Thursday, May 24, 2007

Indonesia: A who's who of Indonesian biofuel


By Bill Guerin

JAKARTA - Some of Indonesia's most influential and politically connected
companies have refocused their business strategies and are joining hands
with foreign investors to push forward the government's multi-billion
dollar ambition to transform the country into the world's leading
biodiesel producer.

But there are major political, financial and environmental risks to the
grand designs, which arguably are being understated and threaten to
complicate the emerging industry's outlook. The same local companies now
leading Indonesia's biofuel drive incurred and defaulted on huge foreign
debts in the wake of the 1997-98 Asian financial crisis. Few fully
repaid their debts and today they still dominate the country's logging,
wood-processing and pulp industries. Several also have highly suspect
environmental records.

Now, they are landing big new foreign joint-venture deals to develop the
nascent biofuel sector, including major investments in palm-oil
plantation development and big new processing facilities that benefit
from government incentives and policies aimed at rapidly developing the
sector. For instance, Chinese energy giant China National Offshore Oil
Corp (CNOOC) is among 59 foreign and local energy investors who in
January signed many biofuel-related renewable energy agreements worth
US$12.2 billion.

CNOOC is China's leading energy company and leads the country's broad
strategic efforts to reduce its dependence on imported crude oil and
offset the use of coal. It has recently teamed up with local plantation
giant Sinar Mas Agro Resources and Technology (SMART) and Hong Kong
Energy in what is being billed as the world's largest biofuel project.
It has plans to bring three biodiesel plants online this year and
additional facilities in Papua and West Kalimantan provinces beginning
in 2008.

SMART is listed on the Jakarta and Surabaya stock exchanges and is a
subsidiary of the country's largest oil palm grower, Golden
Agri-Resources Ltd. It is also part of the controversial Widjaja
family's sprawling business empire, which includes Asia Pulp & Paper
(APP), part of the Sinar Mas Group and Asia Pacific Resources
International Ltd (APRIL), which in turn is controlled by Raja Garuda
Mas International (RGM).

Therein, some analysts contend, lies big risks. At the height of the
Asian financial crisis, Sinar Mas and APP defaulted on billions of
dollars worth of loans, equivalent to more than a tenth of Indonesia's
total foreign debt. Many have put those dark days behind them, but their
reputations as reliable business partners are still in doubt. APRIL
owner Sukanto Tanoto is Indonesia's richest man, according to a recent
Forbes magazine survey, and he is recently on record as referring to
palm oil as "green gold".

Global market forces are definitely driving up prices, but the family's
past business practices are still questionable in the minds of certain
credit analysts. Golden Agri-Resources Ltd plans a bond issue in
Singapore this year, but US-based credit-rating agency Moody's has
warned that the company's "complicated family-controlled organizational
structure" risks funds being used to support affiliated companies.

The regionally-oriented RGM Asian Agri, which defaulted on $1.26 billion
of debts owed to a consortium of foreign and local banks during the
financial crisis, now operates over 200,000 hectares of palm oil, rubber
and cocoa plantations across Indonesia, the Philippines, Malaysia and
Thailand. Ranked as one of Asia's largest primary producers of crude
palm oil, the company manages more than 26 plantations totaling 160,000
hectares and 19 palm oil mills with a production capacity of more than 1
million tons. It also has three refineries processing crude palm oil
into end products.

Riau province, home to both APP and APRIL's giant pulp and paper mills,
has more recently become Indonesia's largest crude palm oil producing
area. Both enterprises also have the lion's share of plantation
concessions there. Out of a total of 1,806,533 hectares of plantation
concessions, APP holds 679,424 and APRIL 639,593. APRIL also has
concessions for 57,807 hectares in the Riau islands.

Eyes on the Forest, a coalition of three environmental groups active in
Riau, claimed that an independent investigation they conducted found
that APRIL was involved in questionable forest clearance operations in
two concession areas and that the company did not possess a valid
logging license. APRIL has denied that it was not in "full legal
compliance" and no legal action has been taken against the company.

APRIL announced earlier this month a plan to spend $60 million on a new
biodiesel plant with Texas-based Fulcrum Power Services and is now
building a second paper mill in Sumatra province which will double its
capacity to 800,000 tons per annum by year's end. Meanwhile, RGM's Asian
Agri unit has a production capacity of about 1 million tons of crude
palm oil per year, which is currently used mainly for food production,
but the company now says it plans to build a palm-based biodiesel plant
in the area.

Another major player is publicly listed PT Bakrie Sumatera Plantations
(BSP), owned by the listed conglomerate PT Bakrie & Brothers, which is
80% owned by the family of Coordinating Minister for People's Welfare
Aburizal Bakrie. The family accumulated and defaulted on part of more
more than $1 billion in debts at the height of the Asian financial
crisis related to a broad range of businesses.

