIDI fund (Government Investment in Decarbonising Industry). It is touted as a model for large-scale biomass conversion.

The strategy also includes electrification efforts with electrode boilers at selected sites, which provides some diversification. Wood pellets, however, remain a key feature of Fonterra’s plans.

Things have come a long way - hand milking cows in a walk through shed NZ - Source Te Ara Emcyclopedia of New Zealand.

Where Pellets Come From

Wood pellets in New Zealand are primarily manufactured from sawmill residues, the sawdust, shavings and offcuts produced when forestry logs are milled into timber. Some production also draws directly on low-grade logs that are unsuitable for structural timber.

Although scattered all over the country, New Zealand’s commercial forests are predominantly radiata pine in the central North Island and the Tasman region in the South Island. Combined they are estimated to generate around six million tonnes of logging residues annually. In a functioning, high-volume forestry system, this represents a substantial feedstock supply.

The Bioenergy Association is optimistic about wood pellets. They argue that the constraint is not feedstock availability, but investment in manufacturing infrastructure.

This optimism rests on an assumption that the forestry system continues to function at or near full capacity. It is an assumption worth testing.

Natures Flame white pellet production facility - Source Natures Flame

The Diesel Dependency

Forestry is one of New Zealand’s most diesel-intensive industries.

Every stage of the forestry supply chain is deeply dependent on diesel. Harvesters, skidders, excavators and loaders all run on it. Log trucks burn it on roads between forests and mills. Stacker cranes at log yards and port equipment consume it loading ships.

A Future Forests Research paper reviewing fuel consumption across NZ harvesting systems put the figure between 1.96 and 3.01 litres per cubic metre of harvested wood, varying by system. Cable harvesting in steep terrain sits at the top of that range. Much of New Zealand’s forestry is found in steep terrain not conducive to other forms of agriculture. Given that pine is about 0.5 tonne per cubic metre, this equates to around four to six litres of diesel per tonne of wood harvested. Road transport adds roughly two litres per hundred kilometres. For forests far from the mill or port that transport leg is substantial.

At historic diesel prices these costs were manageable. At upwards of $3 per litre they are much less likely to be manageable, particularly in steep blocks far from the mill.

There is a fair bit of diesel in that thing.

The Arithmetic Is Brutal

A March 2026 market update by Forest360, quoting PF Olsen’s Scott Downs lays it out clearly.

A $1 per litre increase in diesel takes approximately $6 per tonne off a forest owner’s return. For operators located 200 kilometres or more from markets, the figure rises to $8 per tonne.

These are not small numbers in an industry where margins are thin and log prices are simultaneously under pressure from soft Chinese demand.

The effects are already visible. RNZ reported that logging operations have reduced to 80 percent of capacity across much of the sector, with some smaller operators suspending harvesting entirely. Port log volumes are down approximately 30 percent year-on-year in some regions. One industry insider described the situation to 1News as being on course for a strong year until the Middle East situation “turned everything on its head.”

In my Strait of Hormuz update in March, I wrote about the immediate implications of Middle East crude supply disruption for New Zealand. I made the point that diesel is likely to be more affected than petrol in any refining disruption because the middle distillates of diesel and jet fuel depend heavily on the type of crude being processed. Specifically, Gulf medium sour crude that produces better yields of diesel and jet fuel in Asia’s refineries.

This is why the diesel crack spread, the price of a barrel of diesel relative to crude oil, has remained significantly higher than prior to the conflict.

The implication is straightforward. High diesel prices slow forestry harvesting. When harvesting slows, so does the supply of residues and feedstock available for pellet production.

Crude fractional distillation mapped to the type of crude produced in specific regions - Source Art Berman

Why This Is Structural, Not Just A Supply Shock

Many readers will look at this and assume the current situation is temporary and that prices will eventually return to pre-conflict levels.

Perhaps they will.

The more important question is whether the underlying conditions that created the problem are temporary or structural.

I am sceptical that they are temporary, and I think you should be too.

There is a structural issue with diesel supply that predates the current conflict by many years.

The boom in US shale oil production from the Permian Basin, the Bakken and the Eagle Ford has shifted global crude supply heavily toward light tight oil, with API gravity typically above 40 degrees. This crude is naphtha-rich and well suited to petrol production. It is less well suited to producing middle distillates such as diesel and jet fuel than many of the medium and heavy crude oils upon which the refining system was historically optimised.

Diesel and jet fuel yields are generally lower from light tight oil than from the medium to heavy crudes found in the Persian Gulf, Russian Urals, Canadian oil sands and Venezuelan Orinoco that have historically provided higher diesel yields per barrel.

The refineries optimised to maximise middle distillate output are complex units with hydrocracking and vacuum distillation. They were specifically designed around those medium to heavy crudes. They cannot simply substitute shale oil and achieve identical distillate yields.

