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European blowback for Asian biofuels
European blowback for Asian biofuels
7/2/07 (Asia Times) JAKARTA - New European concerns about the adverse environmental impact associated with Southeast Asian-produced biofuels threatens to scupper the rapidly growing multibillion-dollar industry, just as big new production facilities and cultivation areas come onstream.
European demand for palm-oil-based biofuel has recently skyrocketed, prompting Indonesia and Malaysia to roll out
ambitious national biofuel programs, including sweeteners for farmers to plant more of oil palm. A 2003 European Union directive mandated that all member states use biofuel for 5.75% for total transportation by 2010 and increase that ratio to 8% by 2015.
Indonesia and Malaysia, which currently account for 85% of the world's supply of crude palm oil, combined earn more than US$6 billion a year from the crop. That figure is expected to soar as the two countries gear up for European market exports, where biofuels fetch premium prices. Both Jakarta and Kuala Lumpur recently committed to set aside 6 million tons, or about 40% of each country's annual output, to supply Europe's growing demand for more environmentally friendly fuel sources.
Now Europe is taking a harder look at how the region's biofuels are actually produced, and apparently scientists and environmental groups don't like what they see. Dangers of global warming that only a decade ago seemed exaggerated have suddenly become crucial global issues with growing evidence of greenhouse-gas-driven climate change.
Environmentalists say as much as 87% of Malaysia's deforestation between 1985 and 2000 was caused by the expansion of oil-palm plantations. Malaysia has now reached its natural land limit for new plantations and most of the new oil-palm cultivation areas are being cleared in neighboring Indonesia. An estimated 30% of oil-palm plantations in Indonesia are currently controlled by Malaysian interests, according to official industry statistics.
The Indonesian government has recently earmarked 6.5 million hectares of idle land for biofuel-related crops, including 3 million hectares for oil palm, 1.5 million each for jatropha and cassava, and 500,000 for sugarcane. Currently more than 25% of all palm oil produced in Malaysia and Indonesia is cultivated on peatlands.
The burning, draining and clearing of organic peatlands has resulted in the release of massive amounts of carbon dioxide into the atmosphere, frequently shrouding the region in smoke and turning Indonesia into the third-largest greenhouse-gas emitter in the world. That's raising hard new questions about the net global environmental value of palm-oil-derived biofuels.
Wetlands International, a non-profit group supported by Western governments and conservation groups, and the Dutch water-research institute Delft Hydraulics warned in a recent joint study that about 20 tonnes of carbon dioxide is released from each tonne of oil palm grown on peat. That and other scientific studies have prompted the EU to put its 2003 biofuel directive under review, and many in the industry believe some sort of sanctions or tax could soon be imposed on 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's fastest-growing rural-based industries. Last month, Jakarta rolled out the red carpet for global biofuel investors and pulled in 58 new production agreements worth $12.4 billion. One major $5.2 billion deal will see China National Offshore 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 of Vegetable-Based Fuels, the Indonesian government's team for biofuel promotion, has described the bio-diesel program, which aims to create 3 million new jobs by 2010, as "pro-jobs, pro-growth and pro-poverty reduction". President Susilo Bambang Yudhoyono has likewise identified biofuels as a key engine of future economic growth, particularly for job-starved rural areas. Biofuel is also targeted to account for 10% of
Indonesia's national fuel consumption by 2010, potentially saving the national coffers as much as $10 billion a year in fossil-fuel imports.
Major industrial and energy conglomerates have recently lined up behind Jakarta's biofuel gambit. PT Bakrie Sumatera Plantations, owned by the powerful Bakrie family represented in government by Welfare Minister Aburizal Bakrie, is building the first privately run
bio-diesel plant in a $25 million joint venture with local construction firm PT Rekayasa Industri. PT Astro Agro Lestari and PT Asian Agri have also announced plans to build bio-diesel plants.
With some 75 bio-diesel projects either operational or in the pipeline, Malaysia already has a considerable head start on Indonesia. Golden Hope Plantations, Genting BhD and Sime Darby Bhd are the major Malaysian biofuel players, some of which have aggressively expanded their franchises into Indonesia-based plantations. Genting Biofuel Asia Pte Ltd, a subsidiary of Genting Bhd, has earmarked 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, and with the bigger existing investments in biofuel production, it could be hit hard if the EU reverses course and imposes trade sanctions on palm-oil-derived biofuels. Indonesia, on the other hand, so far only sells biofuel for the domestic market, but the various planned or half-built new production plants are geared to meet the government's target of exporting 12 billion liters (75.4 million barrels) of biofuel by 2010.
