A who’s who of Indonesian biofuel

Some of Indonesia’s most influential and politically connected companies have refocused their business strategies and are joining hands with foreign investors to push forward the government’s multi-billion dollar ambition to transform the country into the world’s leading biodiesel producer.

But there are major political, financial and environmental risks to the grand designs, which arguably are being understated and threaten to complicate the emerging industry’s outlook. The same

local companies now leading Indonesia’s biofuel drive incurred and defaulted on huge foreign debts in the wake of the 1997-98 Asian financial crisis. Few fully repaid their debts and today they still dominate the country’s logging, wood-processing and pulp industries. Several also have highly suspect environmental records.
[survey of companies involved]

One obvious controversial aspect of the master plan is the need for vast new land banks for plantation expansion, which some environmental groups say is accelerating already rapid deforestation. Indonesia currently has an estimated 5.5 million hectares of palm oil plantations, and the government now plans to more than double the total area under cultivation through the development of another 6.1 million hectares in Kalimantan, Papua and other provinces.

Environmentalists say the expansion of oil palm plantations continues to come at the expense of natural forests rather than the conversion of already denuded land because of the better soil conditions fresh-cut forest lands provide. The annual forest fires that rage through Indonesia and frequently smother neighboring countries in smog are started mainly by palm growers to clear land for new planting.

More significantly, perhaps, the biofuel industry’s economics are less than clearcut. Energy analysts note that biofuel projects around the world – even those benefiting from fat government subsidies – would be uncompetitive should crude oil prices fall to about $50 per barrel. Energy consultant Rudy Salim told Asia Times Online that any incentive for making and selling biodiesel produced with Indonesian palm oil will essentially disappear when crude palm oil prices reach levels above $650 per tonne.

He emphasizes that biodiesel is in any case never going to be more than a “drop in the ocean” in terms of overall supply compared to fossil fuel-based diesel. He figures that based on an average price of crude palm oil under $500 per tonne, the break-even point for palm oil versus crude oil would be $40 per barrel of oil. Crude prices now hover around $62 a barrel, while commodity analysts expect palm oil will average $564 a tonne this year compared to between $400 and $500 last year.

It’s not only industry analysts who are raising red flags. United Nations environment program executive director Achim Steiner last month warned attendees at a global business summit for the environment in Singapore that businesses run the risk of a public backlash if the globally in vogue green business model is hijacked by industries who engage in environmentally destructive practices. That may have been a veiled reference to the personalities leading Indonesia’s biofuel development.

Asia Times