28/09/06 (The Edge News)  - South Korea is beating Japan and China in its push into the emerging biodiesel industry thanks to a government mandate that has opened a small but expanding market for the green fuel from Southeast Asia.

Emboldened by Seoul's policies, South Korean Eco Solutions Co Ltd has expanded its investment in a planned biodiesel plant in Sabah, Malaysia, by a third to US$64 million (RM236 million), says John Cho, one of the company's executive director.

Malaysian leader Golden Hope Plantations Bhd, which is building facilities in Malaysia and the Netherlands this month, announced plans to build a 150,000 tonnes per year (tpy) biodiesel plant in Yeosu with South Korea's H-Plus Bio Ltd.

And conglomerate Samsung Corp has stolen a march on Japanese trading rivals with plans to set up a 200,000-tpy jatropha-fuelled biodiesel plant together with a subsidiary of Philippine National Oil Co (PNOC).

Countries across Southeast Asia are promoting biofuels to utilise domestic harvests such as palm oil and cut back on oil costs, but bigger consumers to the north have been less enthusiastic since they do little to ease import reliance.

But Seoul this year decreed that all domestic diesel must have at least 0.5% biodiesel content. That ratio is set to rise to 5% in two years, while heavy machines are expected to use up to 20% of biodiesel in their blends.

That is a major incentive for a company like Eco Solutions, which decided this summer to boost its project from the 150,000-tpy, US$48 million plant that was earlier planned.

"Our initial operational plan is to import the 200,000 tonnes of biodiesel into South Korea," Cho told Reuters. Production is slated to begin in about a year.

Malaysia, set to be the region's main supplier, has approved about 52 projects to turn its crude palm oil into biodiesel, known as B100, sold to oil firms or retailers for blending with crude oil-derived diesel and used in conventional engines.

Eco Solutions plans one day to increase capacity to 500,000 tpy, but Cho declined to say where those supplies may be sold.

It already sells biodiesel from a 40,000-tpy multi-feedstock plant in South Korea to refiners such as Hyundai Oilbank Co Ltd and S-Oil Corp.

South Korea's quiet move to legislate more biofuel use highlights the growing role of alternative fuels in the global oil market, which OPEC members fear could erode future demand for their crude if oil prices continue to climb.

The Eco Solutions and Golden Hope facilities will make about 8,000 barrels per day (bpd) of diesel, a tiny drop for the fourth-biggest crude importer, which consumes 2.2 million bpd.

But the impact will be magnified in countries such as Thailand, China and the United States, where biologically based fuels like ethanol curb oil imports and lift farming income.

Greater demand in Asia will be welcomed by producers, who may worry that the rapid expansion of rapeseed-derived biofuel in Europe could undermine prices from a region that has been expected to set the world's benchmark thanks to its preference for diesel engines and tightening environmental standards.

Europe has a non-binding target of 5.75% biodiesel by the end of the decade.

South Korea has traditionally been a gasoline redoubt, but last spring approved the first sale of diesel-powered passenger cars, helping lift demand by 6.5% last year.

Diesel is already heavily used in trucking and transport industries and is gaining market share among motorists, as it remains relatively cheaper than gasoline.

Although Seoul backpedalled on its initial plan to impose a 5% biodiesel mandate starting this year, investors and analysts remain upbeat on the outlook.

"With crude prices high, now is the right moment for marketing biodiesel," said Victor Shum, senior principal with consultants Purvin & Gertz Inc. "With (Korean) government encouragement the use of biodiesel will grow."

It stands in stark contrast to both China and Japan, whose oil markets are more than twice as large but which have not mandated blending requirements or even set up standard specifications. Taxation rates also differ.

"In South Korea, there is no tax on biodiesel, while in Japan... either you use 100% methyl ester or you are taxed," says Anhar Suki, who heads the biodiesel business at Malaysian market leader Golden Hope, whose first biofuel cargo nevertheless sailed for Japan last month.

China is slowly narrowing the gap with offshore oil producer CNOOC in the lead as it boosts its retail presence.

Local media reported that CNOOC planned to set up a 100,000-tpy Jatropha-fuelled biodiesel plant in Sichuan. It is also conducting a feasibility study with Bio Sweet Sdn Bhd over a project in Malaysia, officials said in July.

Instead, the world's second- and third-largest oil consumers have placed more emphasis on ethanol, a competing biofuel derived from other crops such as sugar and corn and which has also attracted political support in the United States.

Japan's powerful refining industry, which has been resistent to alternative fuels, will begin selling gasoline blended with 7% ethyl tertiary butyl ether (ETBE) in some retail markets in the second half of next year to test its feasibility.

A government official said last month that Tokyo would also establish nationwide specifications to allow up to 5% biodiesel in motor fuel this year, although use is now limited to a handful of local municipal transportation systems. - Reuters