18/5/06 JAKARTA (Asia Times) - Spiking global oil prices have fuel-importing countries everywhere examining the potential of lower-cost biofuels to save on their fuel bills and shore up national energy security. That's particularly true for Indonesia, which currently imports 30% of its energy needs but also boasts Asia's biggest bounty of the tropical resources used to produce the most efficient biofuels.

Government officials are preparing plans to make Indonesia a major player in the still-nascent global biofuel industry, which if oil prices stay high will have enormous export potential. For years, the government has backed research into biofuels, including various biotechnological research and development projects through the state-run Agency for Assessment and Application of Technology (BPPT).

But only after the government last year slashed fuel subsidies did the private sector aggressively take up the biofuel cause. Speculation in Indonesia's biofuel potential has recently driven the share price of the country's main publicly listed producer of crude palm oil (CPO), Astra Agro Lestari, to all-time highs.

Plantation company PT Bakrie Sumatera Plantations, meanwhile, plans to build the country's first privately owned bio-diesel plant in a US$25 million joint venture with construction firm PT Rekayasa  Industri. The plant will have a capacity of 60,000-100,000 tons of bio-diesel a year and will adopt a "multi-feed" concept using several different raw materials, such as CPO and castor oil.

In hopes of sparking grassroots activity, the government has earmarked $33 million to build four pilot bio-diesel plants, meant to serve as national models for alternative-energy production. The plants in Kalimantan and Sumatra, with a combined annual capacity of 6,000 tons, will reportedly be operative by the end of this year.

A new government roadmap lays down hard targets for using less petroleum and more alternative energy sources in the future, mostly biofuels. The biofuel-promoting plan aims aggressively to reduce the country's use of petroleum, which currently represents 60% of national fuel consumption, down to 30% by 2025.

Indonesia is the world's second-largest producer of palm oil, the material most commonly used in producing bio-diesel, a biofuel that may be blended directly with conventional petroleum-based diesel. From an efficiency perspective, the yield from Indonesia's CPO plantations is way ahead of other tropical biofuel options, including the use of coconut oil.

Because bio-diesel contains veritably no sulfur, it proponents note that bio-combustion produces few of the harmful oxides-of-sulfur emissions that petroleum-based fuels do. Moreover, the modification of most diesel-burning engines to use biofuels is a straightforward process.

Global demand for biofuels is surging, particularly in fuel-strapped, environmentally conscious Western Europe. European Union member countries are increasingly chasing up global supplies of bio-diesel to meet stringent European emission standards. European bio-diesel production meets a mere one-sixth of current demand, which is projected to grow much higher as long as global petroleum prices hover at or above US$60 per barrel.

Barriers to burn
While Indonesia's biofuel future may initially look bright, there are still plenty of barriers to burn before the country maximizes its potential. High initial investment costs, an absence of state incentives for growers and producers, and the lack of credit facilities for small-scale entrepreneurs all threaten to stymie the industry's development.

Moreover, the government has a history of squandering its natural resource endowments. Indonesia, long plagued by mismanagement and chronic official corruption, is the only member of the Organization of Petroleum Exporting Countries (OPEC) that despite its huge resources is actually a net importer of fuels.

President Susilo Bambang Yudhoyono is moving to lower at least some of the hurdles. A recent Presidential Instruction for the provision and utilization of biofuel sets out new parameters for its supply and usage - although details governing the policy's actual implementation are thin. The instruction will be incorporated into a draft law on national energy due soon for debate in the House of Representatives.

Energy and Mineral Resources Minister Purnomo Yusgiantoro says the government is considering fiscal and administrative investment incentives for biofuel producers - although his plans simultaneously conjure up the specter of new bureaucratic tangles for the infant industry. Yusgiantoro said at a seminar this month that the Finance Ministry plans to formulate tax and import duty incentives for biofuel-production equipment.

Other ministries and governmental offices have been charged with formulating incentives other than plain fiscal ones, he said. For example, local administrations have been ordered to simplify arrangements for land-use permits, the Agriculture Ministry to encourage more raw-material production, and the Industry Ministry to simplify plant-licensing procedures.

If all the proposed incentives are actually adopted, the targets for biofuel production would steadily increase, starting at 720,000 kiloliters a year through 2010, ramped up to 1.5 million kiloliters per year from 2010 to 2015, and more than trebled at 4.7 million kiloliters per year in the decade ending in 2025, according to Yusgiantoro's projections.

Domestic bio-diesel retail sales in Indonesia are now estimated by his ministry at a mere one tonne per day. Indonesian regulators now allow fuel retailers to blend in up to 10% biofuel in their mixes. State-owned oil giant Pertamina recently unveiled two types of bio-diesel - known simply as B10 and B5 - in several fuel stations in Jakarta. Both fuels are supplied from the government's Agency for Assessment and Application of Technology, which currently runs a bio-diesel plant with a production capacity of 1.5 tonnes a day from CPO.