The result is a structural mismatch that has been building for at least a decade. Around the world, the fastest-growing source of crude supply is less well suited to producing the diesel that underpins much of the physical economy.

Meanwhile, many of the crude sources best suited to diesel production face constraints of their own. Russian Urals supply has been disrupted by sanctions following the Ukraine war. Venezuelan production remains a fraction of historical levels. Canadian oil sands expansion has faced persistent regulatory and political headwinds.

On the demand side, the dynamics also favour tightening. Electric vehicles are displacing petrol demand much faster than battery-electric trucks are displacing diesel. Agricultural mechanisation in emerging economies continues to grow diesel demand. Diesel demand tends to fall only during periods of economic contraction.

To my point, the IEA’s April 2026 Oil Market Report revised global demand forecasts downward slightly due to trade slowdown concerns. However, the structural supply constraints do not fundamentally change with a modest revision to demand projections.

Vietnam To The Rescue

Here is where the story returns to Fonterra’s decarbonisation efforts.

New Zealand does not yet have the capacity to supply sufficient volumes of wood pellets to meet Fonterra’s needs. As a result, Fonterra is currently importing wood pellets from Vietnam to supply boilers at Clandeboye.

In August 2025 Fonterra confirmed that it was using an overseas supplier until domestic producers could meet its required demand. It anticipated it could secure local supply “by next season.”

Why is domestic supply insufficient?

The answer takes us back to forestry economics and the vicious circle at the heart of this story.

Domestic pellet production depends on a functioning, high-volume forestry sector generating sufficient residues. Forestry is currently under pressure from exactly the diesel economics described above. Less harvesting means less residue. Less residue means less feedstock for pellets.

The domestic supply constraint that Fonterra is experiencing today is likely to persist, or worsen, if diesel prices remain elevated and forestry economics continue to deteriorate.

Fonterra’s aspiration to bring supply onshore “next season” was stated in late 2025. Given current conditions, that may be optimistic.

Powered by an increasingly scarce resource.

The Uncomfortable Arithmetic

Let me draw the full picture together because the circularity here is striking.

New Zealand is pursuing biomass as a decarbonisation pathway, partly because natural gas is declining (I have written at length about this in my 2026 Energy Stock-Take series) and partly because coal faces regulatory and reputational pressure. Wood pellets are positioned as the bridge fuel, renewable, available and scalable.

But wood pellets depend on forestry and forestry depends heavily on diesel. Diesel is becoming more expensive, for reasons that have little to do with New Zealand policy and much to do with global crude supply dynamics and geopolitics.

Higher diesel prices make forestry uneconomic at the margin, reduce harvest volumes, reduce the residue stream and constrain the domestic pellet supply that the decarbonisation strategy requires.

The hidden diesel dependency is not unique to biomass. Whether it is wind turbine installation, solar panel manufacturing, biofuel feedstock logistics or almost any other energy source, diesel remains embedded throughout the supply chain. Physical work still matters, and diesel remains one of the primary means by which that work is performed.

Fonterra is not to blame for this situation. It is making rational decisions within the constraints it faces, and its investment in electrode boilers alongside biomass represents what appears to me to be a genuine attempt to diversify risk. But the $790 million decarbonisation programme rests on a diesel supply chain that is more fragile than public announcements might suggest, and the structural forces bearing down on that supply chain are unlikely to disappear any time soon.

What Should We Make Of All This?

I do not raise these concerns to argue against the biomass industry, to defend coal, or to suggest that Fonterra’s decarbonisation efforts are without merit.

The domestic wood pellet industry needs investment and time to scale. That scaling depends on a stable forestry sector, which in turn depends on a diesel price environment that is not currently stable and may not become so. Meanwhile Fonterra’s boilers need fuel to run, and if domestic supply cannot meet the requirement, the choice is between Vietnamese pellets or reverting to coal.

There is also a question worth asking about the long-term energy return on investment of a biomass system that is structurally dependent on diesel throughout its supply chain, from planting and maintenance through to harvest, milling, pelletising, drying and transport. This deserves proper accounting, not assumptions.

The lesson here is not that biomass is a bad idea. Nor is it that Fonterra has made the wrong decision.

The lesson is that energy systems are deeply interconnected.

We often talk about replacing one fuel with another as though they exist in isolation. They do not, and never more so than with diesel.

Behind every wood pellet sits a forestry supply chain. Behind that supply chain sits a diesel engine. And behind that diesel engine sits the global oil system.

The question is not whether New Zealand can build a domestic biomass industry.

The question is whether we fully understand the dependencies that sit beneath it.

P.s.

As always, I welcome your comments and corrections. If you have direct experience in the forestry or wood pellet industries, I would particularly value your perspective.

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Larry