Europe could potentially switch from importing cheaper palm-oil-derived biofuels to using more expensive, locally produced rapeseed-based fuels, which currently provide 80% of the EU's biofuel needs. Currently bio-diesel demand consumes just about half of the EU's total rapeseed production, but anticipated higher demand has recently pushed rapeseed futures in global commodity markets to a record premium over other oilseeds.
Significantly, up to 90% of bio-diesel's cost is related to the price of feedstock. Analysts have said palm-oil-produced bio-diesel is only commercially viable if global crude-petroleum prices stay around $58 per barrel and palm-oil prices remain below $422 per ton. Recent global commodity price fluctuations have drawn the economics of palm-oil-based biofuel into question. While petroleum is now being quoted at about $50 a barrel, down more than 34% from a record high last July, palm-oil prices have risen to about $554 a ton, gaining about 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 and other fossil-fuel-importing Asia-Pacific markets, where using more biofuels is just now coming into vogue. That may or may not be a viable business plan, however. In Indonesia, Pertamina, the country's sole government-authorized buyer and distributor of biofuels, currently sells about 1,310 kiloliters of bio-diesel and bio-gasoline per day at fuel stations across Jakarta.
The state company already claims that it is losing Rp3 billion ($68 million) a month on its bio-diesel operations, and it has reportedly warned the government that it will stop distributing and selling bio-diesel in April if complex issues involving fuel subsidies and cross-subsidies are not soon resolved.
Foreign energy companies will soon be allowed to buy biofuel from producers and retail it back to the public, with the caveat that it is used only for local transport purposes. But it is unclear whether big Western companies will - similar to the EU - soon be forced to rethink their positions on Indonesian- and Malaysian-produced biofuels as well.
Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000, has been in Indonesia for more than 20 years, mostly in journalism and editorial positions. He specializes in Indonesian political, business and economic analysis, and hosts a weekly television political talk show, Face to Face, broadcast on two Indonesia-based satellite channels. He can be reached at softsell@prima.net.id.
European demand for palm-oil-based biofuel has recently skyrocketed, prompting Indonesia and Malaysia to roll out
ambitious national biofuel programs, including sweeteners for farmers to plant more of oil palm. A 2003 European Union directive mandated that all member states use biofuel for 5.75% for total transportation by 2010 and increase that ratio to 8% by 2015.
Indonesia and Malaysia, which currently account for 85% of the world's supply of crude palm oil, combined earn more than US$6 billion a year from the crop. That figure is expected to soar as the two countries gear up for European market exports, where biofuels fetch premium prices. Both Jakarta and Kuala Lumpur recently committed to set aside 6 million tons, or about 40% of each country's annual output, to supply Europe's growing demand for more environmentally friendly fuel sources.
Now Europe is taking a harder look at how the region's biofuels are actually produced, and apparently scientists and environmental groups don't like what they see. Dangers of global warming that only a decade ago seemed exaggerated have suddenly become crucial global issues with growing evidence of greenhouse-gas-driven climate change.
Environmentalists say as much as 87% of Malaysia's deforestation between 1985 and 2000 was caused by the expansion of oil-palm plantations. Malaysia has now reached its natural land limit for new plantations and most of the new oil-palm cultivation areas are being cleared in neighboring Indonesia. An estimated 30% of oil-palm plantations in Indonesia are currently controlled by Malaysian interests, according to official industry statistics.
The Indonesian government has recently earmarked 6.5 million hectares of idle land for biofuel-related crops, including 3 million hectares for oil palm, 1.5 million each for jatropha and cassava, and 500,000 for sugarcane. Currently more than 25% of all palm oil produced in Malaysia and Indonesia is cultivated on peatlands.
The burning, draining and clearing of organic peatlands has resulted in the release of massive amounts of carbon dioxide into the atmosphere, frequently shrouding the region in smoke and turning Indonesia into the third-largest greenhouse-gas emitter in the world. That's raising hard new questions about the net global environmental value of palm-oil-derived biofuels.