The new 'crude cartel'
Indonesia is currently the world's second-largest producer of CPO, lagging behind only neighboring Malaysia. Together, the two Southeast Asian countries account for 84% of total world production and 88% of global exports. Significantly, Indonesia and Malaysia are now in talks about the establishment of a cartel-like strategic alliance. Although key issues such as profit-sharing and technology transfer are still under negotiation, once up and running a CPO cartel would potentially give the two countries a large degree of supplier control over the commodity's global price.

That is, if all goes according to plan. CPO production in Indonesia is forecast at 15.2 million tonnes this year, enough perhaps to transform it into Asia's largest bio-diesel producer. Domestic consumption is currently estimated at 30-40% of total production, leaving about 9 million tonnes for biofuel processing and export.

Commodity analysts note that Indonesia's and Malaysia's palm-oil industries differ in important ways that, unless rectified, could result in Malaysia gaining significantly more from the emerging global appetite for biofuels.

While Indonesia has plenty of land and cheap labor, it lacks the capital and technical know-how needed to maximize these advantages. Malaysia, which has a substantially more skilled workforce, has already hit a significant land barrier to palm-plantation expansion and rising labor costs have contributed to stinting new investments.

Nearly 25% of Indonesia's current CPO production is derived from Malaysian investments. Indonesian nationalists, some represented in parliament, have long complained that Indonesia serves as merely a source of raw material and cheap labor for Malaysia's better-funded, more sophisticated and considerably more profitable operations.

Moreover, Malaysia has recently gone on a buying spree of Indonesian oil-palm plantations. Global capital, too, is increasingly bidding to get in on the act: a US-Malaysian joint venture recently announced plans to build a new biofuel-processing plant on Batam, in Indonesia's Riau province, a mere 30 kilometers southeast of Singapore. Riau, after massive deforestation, has emerged as the largest palm-oil-producing area in Indonesia.

How the two sides handle these potentially volatile issues will go a long way in deciding the success or failure of their emerging cartel arrangement. Another big question is whether plantation owners will actually assist the Indonesian government's new drive toward more biofuel production and agree to sell their CPO locally rather than exporting it.

The latter issue cannot be taken for granted. Indonesian CPO producers have recently complained that the government views them merely as another source of state revenue now that global demand for the commodity is surging. Agriculture Minister Anton Apriyantono has notably started to play the nationalist card in appealing to CPO farmers. "For the sake of the national interest, I hope the industry will sacrifice some of its profits in order to develop the bio-diesel industry," he recently said.

Indonesian Palm Oil Producers Association (GAPKI) chairman Derom Bangun said its members would not be willing to sacrifice without considerably more government support for the industry. He said the government should "learn from Malaysia", where CPO producers receive a healthy subsidy for selling their oil to the bio-diesel industry.

Agustino Sudjono, a senior executive at the publicly listed CPO producer London Sumatra Indonesia (Lonsum), notes that while Malaysia is expected to have a production capacity of 1.2 million tonnes of bio-diesel by 2007, which will inevitably increase its demand for CPO, in comparison, "we are still lagging behind and waiting for the regulation to be made official".

CPO: Environmental friend or foe?
So, is this the dawn of a new biofuel-driven era of economic prosperity in Indonesia? There are still many unanswered questions concerning the long-term sustainability of biofuels, chief among them the future price of oil. While reducing dependence on fossil fuels is now globally en vogue because of sky-high pump prices, it could be a passing trend if petroleum prices eventually return somewhere close to their historical moving average.

The adverse impact of palm plantations on Indonesia's and the broader region's natural environment is also a potential deal-breaker. A recent report by the environmental group Friends of the Earth claims that the development of oil-palm plantations was responsible for an estimated 87% of all deforestation in Malaysia. Forest fires in Indonesia, which sometimes cover neighboring countries in smog, are started mainly by palm growers to clear land for new planting.

There is a social cost to plantation expansion, too. In Indonesia, palm-plantation owners frequently clash with local residents over land-ownership rights, while aggrieved locals often protest violently over what they perceive to be only half-hearted corporate-led community development programs. Thousands of indigenous people have been evicted from their lands in recent years, with some beaten and even tortured when they resist, according to rights groups' accounts. This has predictably led to widespread local opposition to the establishment and expansion of plantations.

Environmentalists have already drawn blood over Jakarta's plan, funded by China, to create the world's largest integrated oil-palm plantation, including processing facilities, which would run along the mountainous 850km border with Malaysia in Kalimantan. The environmental group WWF warns that the plan would have a devastating impact on the forests, wildlife, and indigenous community. Most of the mountainous region, known as the "Heart of Borneo", is covered in prime forests and is considered one of the richest areas of biodiversity on Earth.

Minister Apriyantono announced last week that only 180,000 hectares, or 10% of the planned 1.8 million hectares of rainforests, would be used for palm-oil development. However, law enforcement is still dicey in Indonesia's hinterlands. As the country gears up for more biofuel production - before the industry has even taken root - hard questions about long-term sustainability are certain to crop up.

Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000, has worked in Indonesia for 20 years, mostly in journalism and editorial positions. He has been published by the BBC on East Timor and specializes in business/economic and political analysis related to Indonesia. He can be reached at softsell@prima.net.id.