BSP currently has concessions on 53,000 hectares of mixed plantations,
the majority of them planted with oil palms. The company recently
acquired another 25,500 hectares in Sumatra and expects to boost crude
palm oil production to 180,000 tons this year, up from 158,000 in 2006.
The company also operates three palm oil refineries in West Java and
Sumatra and holds a 70% stake in Bakrie Rekin Bio-Energy, a joint
venture with state-owned contractor Rekayasa Industri, with whom it has
started building a biodiesel plant in Batam with a capacity of 100,000
tons per year

The Widjaja and Bakries are not the only ones bidding to rehabilitate
their businesses and restore their family fortunes through
biofuel-related businesses. For instance, the Salim Group's publicly
listed Indofood Agri Resources Ltd, with investments in oil palm
plantations, commands a 60% share of Indonesia's cooking oil sector. It
recently raised $275 million in a share sale in Singapore to be
partially used for biofuel-related outlays. The group was founded by
Liem Sioe Liong, a renowned business associate of former strongman
president Suharto.

Meanwhile, PT Astra Agro Lestari, owned by Indonesia's giant auto maker
Astra International, is the country's largest crude palm oil producer.
Founded by Suharto associate and former trade minister Bob Hasan, the
company controls some 205,000 hectares of plantation area in Sumatra,
Kalimantan and Sulawesi provinces. Hasan was convicted on corruption
charges in February 2001 for causing the Indonesian government to lose
$244 million in a fraudulent forest-mapping project. He was released on
parole in February 2004.

Although criticized for their past cozy relations with senior
politicians, Indonesia's emerging biofuel tycoons are almost universally
taking their corporate cues from the government. The chairman of the
government's biofuel development committee, Alhilal Hamdi, says current
planning envisages production of about 200,000 barrels of oil equivalent
in biofuel per day by 2010.

Towards that end, the government has ordered provincial governments to
simplify arrangements for land-use permits, urged the Agriculture
Ministry to encourage more raw material production, goaded the Industry
Ministry to simplify plant-licensing procedures and passed a new
investment law that gives foreigners control over land for as long as 90

Most of the new land to be made available by the government will be used
to nurture palm oil, the government's most favored basic feedstock for
biodiesel. Palm oil production hit 16 million tonnes last year, with
about 60% of that total exported both as finished product known as RBD
palm olein and crude palm oil. Total output is expected to grow by
500,000 tons to 750,000 tons a year for the foreseeable future as more
acreage comes on stream.

One obvious controversial aspect of the master plan is the need for vast
new land banks for plantation expansion, which some environmental groups
say is accelerating already rapid deforestation. Indonesia currently has
an estimated 5.5 million hectares of palm oil plantations, and the
government now plans to more than double the total area under
cultivation through the development of another 6.1 million hectares in
Kalimantan, Papua and other provinces.

Currently, decisions on the maximum and minimum area to be used for palm
oil and other commercial crop plantations are in the hands of the
minister of agriculture. Plantation companies are licensed by local
administrations in the respective provinces, which officially dispense
35-year renewable concessions based on the availability of land,
population density and other factors.

Environmentalists say the expansion of oil palm plantations continues to
come at the expense of natural forests rather than the conversion of
already denuded land because of the better soil conditions fresh-cut
forest lands provide. The annual forest fires that rage through
Indonesia and frequently smother neighboring countries in smog are
started mainly by palm growers to clear land for new planting.

More significantly, perhaps, the biofuel industry's economics are less
than clearcut. Energy analysts note that biofuel projects around the
world - even those benefiting from fat government subsidies - would be
uncompetitive should crude oil prices fall to about $50 per barrel.
Energy consultant Rudy Salim told Asia Times Online that any incentive
for making and selling biodiesel produced with Indonesian palm oil will
essentially disappear when crude palm oil prices reach levels above $650
per tonne.

He emphasizes that biodiesel is in any case never going to be more than
a "drop in the ocean" in terms of overall supply compared to fossil
fuel-based diesel. He figures that based on an average price of crude
palm oil under $500 per tonne, the break-even point for palm oil versus
crude oil would be $40 per barrel of oil. Crude prices now hover around
$62 a barrel, while commodity analysts expect palm oil will average $564
a tonne this year compared to between $400 and $500 last year.

It's not only industry analysts who are raising red flags. United
Nations environment program executive director Achim Steiner last month
warned attendees at a global business summit for the environment in
Singapore that businesses run the risk of a public backlash if the
globally in vogue green business model is hijacked by industries who
engage in environmentally destructive practices. That may have been a
veiled reference to the personalities leading Indonesia's biofuel

Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000,
has been in Indonesia for more than 20 years, mostly in journalism and
editorial positions. He specializes in Indonesian political, business
and economic analysis, and hosts a weekly television political talk
show, Face to Face, broadcast on two Indonesia-based satellite channels.

He can be reached at

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