18/10/05 CHACABUCO, Argentina (Reuters) - Armed with 12 tonnes ofsoybeans, a young Argentine engineer named Edmundo Defferrari can produceenough fuel in one day to fill the tanks of five soy trucks.

Backed by local seed company Don Mario, Defferrari developed a biodieselplant prototype in Chacabuco, Buenos Aires province, at a cost of 450,000pesos ($152, 000).

The engineer's goal is to sell similar plants to farmers who are anxiousto lower their fuel costs or even achieve self-sufficiency in the face ofsoaring oil prices.

"The farm sector consumes 76 percent of diesel in Argentina and farming isdone throughout the nation. So we have an enormous logistical advantagebecause we consume fuel in the same place where we could produce it,"Defferrari said.

"This would reduce not only freight costs but also pollution," he added.

The cost of this biodiesel is 70 centavos per liter (about 95 U.S. centsper gallon), roughly half of what conventional diesel costs at the pump.

Analysts say biodiesel is the renewable fuel with the most promise inArgentina, the world's top exporter of soyoil and sunflower seed oil.

Biodiesel is made with vegetable oils -- such as soy, sunseed, rapeseed orpalm oil -- and animal fats, and it can be used purely or blended withconventional diesel.

As the world's No.2 corn exporter, Argentina is also well-positioned todevelop ethanol, an alternative to gasoline that is made with corn orsugar cane. Neighboring Brazil is the world's top ethanol producer andexporter.

"With ethanol production, everything adds value to corn because when thestarch is extracted and converted into ethanol, leftover proteins remainas a concentrate that can be used for animal feed," said Gustavo Vergagni,an analyst with V&A Desarrollos Empresarios consultancy.

SURGING WORLD DEMAND

With 12 tonnes of soybeans, the small plant in Chacabuco -- some 145 mileswest of Buenos Aires -- produces about 1,400 liters (364 gallons) ofbiodiesel and 10.2 tonnes of expellers, which are used for animal feed.

Bionerg, the company created by Defferrari and Don Mario, is focused fornow on addressing farmers' needs. But it does not rule out producingbiodiesel on a larger scale as the international context for biofuelsimproves.

Analysts say measures being taken worldwide that require the blending offossil fuels with biofuels will ensure rising demand in coming years.

In the European Union, for example, all fuels must contain a minimumof 5.75 percent of biofuels by the year 2010.

"The outlook is for very strong demand. Europe is consuming more and morebiofuels and at this pace, it will not be able to produce enough locallyto satisfy demand," said Claudio Molina, head of the Argentine Associationof Biofuels.

"In some cases, they will import the raw materials and produce biodieselor bioethanol there, but in other cases they will seek out finishedbiofuels and Argentina is in a privileged position because it's anagricultural powerhouse," Molina said.

Another advantage of "green" fuels is their price relative to crude oil,the cost of which recently surpassed that of soybean, palm and rapeseedoil for the first time ever.

LEGAL BLACK HOLE

The development of a robust biofuels business in Argentina is stillincipient. Some companies, like Spain's Repsol YPF and some oilseedprocessors, have shown interest.

But analysts say the sector will not take off until there are laws inplace to regulate it.

Sen. Luis Falco introduced a bill that includes tax breaks for companiesand would require that at least 5 percent of biodiesel be blended withconventional diesel, with the same ratio for ethanol and gasoline.

"This will give the sector a legal framework so people will want to investin biofuels. This is important because it's a small solution to energyconcerns, it protects the environment and it's a new industry that willcreate jobs," Falco said.

Although the bill is stalled in Congress, Defferrari is losing no time.

"There is a great deal of interest among producers here and also inParaguay and Uruguay, where the legal framework is more solid," saidDefferrari, adding he has also gotten calls from the United States andEastern Europe.