12/1/07 SHANGHAI (Interfax-China) -- PetroChina Company Ltd. [NYSE:PTR] signed an agreement with the State Forestry Administration to establish bio-energy bases in Yunnan and Sichuan Provinces to produce ethanol and biodiesel, a company official told Interfax.

The first phase of the project will cover 600,000 mu (40,000 hectares), said Zhang Anping, an official from the company.

Xiao Hui, an analyst at United Securities, said ethanol produced from corn can't satisfy China's demand, especially with the country's recent restrictions, and will require new methods to produce alternative energy.

"Bio-energy has vast prospects in China, as we're looking for new alternative energy when traditional energy like oil is not sufficient," Xiao added.

In a statement, PetroChina said forestry bio-energy, a key part of China alternative energy development strategy, will achieve a win-win for industry and ecology, and ease energy supply shortages.

PetroChina plans to build more than 2 million metric tonnes of forest bio-energy ethanol production capacity per year, and account for more than 40 percent of the national capacity by 2010. The company also aims to construct 200,000 metric tonnes of bio-diesel capacity per year by then.

China has more than 6 million hectares of oleaginous forest with fruit output of more than 4 million metric tonnes. China can produce up to 500,000 metric tonnes of bio-diesel if they use one third of the plants, said Wang Tao, from China Academy of Engineering in Beijing in Nov 2006.

On Wednesday, China oil major China National Offshore Oil Co. [NYSE:CEO] announced it would join palm oil producer PT SMART Tbk and a Hong Kong energy firm to invest $5.5 billion in producing biofuel in Indonesia.

SMART, state-owned CNOOC and Hong Kong Energy Ltd. will spend $5.5 billion in three phases over eight years to develop crude palm oil-based biodiesel and sugarcane- or cassava-based bioethanol.

Commentary

China would risk becoming a net importer of corn if industrial feedstock usage continues on its current growth pattern. Restrictions are now in place which means that alternatives need to be found.

We have oft suggested raw sugarcane of which there is plentiful supply. Oleaginous crops, such as rapeseed, soybean & sunflower, are most commonly used in bio-fuel production.

Non-wood forestry products will also be effective and the conversion cost of existing plant, which is running substantially below capacity, would not be prohibitive.