JAKARTA - 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.
(Copyright
2006 Asia Times Online Ltd. All rights reserved.
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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. 
