Indonesia, Malaysia look to biodiesel amid high oil prices

By Eric Unmacht and Julia Yeow Jun 30, 2006, 3:56 GMT

Jakarta/Kuala Lumpur - Faced with soaring oil prices, Indonesia and Malaysia are turning to biodiesel, a fuel that cuts regular diesel with vegetable oil, to reduce emissions and costly subsidies.

Indonesia has long searched for ways to reduce air pollution in Jakarta, one of the dirtiest cities in the world, and the government last month introduced biodiesel at petrol stations in the capital.

'The air pollution in Jakarta is very terrible,' said Amir, 35, a bus driver who was filling up at a Pertamina station in East Jakarta. 'I chose using biodiesel to support our government's planning and make the air in Jakarta fresher.'

'More than anything else the cost of biodiesel fuel is cheaper than [regular diesel],' he said, 'so I can save money for my family.'

While cost is the main motivator for most Jakarta residents, the alternative fuel was, in fact, only slightly cheaper than regular diesel during the weekend launch because it was being sold at petrol stations owned by the government, which set the prices artificially low.

The high cost of substitutes is just one of the obstacles governments around the world face in making the move to alternative energies and weening their populations off a heavy dependence on fossil fuels.

'The biggest impediment of biofuel popularization is its higher price than conventional fuel,' Tomohide Sugino, a project leader for the UN's Centre for Alleviation of Poverty through Secondary Crops' Development in Asia and the Pacific, wrote recently in a Jakarta Post opinion column.

'Roughly speaking, the production cost of biofuel is twice as much as gasoline,' he wrote. 'The forerunners who have successfully increased biofuel consumption have provided tax exemptions or subsidies to their biofuel producers.'

Without these incentives, private companies have been hesitant to produce and sell biodiesel because of the relatively high cost of their most available substitute - palm oil.

The uncertainty of supplies is another factor, despite the fact that Indonesia is second only to Malaysia in the production of crude palm oil.

Indonesia and Malaysia together control nearly 85 per cent of the global production of crude palm oil, but demand for it has been rising overseas - from Europe, Colombia, India, South Korea, Turkey and elsewhere.

The versatile 'wonder oil' has been used in goods ranging from margarine and soaps to lipstick and even napalm and is now found in an estimated one in 10 supermarket products.

'The prices of crude palm oil are rising, and export demand is increasing, so small and large palm-oil-producing companies are already making enough [money],' said Andrew Lim, a palm-oil-estate small holder.

'It isn't worth the risk right now to put in the capital for a biodiesel plant unless the government can make it worth our while,' he added.

That's why the Indonesian government is looking at new ways to increase the production of palm oil and biodiesel for domestic use.

Research and Technology Minister Kusmayanto Kadiman said he had asked relevant ministries to develop a policy that would prioritize the production of palm oil for biodiesel use in Indonesia.

Kadiman said his ministry planned to build four biodiesel- processing plants in Indonesia that would together cost up to 33 million dollars, and to develop 500,000 hectares of plantations every year, with more than 1 billion dollars from the government.

The Malaysian government is taking similar steps and pledged last year to implement a national biofuel policy to reduce the country's dependence on crude oil and instead promote demand for palm oil as the key ingredient in biofuel production.

The policy calls for the mandatory use of biodiesel made of 5-per- cent processed palm oil with 95-per-cent petroleum diesel for all diesel vehicles from the year 2007.

If the legislation is approved, the country would be the first in Asia to have such a policy.

'Malaysia's move towards biofuel can only benefit the country's palm-oil industry,' said Sabri Ahmad, executive director of Golden Hope Plantations, a company involved in a government-sponsored pilot project to develop palm-oil biodiesel plants.

'If only 5 per cent of palm oil is blended with diesel, a total of 500,000 tons of palm oil would be used for this purpose each year,' he said. 'This would translate into an extra 1 billion ringgit [270 million dollars] in additional revenue.'

However, the push for palm oil biofuel is worrisome for some environmental groups which charge that new plantations will destroy rainforests and habitat for such threatened Indonesian wildlife as orangutans, Sumatran tigers and rhinoceroses - and also infringe on land used for local livelihoods.

'It's like they're going to solve one problem by creating another,' said Rudy Lumuru, executive director of Sawit Watch. 'They say biofuel is to minimize air pollution, but when they cut the forests, they create a new problem.'

The government has shown some willingness to reform the palm-oil industry and use already-abandoned lands for planting instead of opening new ones. Officials are also looking to better substitutes for petrol-based fuel, such as jatropha, a cheaper source of vegetable oil that can be grown on dry, non-arable lands.

But with corruption still rampant, companies continue to clear forests that are often not even used afterward for palm oil. Large- scale development of jatropha and other alternative fuel sources would take years, adding to environmentalists' concerns.

'The government and the country see palm oil as one promising sector to develop,' said Fitrian Ardiansyah, a programme coordinator for the World Wildlife Fund. 'We have to balance the demand for alternative fuels and economic growth of the country with environmental and social concerns.'