[Kabar-indonesia] BT Roundtable: Driving the biofuel industry

[Joyo at aol.com]

Business Times [Singapore]
Wednesday, November 1, 2006

Driving the biofuel industry

OVERVIEW

SINCE crude oil prices burst through US$60 per barrel last
year, the market has been rife with suggestions on
alternative fuels. Very soon, biofuels became the hottest
thing to venture into, because of its environment-friendly
qualities and renewable nature. Potential feedstocks such as
corn, palm oil, rape seed, soya beans and sugarcane can all
be planted again and again. And some even toyed with
converting agricultural waste into fuel. Yet, with the
recent fall in crude oil prices, questions were raised
regarding the viability of such non-fossil-based energy
sources. In the long run, does it take more than it seems to
drive a sustainable biofuel industry? And if so, what are
the risks and challenges at hand? Three panellists share
their views.

Chen Huifen: Since last year, numerous infrastructure
projects for the biofuels industry have been announced by
governments and the private sector in the region, especially
in the area of palm-based biodiesel manufacturing and
storage. What is the buzz all about? Are the bullish
sentiments about the growth of the industry valid?

Anton Timpers: Escalating crude oil prices and adherence to
the Kyoto protocol are pushing governments to consider
biofuels as an alternative energy source and to diversify
from the overall dependence on crude oil. Biofuels currently
represent the only means by which renewable energy can be
utilised by the transport sector - a significant contributor
to global warming. At the same time, there is a growing list
of countries that have implemented policies to boost
biofuels utilisation with supportive legislative and policy
environment to kickstart the sector worldwide. Tax
concessions are making production and utilisation of
biofuels commercially viable.

These factors have helped fuel opportunities and investments
into the sector globally. While Rabobank shares the bullish
sentiments on biofuels, it is still early days to see who
will be the real champions of the industry. Can we keep up
with the high demand based on projected consumption
capacity? Are we able to resolve some of the technical
issues surrounding palm-based biodiesel? Is there a strong
will on the part of governments to drive consumption,
implement mandatory blending policies and support the
industry in the face of falling crude prices? If these
issues can be sustainably addressed, the prospect for the
industry will be excellent.

John Hall: I think that the growth being discussed is out of
proportion, and the buyers are only a handful who have
generated hysteria. Every plantation owner thinks he can,
with a relatively small investment, add so many more dollars
of value to palm oil. Both the European Union and the US are
considering means of stopping tax rebate dollars going to
Malaysian-produced, palm-based biodiesel, for two reasons.
One, the Malaysian government has shouted from the rooftops
that it will sponsor biodiesel projects for export to Europe
and the US, at the same time encouraging the use of palm
oleine without sponsorship in its own country - in other
words, we care about the environment where we can make
money. Two, palm methyl esters do not meet European
specifications.

Rahul Kale: The regional announcements on palm-based
biodiesel signal the global acceptance of biodiesel as an
important part of the mix in bio-fuels. Palm biodiesel is a
competitive component relative to other biodiesels. With
technological advances, we should see an even greater
acceptance level of such biodiesels globally.

Huifen: One of the factors that will play a key role in
determining the viability of the biofuel industry is the
price of crude oil. Do you think the high crude oil prices
we see today are sustainable? Apart from crude oil prices,
what other factors will be vital to the development of a
viable biofuel industry in Asia? Please give your reasons.

Rahul: We do not claim to be forecasters of crude oil
prices. We do, however, believe that a finite resource with
few alternatives will be a highly prized asset. We believe
that government mandates for use of biofuels are essential
to create the necessary infrastructure - be it production,
storage or distribution - which will ensure the long-term
use of alternate fuels.

John: Crude prices are already at levels where European
biodiesel producers are not making money, as the glycerine
by-product is a large debit cost to the production model. I
think crude price will retreat to nearer US$50 a barrel and
that will put more pressure on European producers using rape
oil as feedstock. Crude oil will also impact Asian
production as the increased palm oil price has seen the gap
narrow between local gas oil and palm methyl esters. The
other expected impact is sustainability and the industry
needs to implement measures of traceability of feedstock to
exclude further damage to tropical rainforests seen recently
in Indonesia.

Anton: As we witnessed with crude price volatility over the
last month, no one can really predict with certainty where
prices will be in the short to medium term. While we see a
strong correlation between the prices of crude oil and
biofuels, the implementation of pro-biofuel policies and
governments' move towards mandatory blending can
significantly reduce this correlation, irrespective of the
price of crude oil.

The outlook of vegetable oil prices therefore seems good
(soybean oil, rape seed and palm oil which are used as
biofuels feedstock) with increasing demand for both food and
fuel, which might lead to scarcity on the supply side. The
development of a viable biofuels industry in Asia will
require a concerted effort by governments to implement
mandatory blending and stimulated domestic biofuels
production and consumption. For producing countries like
Thailand (molasses for ethanol) and Malaysia and Indonesia
(palm oil for biodiesel), it is essential to create fiscal
incentives and implement policies to drive domestic
consumption, building on the successful experience of
Brazil.
Huifen: Much of the biofuels that are being produced here
(mainly palm oil-based biodiesels) will supply to markets in
Europe and US. What can be done to create greater demand for
biofuels in Asia?

