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25 Aug 2006


Bio-Diesel Fuel: Alternative Energy amid Steep Oil Prices (Current Issue No.1896)

In an environment of persistently high oil prices, the world has inevitably been confronted with an energy crisis. Thailand has implemented a policy of less dependence on oil imports and more reliance on alternative energy sources. To this end, development of alternative fuels over the long-term should be taken into account. A Cabinet resolution on May 17, 2005, determined that Thailand should envisage the use of a 5-percent bio-diesel blend (B5) nationwide by 2011, and a blend containing 10 percent bio-diesel (B10) by the following year. To meet this target, daily production of bio-diesel must reach around 8.5 million liters. This will also lead to rising investment for the expansion of oil plant cultivation, particularly for oil palms and physic nuts -- the targeted oil plants to supply bio-diesel raw material – plus construction of bio-diesel factories, as well as pumps at service stations for bio-diesel fuel.
Despite the government's strategies toward the development and promotion of bio-diesel production to partially replace pure ‘petro-diesel' use, several obstacles seem to be in the way of achieving that goal, as summarized in the following:
Production-related problems, i.e. --
Procurement of Raw Material: Expansion of oil palm cultivation has so far failed to meet the target due to:
- Dwindling prices of oil palm nuts discouraging farmers from expanding cultivation. The government has implemented a policy of planting oil palms as an alternative fuel source. Farmers have been encouraged to grow this type of oil plant with a subsidy of Baht7,000 per rai given to those who have more than 15-rai of farmland. Repayment on the program is given a six-year term. The government is expected to also guarantee the price of oil palm nuts (full bunch) at THB3.50 per kilogram. However, the state-guaranteed price has yet to be officially announced, and the price of oil palm nuts (full bunch) has recently dropped to THB1.60-1.80 per kilogram. Most oil palm planters have thus been faced with losses, as the average cost of production stands at THB2.00 per kilogram. It can be said that the government-supported oil palm cultivation policy has proven to be unpopular with farmers, most of whom are more interested in growing rubber. Under these circumstances, expansion of oil palm cultivation may fall short of the set target. Another point to be considered is the government's policy of expeditious expansion of cultivation of other cash crops, particularly, rubber, on top of oil plants for the production of ethanol and bio-diesel, as part of its efforts to encourage greater use of alternative energy sources. Farmers, therefore, have to consider the cost-effectiveness of their cultivation. In addition, Thailand has only limited capacity to expand such cultivation to accommodate the government's policy. For investment in cultivating these plants in other countries, other risks, in particular, political uncertainty, must also be taken into account.
- Suitable zones for more palm oil cultivation. Lack of confidence in the suitability of potential cultivation area soil casts doubt over the yield meeting the expected volume. Specifically, the plan to increase palm oil plantations in the northeastern region is in doubt, because a suitable area, according to the study based on an aerial map prepared by the Department of Agriculture, has led to disagreement between some experts and palm oil entrepreneurs. This is because, apart from the appropriateness of the soil and good seed plants, palm oil plantations need sufficient water, a major problem facing palm oil cultivation in that region.
-Expanding palm oil plantations to neighboring countries. The government policy to increase palm oil cultivation includes expanding onto another one million rai in neighboring countries such as Laos, Cambodia and Myanmar under contract farming agreements. One risk involved in this type of investment is a breach of contract after harvesting, for example, refusal to sell the output as agreed, and political uncertainty, which would be affected by the investment policies as well as other recent policies of these countries to begin cultivating these plants as a source of bio-diesel power, themselves.
Another point to be considered is the setting up of palm oil refinery plants, as cut palm oil nuts need to be processed within 24 hours to get the best quality from them. It would then be necessary to establish extracting factories near cultivation areas. The problem of needing new factories will occur if the new growing areas are far from the existing plantations.
-Seed Problems. The government policy to increase palm oil cultivation under the plan to promote bio-diesel fuel has led to a shortage of breeding seeds. Under the Department of Agriculture‘s regulations, palm oil seeds imported by the private sector must be registered for inspection. Palm oil planters who buy registered seeds will be protected by a guarantee scheme that says, if the yield is below target after cultivation for 4 years, the seed importers will pay compensation of THB363 per plant to the planters.
However, although the Ministry of Agriculture has regulated on the qualifications of oil seed producers for the project to promote palm oil as a source of alternative fuel, there are palm oil producers under the CEO Governors budget who are not subject to the regulations of the Ministry of Agriculture. The qualifications of these producers and the seeds they buy are not regulated by the same standards set for the country. Besides this, the Ministry of Agriculture and Cooperatives, and the Department of Agriculture, are in conflict about the qualifications of palm oil plant breeders. Out of the 23 names proposed by the Department of Agriculture, only 11 names were approved by the Ministry of Agriculture and Cooperatives. They are 1. Sinthuset Co. Ltd., 2. Univanich Palm Oil Public Co., 3. Lang Suan Palm Oil Breeding Co., Ltd., 4. Wichaiphan Rubber-Palm, 5. Kru Chan Palm Oil Breeding, 6. Forest World Group Co., Ltd., 7. Thitawan Palm Oil Breeding, 8. Thaksin Palm Co., Ltd., 9.,Surat Palm Oil Breeding Limited Partnership, 10. Kor. Palm Oil Breeding, and, 11. Vibahvadhi Plant Co., Ltd. The dispute lies in a provision that requires a bank certificate on their financial status, and a bank guarantee worth 5 percent of the plants to be grown. This means planters who do not buy palm oil plants from approved companies will not be entitled to compensation.
