The Palm Scribe

CPO gives Indonesia edge in biodiesel market

Indonesia stands a good chance of becoming the world’s top biodiesel producer. as it is the world’s the largest Crude Palm Oil (CPO) producer,  has abundant land and raw materials, relatively stable economic growth and a foreseeable steady demand for fuels.

palm oil workers
ILLUSTRATION: Palm oil palm fruits and workers in background.

Biodiesel is a renewable, clean-burning fossil diesel replacement that can reduce dependence on fossilfuels, create jobs and improve the environment – if produced sustainably.

It is produced using a broad variety of resources including CPO, soy beans, jathropa, grape seed, rapseed,  sugar cane, animal fat, recycled cooking oil, and algae. It can be used in existing diesel engines without modification, most often in blends of up to 20 percent biodiesel.

Indonesia is keen to develop its biodiesel industry as it could significantly lessen dependence on imported crude oil, bolstering national security and reducing its trade deficit. A growth of the biodiesel industry would also boost the economy, not just by creating jobs but also by reducing dependences on global oil markets and price vulnerability.

In developing its biofuels program, Indonesia focuses on palm oil-based biodiesel although it did initially also encourage the growth of jatropha as a feedstock. The biofuel program has been also primarily centred on the development of biodiesel for domestic consumption, especially for road-transportation. With the saturation of the domestic market, however, producers are now increasingly looking to export opportunities.

Recent trade barriers in the form of higher duties and dumping charges, in the European Union and the United States, two major export markets, are now tempting Indonesian producers to look into developing new markets, including the huge Chinese one.

From the mid-2000s, the government began to come out with an energy policy aimed at shifting part of the country’s hydrocarbon fuel consumption to renewable energy sources, including biofuels. It made mandatory the mixing of a percentage of biofuel in regular fossil fuels. However, this quickly faced a stumbling block, as the world price of fossil fuels became weak while biofuel production cost was rising.

The cost disparity forced the closure of many companies producing palm oil for biofuel and the industry clamoured for government incentives, including in tax, to be able to continue operations.

A welcome breakthrough came in 2015 with the passage of a number of business-friendly regulations concerning palm oil.

They included Regulation Number 12 of 2015 of the Minister of Energy and Mineral Resources on Mandatory Biodiesel Blending of 15 percent (B15), Government Regulation No. 24 of 2015 on Collection of Plantation Fund and Presidential Decree No. 61 of 2015 on Collection and Utilization of the Palm Oil Plantation Fund.

Under the Palm Oil Plantation Fund policy, the government levies USD 50 per ton, partly to subsidize the national biodiesel program by offsetting the difference between fossil diesel and biodiesel prices for Indonesian consumers. The fund is managed by the Oil Palm Estate Fund agency (BPDPKS).

At present, the Indonesian Association of biodiesel producers said it currently has 22 members, with an annual production capacity of 10,070,448million tons of biodiesel.

The Ministry of Energy and Mineral Resources reports that Indonesia’s biodiesel production capacity has grown from about 4.8 billion litres in 2012 to about 10.8 billion litres in 2016. It, however, also reports that biodiesel production only reached 3.656 billion litres.

The ministry said that biodiesel consumption in 2016 reached 3.008 billion litres, but in 2017 the figure is expected to drop to 2.8 billion litres, because of slightly declining procurement.

Trade data puts Indonesia’s 2016 exports at 478 million litres. First quarter 2017 biodiesel exports, however, were low, at 1,018,944 kilolitres, likely in response to low fossil diesel prices. This condition is expected to remain the same for the year, and possibly next year too.

Besides the current stagnant domestic market, Indonesia’sbiofuel industry also faces a host of other daunting challenges. First of all, the development of the downstream industries in the oil palm sector, including the biodiesel industry, needs a substantial investment.

Most of the crops used for biofuel production, including oil palm,  are originally grown for food consumption, prompting conflicts and competition that have resulted in increasing food prices.

The sprawling archipelagic nature of Indonesia translates into higher logistic costs, and thus increase the selling price of CPO.

Tedious bureaucratic permit processing, low participation from local administrations as well as the reluctance of the industry to jump into the bandwagon because of market uncertainty, also do not help.

Last but not least are the sustainability issues plaguing the palm oil plantation sector, with widespread accusations of deforestation of primary forests, uncontrolled carbon gas emission, contamination of natural water systems, land conversion, the use of peat land, human rights violations linked to the workers and the local communities and inefficiencies in the production of CPO.

Overcoming these obstacles would put Indonesia right up there as a biodiesel producer. The Palm Scribe will be talking to government officials to get a closer look at how they intend to do just that.

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