John: Awareness of environmental issues. One only has to
look at the sky in Singapore to understand the difference
with developed countries. The haze generated by Indonesian
farmers is a measure of their environmental awareness. How
can they expect to sell their products to the world on the
environmental stage when they behave in such a way? Malaysia
also needs to get away from the notion that they can promote
oil as a fuel in their country but then insist that cleaner
burning methyl esters are exported to countries with a
bigger concern for the air quality. Singapore has adopted
Kyoto protocol but needs now to go further and set the
limits and standards.

Anton: In addition to driving consumption domestically in
producing markets, South Korea, China and Japan represent
potentially big markets as they are largely dependent on oil
imports and do not have feedstock-producing capability. So,
these countries can either become large importers of
biofuels or biofuels feedstock for production domestically.

South Korea and Japan are considering voluntary and
mandatory blending of up to 5 per cent by 2020. The Chinese
government is targeting 15 per cent use of biofuels in 2020.
Rabobank estimates that the potential demand in Asia can
reach 4-6 million tonnes by 2010 in Asia and 14-16 million
tonnes globally. The future of biofuels in Asia would depend
on three factors: government support along with a clear
expansion plan for biofuels production and access to
feedstock, R&D to solidify technologies for production, and
a transparent pricing mechanism and clear framework to
encourage the distribution of biofuels to consumers.

Huifen: Apart from being a hub for the transport of
feedstocks and end products, how can Singapore play a role
to help drive the biofuel industry in Asia?

John: Singapore needs to look at the developed nations and
see that diesel fuel is no longer the dirty pollutant of
yesteryear but a clean-burning efficient fuel that gives
twice the efficiency of petrol-powered vehicles. Singapore
needs to abolish the diesel tax and let the public decide. A
BMW 320i gives a consumption of 30-35 mpg (miles per gallon)
yet the similar 320tdi (diesel version) gives 55-60 mpg -
hence twice as efficient for the same carbon dioxide
emissions. Data are available from Europe and the US
(California Air Resources Board) that demonstrates that
consumption for emissions are better with diesel, and are
improved still further by the use of biodiesel in balancing
carbon dioxide emissions. The Economic Development Board is
promoting the change, but it will take a few years.

Rahul: Singapore, being a small and densely populated city
state with the highest per capita incomes of the region by
far, must engage the industry by either mandates or by
fiscal benefits for use of bio-fuels. If done correctly,
infrastructure needs in Singapore will be minimal. Biofuels
have to be encouraged to ensure a quick take-up rate and to
be removed from the realm of tree huggers, as we are seeing
in most of the world.
Anton: Given Singapore's strategic position in the
petrochemicals cluster and logistics connectivity, it is
well placed to serve as the regional oil palm hinterland
with value added opportunities, and taking advantage of low-
cost logistic networks and access to major port facilities.
With access to ample supply of palm-based feedstock from the
neighbouring producers of Malaysia and Indonesia, Singapore
is well placed to be a biodiesel blending and storage hub,
with a direct link to crude oil traders and petrochemical
companies operating in the region. As we expect to see
robust investment flows into biofuels in the coming years,
this means that the capital that needs to be invested in
order to bring about this expansion is significant, and
Singapore can potentially serve as a financial centre and
generate interest among commercial banks and private equity
funds to finance the growth in the biofuels sector. As the
market matures, there will also be a need to establish a
biofuels futures index.

Huifen: For investors interested in getting a piece of the
action, what are the investment opportunities available?

John: The biodiesel industry has a long way to go, and
investors will see short-term returns by investing in
facilities using current technologies, but the bigger play
is in plantation investments for biodiesel production.
However, my personal view is that technology within the next
five years will make ester technology second-best as
processes are being developed and improved every week to
make more efficient biofuels.

Anton: We expect tremendous growth in the biodiesel and
ethanol sectors in the years to come. In South-east Asia,
there is currently a surge in biodiesel investments, either
under construction or planned. Industrial investors go for
(control over) real assets through direct investments,
acquisitions, joint ventures either in plantations/biofuel
or adjacent industries such as storage, blending, etc.
Financial investors look for investments in shares of
biofuel companies (quite a few listed in the US) or
plantation companies with biodiesel capability (eg
Singapore-listed Wilmar) or alternatively invest in funds
such as the Robeco Clean Tech Private Equity fund that
spreads risk over a variety of countries and sectors.

Rahul: Wilmar International offers an integrated model.
Production models, coupled with either origination of the
feedstock or distribution, would be the best models to seek
out.

PARTICIPANTSin the roundtable

Moderator: Chen Huifen, correspondent, The Business Times

Panelists:

John Hall, global director, Peter Cremer Singapore GmbH

Rahul Kale, biofuels head, Wilmar International

Anton Timpers, corporate banking head, Rabobank
International, Singapore branch

KEY POINTS
There is great expectation about the potential of palmoil-
based biodiesel but such expectations need to be tempered
with the issues surrounding its viability in the long run.

Notwithstanding fluctuating crude oil prices, the long-term
sustainability of the industry will also require government
policies that encourage consumption and production, good
infrastructure, sound management of feedstock sources, and
technological advances to bring down the production costs
further.

Singapore can play a role by leading the region in the use
of cleaner biodiesels. Leveraging on its petrochemicals
industry and logistics strengths, the Republic can become a
blending and storage centre and serve as a key node for the
supply of palm oil feedstocks from the region.

Singapore can also serve as a financial centre for
investments in the biofuels industry. As the market matures,
it should also consider the potential for a biofuels futures
index.

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Joyo Indonesia News Service
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