Indonesia’s Biodiesel Take-Up to Lag Reform Target

Indonesia will find it hard to meet its ambitious timetable to burn more palm-based biodiesel, hampered by the demands of distributing the fuel to its thousands of islands and by reluctance to fill up tanks with biofuel.

The Southeast Asian nation is the top producer of palm oil and adding more to fuel could cut its oil import bill by around $2.5 billion a year. That would help Indonesia reverse trade deficits that have weakened its currency and dented investor confidence in the region’s largest economy.

Using more biodiesel at home would also help offset a likely fall in exports after major customer the European Union agreed to impose punitive duties on Indonesia for selling the fuel at unfairly low prices.

Jakarta’s energy ministry in August issued a new regulation — to go into effect next year — raising the minimum bio content in diesel to 10 percent, up from levels of 3-10 percent. For the power industry, the minimum was doubled to 20 percent.

But Indonesia is already failing to meet its existing domestic biodiesel requirements despite plentiful palm oil supplies and abundant refining capacity, and analysts say the new regulations will not be met overnight.

“The stumbling block is whether they can roll it out to the rest of the region where they have not done the logistical preparation,” said Ivy Ng, senior research analyst at Malaysia’s CIMB Investment Bank.

Indonesia’s current biodiesel consumption is estimated at about 5 million barrels a year, about half the 9.4 million barrels it should use under current rules, according to the Indonesian Biofuel Producers Association (Aprobi).

The new regulation would take consumption to around 25 million barrels if implemented in full, but Ng said she expected consumption to rise to about 12.5 million barrels by 2015.

A consumption boost will benefit biofuel producers and plantation owners such as Wilmar International and Astra Agro Lestari, but the sticking point will be how quickly the oil industry and consumers respond to the new rule.

Reducing imports

Indonesia has to import up to 6 million barrels of diesel a month, about 40 percent of its total oil product consumption, because the refining capacity at state-owned oil company Pertamina can only meet around two-thirds of demand.

If the new regulation was fully implemented, Indonesia would import around a third less diesel, saving more than $200 million a month based on benchmark diesel prices, according to industry and Reuters calculations.

Analysts and industry officials point to insufficient blending capacity at Pertamina, as well as a lack of the separate shipping and storage capacity needed for biodiesel, as a reason for not meeting usage requirements.

Transporting biodiesel from the domestic hubs on Java and Sumatra islands is more expensive than shipping diesel direct from Singapore due to the limited availability of tankers, said Aprobi general secretary Paulus Tjakrawan.

Pertamina though says it can ship the required level of biodiesel, blaming the slow take-up so far on concerns that the blend can damage engines.

“There are some challenges from the car industry. All of the cars can use this blended fuel, but it could impact the engine in the future,” said Pertamina refinery director, Chrisna Damayanto.

“Car producers are already complaining to the government about these problems.”

Indonesia’s powerful auto industries lobby group Gaikindo has said the new biodiesel blend can lead to a rise in fuel consumption and overheating in the types of engines used in Indonesia.

For consumption of the blended fuel to eventually meet targets, Ng said state power company PLN would need to convert to biodiesel at its diesel-fired power generators.

PLN president director Nur Pamudji told Reuters the power company would adopt the new standard with its existing infrastructure.

“There won’t be a problem with storage tanks – the existing tanks can be used straight away,” Pamudji said in a text message, adding that the new regulation would have no impact on the power company’s diesel engines.

Ref: Jakarta Globe (Update 27 November 2013)