Wetlands International, a non-profit group supported by Western governments and conservation groups, and the Dutch water-research institute Delft Hydraulics warned in a recent joint study that about 20 tonnes of carbon dioxide is released from each tonne of oil palm grown on peat. That and other scientific studies have prompted the EU to put its 2003 biofuel directive under review, and many in the industry believe some sort of sanctions or tax could soon be imposed on 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's fastest-growing rural-based industries. Last month, Jakarta rolled out the red carpet for global biofuel investors and pulled in 58 new production agreements worth $12.4 billion. One major $5.2 billion deal will see China National Offshore 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 of Vegetable-Based Fuels, the Indonesian government's team for biofuel promotion, has described the bio-diesel program, which aims to create 3 million new jobs by 2010, as "pro-jobs, pro-growth and pro-poverty reduction". President Susilo Bambang Yudhoyono has likewise identified biofuels as a key engine of future economic growth, particularly for job-starved rural areas. Biofuel is also targeted to account for 10% of
Indonesia's national fuel consumption by 2010, potentially saving the national coffers as much as $10 billion a year in fossil-fuel imports.
Major industrial and energy conglomerates have recently lined up behind Jakarta's biofuel gambit. PT Bakrie Sumatera Plantations, owned by the powerful Bakrie family represented in government by Welfare Minister Aburizal Bakrie, is building the first privately run
bio-diesel plant in a $25 million joint venture with local construction firm PT Rekayasa Industri. PT Astro Agro Lestari and PT Asian Agri have also announced plans to build bio-diesel plants.
With some 75 bio-diesel projects either operational or in the pipeline, Malaysia already has a considerable head start on Indonesia. Golden Hope Plantations, Genting BhD and Sime Darby Bhd are the major Malaysian biofuel players, some of which have aggressively expanded their franchises into Indonesia-based plantations. Genting Biofuel Asia Pte Ltd, a subsidiary of Genting Bhd, has earmarked 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, and with the bigger existing investments in biofuel production, it could be hit hard if the EU reverses course and imposes trade sanctions on palm-oil-derived biofuels. Indonesia, on the other hand, so far only sells biofuel for the domestic market, but the various planned or half-built new production plants are geared to meet the government's target of exporting 12 billion liters (75.4 million barrels) of biofuel by 2010.
Europe could potentially switch from importing cheaper palm-oil-derived biofuels to using more expensive, locally produced rapeseed-based fuels, which currently provide 80% of the EU's biofuel needs. Currently bio-diesel demand consumes just about half of the EU's total rapeseed production, but anticipated higher demand has recently pushed rapeseed futures in global commodity markets to a record premium over other oilseeds.
Significantly, up to 90% of bio-diesel's cost is related to the price of feedstock. Analysts have said palm-oil-produced bio-diesel is only commercially viable if global crude-petroleum prices stay around $58 per barrel and palm-oil prices remain below $422 per ton. Recent global commodity price fluctuations have drawn the economics of palm-oil-based biofuel into question. While petroleum is now being quoted at about $50 a barrel, down more than 34% from a record high last July, palm-oil prices have risen to about $554 a ton, gaining about 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 and other fossil-fuel-importing Asia-Pacific markets, where using more biofuels is just now coming into vogue. That may or may not be a viable business plan, however. In Indonesia, Pertamina, the country's sole government-authorized buyer and distributor of biofuels, currently sells about 1,310 kiloliters of bio-diesel and bio-gasoline per day at fuel stations across Jakarta.
The state company already claims that it is losing Rp3 billion ($68 million) a month on its bio-diesel operations, and it has reportedly warned the government that it will stop distributing and selling bio-diesel in April if complex issues involving fuel subsidies and cross-subsidies are not soon resolved.
Foreign energy companies will soon be allowed to buy biofuel from producers and retail it back to the public, with the caveat that it is used only for local transport purposes. But it is unclear whether big Western companies will - similar to the EU - soon be forced to rethink their positions on Indonesian- and Malaysian-produced biofuels as well.
Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000, has been in Indonesia for more than 20 years, mostly in journalism and editorial positions. He specializes in Indonesian political, business and economic analysis, and hosts a weekly television political talk show, Face to Face, broadcast on two Indonesia-based satellite channels. He can be reached at softsell@prima.net.id.