Indonesia, Malaysia push a biofuels cartel

Just as the administration of US President George W Bush is being urged by a group of leading US business executives and senior military officers to act decisively to break America’s dependence on oil and the EU is seeking alternative energy sources, Malaysia and Indonesia want to create a an Opec-style cartel based on one of the alternatives – palm oil as a biofuel.

The two countries together produce about 85 percent of the world’s palm oil, whose production costs are about 40 percent lower than other biofuels. Major palm oil associations for the two countries announced December 9 that they are seeking to establish a joint body to regulate international prices, fight tariff barriers in developed countries and promote palm oil as a feedstock for biofuel production.

Along with a possible cartel, both countries are ramping up production, largely to meet demand in Europe. This might make Europe greener but palm oil plantations also carry a heavy cost in terms of local environmental damage. The UK-based Friends of the Earth (FOE), has called the palm oil industry "the most significant cause of rainforest loss" in Malaysia and Indonesia. Alarmed ecologists say the damage caused by logging and palm oil plantations to the habitat of the endangered orang-utan, Sumatran tigers, and rhinoceros. The double whammy of growing palm oil and the removal of tropical hardwood timber is taking an immense toll on Indonesia's forests and surrounding communities while the practice of using fire to clear land for palm oil cultivation in Indonesia has blanketed the region in thick haze for parts of the year.

But markets in the west beckon. The US is almost exclusively dependent on oil for transport and a bipartisan report issued Wednesday, pointed out that more than 90 percent of the world’s crude oil is controlled by foreign governments. After six years of inaction, the Bush administration is finally beginning to think in terms of finding alternative fuel sources. Other countries, particularly Brazil, have made important strides in developing alternatives. Biofuels, particularly from sugar cane, now account for about half of Brazil’s transport fuel, making it the biofuels leader. In the United States corn and soybeans are increasingly grown to produce extremely expensive ethanol supported by government subsidies.

Malaysia and Indonesia announced jointly earlier this year that they are allocating 40 percent of their combined annual palm oil output for biodiesel production. The move could further increase prices, making it expensive for both food and energy users. As one commodity analyst in Jakarta pointed out to Asia Sentinel, palm oil is a source of both energy and food so both demand and price should increase.

The rising popularity of palm oil has also driven the consolidation of government-linked plantation companies in Malaysia, as Golden Hope Plantations, Sime Darby and Kumpulan Guthrie merged to create the world's largest listed palm oil estate, accounting for some 6 percent of global production. These and other Malaysian companies have expressed interest in 'cooperating' with Indonesian enterprises in the biofuel sector.

Notwithstanding the robust export market for palm oil in food production and domestic demand for bioenergy, the real goal of both countries is to meet surging demand for biofuels in the environmentally-conscious European Union, the world's biggest biodiesel producer and consumer. Member countries are chasing biodiesel supplies to meet stringent emission standards ‑ the EU has set a non-binding target of replacing 5.75 percent of diesel in the transport sector with renewable energy by 2010.

As a result Malaysia is trying to dominate biodiesel supply for the EU. Three plants, with a combined capacity of 276,000 tonnes a year, are already making biodiesel and shipping to the EU. Several other plants are due to come on stream in the near future. Malaysia is projecting one million tonnes of biofuel production next year for export.

In Indonesia, palm oil generated more than US$6 billion last year and growing energy crops in addition to food crops could, in theory, transform the lives of small farmers and help alleviate unemployment and poverty at the same time. Up to 70 percent of all households live in rural areas and biofuels promise salvation for the long-neglected agricultural sector. The big question is how Jakarta might go about cashing in on demand for palm oil, which could drive the expansion of large-scale oil palm plantations, which in Indonesia totalled 5.4 million hectares in 2005. The government plans to develop an additional 3 million hectares by 2010.

But because of environmental damage and other factors, there is widespread local opposition to the establishment and expansion of plantations. Thousands of indigenous people have been evicted from their lands over the years, with many beaten and even tortured when they resist, human rights groups say. Nonetheless, the 20 percent rise in palm oil prices this year has spurred plantation owners and farmers across Indonesia to burn vegetation for replanting, darkening the skies for hundreds of kilometers across Southeast Asia.

Most of the land allocated for plantations is “conversion forest” and has already been logged by timber companies. Any remaining trees are cut down and sold by the plantations before the brush and debris are burned. After clearing the land, the timber companies plant oil palm.

Environmental groups cite palm oil production as merely a ploy to log the rainforests, however. It is also a cheap way for companies to retain their legal concessionary rights by complying with reforestation regulations. Despite a ban on burning since 1995, big plantation companies use fire as the cheapest way and quickest way of clearing land. According to the Indonesian environmental group Sawit Watch, 133 oil palm plantation companies were among 176 companies identified as possible suspects in a series of fires in 1997 that clouded the region for weeks. At around the same time, former Indonesian dictator Suharto's son Bambang Trihatmodjo and former Malaysian Prime Minister Mahathir Mohammad's son Mirzan were partners in Malaysia's Berjaya group, which was excoriated by US environmental groups for its widespread destruction of forest land.

Tony Guilding, Vice President of the Australian Orang-utan Project (AOP), points out that government policy in both countries does not seem to affect the operations of the plantations. “It's the wild west out there in Malaysia and Indonesia ‑ people have little idea what goes on,” he is quoted as saying in a report. “Regulators are on the take, and poor workers who need incomes make up the labour. We've experienced the militant threats and seen the rules flouted.”

Historically too, Indonesian administrations have mismanaged natural resources, which, helped by endemic corruption, has seen the country become a net importer of fossil fuels. Nonetheless, the national biofuel plan aims to reduce the country's petroleum consumption, which now represents 60 percent of national fuel consumption, to 30 percent by 2025.

Peninsular Malaysia has no more land left for plantation and needs to rely on better yields instead. Officials say that more efficient production and the use of high quality seed could give Malaysian producers an oil extraction rate of 25% and a production yield of 35 tonnes per hectare per year. Indonesia, on the other hand, still has vast tracts of land, although it has only recently started to achieve improved yields.

Rapid expansion of Indonesian oil palm plantations begin in the late 1970s as Suharto set out to overtake Malaysia as the world's main exporter of palm oil. Although the area devoted to oil palm plantations tripled between 1989-2000, yields per hectare dropped by some 33 percent during the period.

Carl Bek-Nielsen, vice chairman of Malaysia's United Plantations Bhd, explains the interesting rationale behind Malaysia's optimism: “As capacity in Europe grows, room for other oils, including palm oil, is bound to open up. Even if it is another oil that goes into biodiesel, that other oil then needs to be replaced. Either way, there's going to be a vacuum and palm oil can fill that vacuum ‑ be it for biodiesel or for food," he told Dow Jones.