Indonesia biodiesel firms await subsidy, fair prices

08/05/2009 (Reuters), Jakarta - Indonesia's palm-based biodiesel firms, which have mostly stopped operations, are awaiting a fair price formula and government subsidies to survive as they feel the pinch of surging palm oil prices, an industry official said.

The fledgling industry is expected to play a key role in absorbing growing palm output in world's top producer, but as feedstock prices become more expensive than fossil oils, it is difficult for the industry to expand without government support.

The government had planned to subsidize biofuel for transportation and a price formula had recently been agreed by the industry but these have yet to take effect despite the implementation of a mandatory biofuel policy since January.

As a result, the industry has been reluctant to supply biodiesel because prices offered by PT Pertamina, which blends the product, are below commercial prices, said Paulus Tjakrawan, secretary general of the Association of Indonesian Biofuel Producers.

"We can ensure supply sustainability only if prices are right. If you make a loss for a few months, of course you would have to stop selling," Tjakrawan told Reuters in an interview.

He said biofuels firms have received purchase orders from Pertamina but they have been delaying deliveries, or just stopped supplying the state-run fuel distributor.

Indonesian palm-based biodiesel firms could process up to 2.5 million tons of palm oil a year, or about 14 percent of the country's palm output, if they run at full capacity.

But they could lose about 2,000 rupiah ($0.193) per liter for selling their product to Pertamina on par to subsidized mineral-based diesel, which is now priced at 4,500 rupiah per liter, Tjakrawan said.

The outperformance of crude palm oil prices against mineral oil, which has made biodiesel relatively more expensive, has forced six out of 11 Indonesian palm-based biodiesel firms to halt operations with the remaining five firms running below 5 percent of their capacity.

Oil has dropped 60 percent from a record peak above $147 a barrel last July, outpacing palm oil's decline of 40 percent from a record 4,486 ringgit a ton hit in March last year.

Tjakrawan said the government should not delay implementing the price formula as it is deemed to be fair enough for the industry.

"Last time we heard the government wanted to implement the formula on May 1 but it did not happen. So we don't know when it will happen," he said.

According to the formula, the selling price for palm-based biodiesel is a combination of Indonesia's biodiesel price issued by London-based Argus Media Ltd and the monthly palm oil base export price issued by the trade ministry, divided by two.

For bioethanol, the government will use a combination of bioethanol benchmark prices issued by Argus and bioethanol prices from the country's bioethanol producers association.

The government has said it will pay subsidy of 1,000 rupiah per liter on average if prices of biofuel products for transportation are higher than mineral fuels but until now the plan has not been approved by the parliament's budget commission.

Under the subsidy plan, the government has estimated that Pertamina may blend 194,444 kilolitres of bioethanol and 580,025 kilolitres of palm-based biodiesel or about 522,000 tons, in 2009, a government document showed.

World – Oilseed production to hit record high

Global oilseed production is projected at a record 422.1 million mt in 2009, which is up 25.9 million from the previous year due to increasing demand for bio-fuel production, Biofuels International reports.

Demand in China, India, and the EU is considered to be the cause of a projected increase of 3.8% in 2009/10.

In the US, the oilseed production for 2009/10 is projected to reach 94.5 million mt, up 6% from its 2008/09 levels with soybean production accounting for most of the increase. BP PLC Chief Executive said Wednesday that in the long term, the world economy is poised to recover, restoring long term growth in energy demand seen in recent years, which "cannot be reversed”, Dow Jones reports.

But current volatility in oil prices, however, could dampen future oil supplies, constituting "one of the main challenges" faced by the oil industry.

BP's investment patterns, however, remain "very much unchanged”. Short-term recovery will take some time, especially in the US.

BP's industrial customers "are still seeing falling demand" which is expected to bottom out in Q3.

Latin America, whose share of global oil production has declined in recent decades, would need to address fiscal and political risks to investment in order to reverse that trend, adding that Brazil, which has welcomed foreign investment to exploit its deepwater offshore reserves, is "a good example" of a transparent energy regime.

Latin America, led by Brazil's efforts in sugarcane ethanol, is "well positioned" on alternative fuels, while biofuels could make up 20% of gasoline in Europe and the US,he said. (14 May 2009)