European Blowback for Asian Biofuels

EuropeanBlowback for Asian Biofuels

8 February 2007

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Southeast Asia — New European concerns about the adverse environmentalimpact associated with Southeast Asian-produced biofuels threatens to scupperthe rapidly growing multibillion-dollar industry, just as big new productionfacilities and cultivation areas come onstream.

European demand for palm-oil-based biofuel has recently skyrocketed, promptingIndonesia and Malaysia to roll out

ambitious national biofuel programs, including sweeteners for farmers to plantmore of oil palm. A 2003 European Union directive mandated that all memberstates use biofuel for 5.75% for total transportation by 2010 and increase thatratio to 8% by 2015.

Indonesia and Malaysia, which currently account for 85% of the world’s supply ofcrude palm oil, combined earn more than US$6 billion a year from the crop. Thatfigure is expected to soar as the two countries gear up for European marketexports, where biofuels fetch premium prices. Both Jakarta and Kuala Lumpurrecently committed to set aside 6 million tons, or about 40% of each country’sannual output, to supply Europe’s growing demand for more environmentallyfriendly fuel sources.

Now Europe is taking a harder look at how the region’s biofuels are actuallyproduced, and apparently scientists and environmental groups don’t like whatthey see. Dangers of global warming that only a decade ago seemed exaggeratedhave suddenly become crucial global issues with growing evidence ofgreenhouse-gas-driven climate change.

Environmentalists say as much as 87% of Malaysia’s deforestation between 1985and 2000 was caused by the expansion of oil-palm plantations. Malaysia has nowreached its natural land limit for new plantations and most of the new oil-palmcultivation areas are being cleared in neighboring Indonesia. An estimated 30%of oil-palm plantations in Indonesia are currently controlled by Malaysianinterests, according to official industry statistics.

The Indonesian government has recently earmarked 6.5 million hectares of idleland for biofuel-related crops, including 3 million hectares for oil palm, 1.5million each for jatropha and cassava, and 500,000 for sugarcane. Currently morethan 25% of all palm oil produced in Malaysia and Indonesia is cultivated onpeatlands.

The burning, draining and clearing of organic peatlands has resulted in therelease of massive amounts of carbon dioxide into the atmosphere, frequentlyshrouding the region in smoke and turning Indonesia into the third-largestgreenhouse-gas emitter in the world. That’s raising hard new questions about thenet global environmental value of palm-oil-derived biofuels.

Wetlands International, a non-profit group supported by Western governments andconservation groups, and the Dutch water-research institute Delft Hydraulicswarned in a recent joint study that about 20 tonnes of carbon dioxide isreleased from each tonne of oil palm grown on peat. That and other scientificstudies have prompted the EU to put its 2003 biofuel directive under review, andmany in the industry believe some sort of sanctions or tax could soon be imposedon palm-oil-derived biofuels from Malaysia and Indonesia.

Investments up in smoke
If so, it would scupper what was rapidly emerging as one of Southeast Asia’sfastest-growing rural-based industries. Last month, Jakarta rolled out the redcarpet for global biofuel investors and pulled in 58 new production agreementsworth $12.4 billion. One major $5.2 billion deal will see China NationalOffshore Oil Corp, Indonesia’s Sinar Mas Group and Hong Kong Energy (Holdings)Ltd team up to develop bio-diesel from crude palm oil and bio-ethanol.

Al Hilal Hamdi, chairman of the National Team for the Development ofVegetable-Based Fuels, the Indonesian government’s team for biofuel promotion,has described the bio-diesel program, which aims to create 3 million new jobs by2010, as “pro-jobs, pro-growth and pro-poverty reduction”. PresidentSusilo Bambang Yudhoyono has likewise identified biofuels as a key engine offuture economic growth, particularly for job-starved rural areas. Biofuel isalso targeted to account for 10% of Indonesia’s national fuel consumption by2010, potentially saving the national coffers as much as $10 billion a year infossil-fuel imports.

Major industrial and energy conglomerates have recently lined up behindJakarta’s biofuel gambit. PT Bakrie Sumatera Plantations, owned by the powerfulBakrie family represented in government by Welfare Minister Aburizal Bakrie, isbuilding the first privately run

bio-diesel plant in a $25 million joint venture with local construction firm PTRekayasa Industri. PT Astro Agro Lestari and PT Asian Agri have also announcedplans to build bio-diesel plants.

With some 75 bio-diesel projects either operational or in the pipeline, Malaysiaalready has a considerable head start on Indonesia. Golden Hope Plantations,Genting BhD and Sime Darby Bhd are the major Malaysian biofuel players, some ofwhich have aggressively expanded their franchises into Indonesia-basedplantations. Genting Biofuel Asia Pte Ltd, a subsidiary of Genting Bhd, hasearmarked as much as $3 billion for different types of biofuel-production plants,using either crude palm oil, sugarcane or jatropha beans as sources.

Malaysia is already exporting major consignments of bio-diesel to Europe, andwith the bigger existing investments in biofuel production, it could be hit hardif the EU reverses course and imposes trade sanctions on palm-oil-derivedbiofuels. Indonesia, on the other hand, so far only sells biofuel for thedomestic market, but the various planned or half-built new production plants aregeared to meet the government’s target of exporting 12 billion liters (75.4million barrels) of biofuel by 2010.

Europe could potentially switch from importing cheaper palm-oil-derived biofuelsto using more expensive, locally produced rapeseed-based fuels, which currentlyprovide 80% of the EU’s biofuel needs. Currently bio-diesel demand consumes justabout half of the EU’s total rapeseed production, but anticipated higher demandhas recently pushed rapeseed futures in global commodity markets to a recordpremium over other oilseeds.

Significantly, up to 90% of bio-diesel’s cost is related to the price offeedstock. Analysts have said palm-oil-produced bio-diesel is only commerciallyviable if global crude-petroleum prices stay around $58 per barrel and palm-oilprices remain below $422 per ton. Recent global commodity price fluctuationshave drawn the economics of palm-oil-based biofuel into question. Whilepetroleum is now being quoted at about $50 a barrel, down more than 34% from arecord high last July, palm-oil prices have risen to about $554 a ton, gainingabout 40% in 2006.

If EU demand for palm-oil-based biofuel dries up, as some analysts predict,Indonesia and Malaysia could try to farm their stocks to Japan, Australia andother fossil-fuel-importing Asia-Pacific markets, where using more biofuels isjust now coming into vogue. That may or may not be a viable business plan,however. In Indonesia, Pertamina, the country’s sole government-authorized buyerand distributor of biofuels, currently sells about 1,310 kiloliters ofbio-diesel and bio-gasoline per day at fuel stations across Jakarta.

The state company already claims that it is losing Rp3 billion ($68 million) amonth on its bio-diesel operations, and it has reportedly warned the governmentthat it will stop distributing and selling bio-diesel in April if complex issuesinvolving fuel subsidies and cross-subsidies are not soon resolved.

Foreign energy companies will soon be allowed to buy biofuel from producers andretail it back to the public, with the caveat that it is used only for localtransport purposes. But it is unclear whether big Western companies will -similar to the EU – soon be forced to rethink their positions on Indonesian- andMalaysian-produced biofuels as well.

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