1.2 Setting up bio-diesel production plants is a key linkage in the plan to promote the development and use of bio-diesel fuel. In this respect, businesses can invest in bio-diesel production with one of the following approaches:
1. Continue production and add investment over their existing crude palm oil (CPO) pressing mills as well as renovating their power plants. This investment should focus on bio-diesel production plants with a production capacity of 100,000 liters per day (which is best for the Southern region). The project would need investment capital of THB400 million, of which THB350 million would be needed for the construction of the bio-diesel production plant and THB50 million would be required for power plant renovation.
2. Investments in bio-diesel production plants with a production capacity of 100,000 liters per day and buying crude palm oil (CPO) and stearin (animal fat) from the market, which would be a suitable plan for the Central region. The required investment capital is THB350 million for the construction of the bio-diesel production plant.
3. Investing in the entire system starting with growing palms to constructing a bio-diesel production plant. This type of investment would require a total capital of THB1 billion for growing oil palm on 60,000 rai, plus THB200 million to build a CPO pressing mill, as well as THB220 million to build a power plant and THB350 million to build a bio-diesel production factory.
The problem at the moment is clarity about those who would invest in bio-diesel production for commercial purposes, where there are only PTT PCL. and Bangchak Petroleum PCL as buyers, at present. So investors who would supply bio-diesel to these two companies would be considered as having lower risk, because those retailers' bio-diesel production plants and bio-diesel service stations are definitely ready to support sales, while the investment to produce bio-diesel at the community level has more potential as production would be kept in line with the demand of each community.
Risks that investors must consider in setting up plants for commercial bio-diesel production tend to be the same as those faced by investors of ethanol production factories, i.e., return on investment, which remains uncertain due to many factors:
- Fluctuating oil prices in the global market, which affect the cost/profit calculations on the bio-diesel retail price, and have an ongoing effect on the calculation of the break-even point in setting up a bio-diesel production factory.
- Clarity in the government's policies. According to the plan, the government would promote bio-diesel usage by granting subsidy or waiving taxes as with the policy for gasohol, particularly taxes contributed to the Energy Conservation Promotion Fund, the State Oil Fund, Municipal Taxes and Excise Tax, to keep the bio-diesel retail price lower than the price of petro-diesel (where the former is still not defined at present, while the selling price of gasohol is set at 1.50 Baht per liter lower than benzene, and companies will not be compensated if their production is below set targets.
Risk from volatile prices of raw materials due to the possibility that if the expansion of palm cultivation does not meet the target, or the weather conditions are unfavorable, it will affect the palm oil output, varying from the projection, resulting in a higher CPO price. This would also mean that the cost of bio-diesel production would rise, which could effect the price of bio-diesel to move closer to that of petro-diesel until it becomes unviable for investment, etc.
Besides this, another issue is that bio-diesel factories have imported raw palm oil at prices tending to be lower than the prices for domestic product, because the key production sources of raw palm oil in the world -- Malaysia and Indonesia -- are promoting the production of bio-diesel, as well. As a result, they have an advantage over Thailand on the production cost of raw palm oil, being lower than Thailand. No matter whether it is raw palm oil or bio-diesel that is imported, it will affect the domestic raw palm oil market to be in excess supply in the market. That may affect palm oil plants and palm oil agriculturists. There has been no announcement on utilizing bio-diesel for commercial purposes, other than on the standard of community bio-diesel, which does not instill confidence about the quality of blended bio-diesel for customers. Hence, the demand for bio-diesel might not be as high as expected.

2. The demand for bio-diesel. As for the plan for the utilization of B5 by 2011 nationwide, and the utilization of B10 by 2012, the probability of it occurring will depend on the raw material supply, which means that the expansion of palm cultivation, the establishment of bio-diesel factories to support increased palm oil production, as well as the acceptance of consumers as important factors affecting confidence in the plan, and particularly the effect of bio-diesel on engines. As a result, the authorities will have to make an announcement on the standards for commercial bio-diesel fuel, and create confidence with automobile producers by providing test reports and announcing certification of B5 and B10 bio-diesel fuels. Stimulating the populace to use bio-diesel fuel will not depend only on its price, but also on official policy to supplant petro-diesel, as with the announcement discontinuing 95-octane gasoline. Such strategies have driven consumers to use more gasohol. Because of that, the promotion policies on ethanol production for use in gasohol have been successful.

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