Thursday, October 11, 2007

[PBN] Philippines: Biofuel Program Virtues Not Clear


Bio-fuel for your car engine, anyone?

By Euan Paulo C. Añonuevo and Likha C. Cuevas-Miel, Reporters

WITH crude oil prices scaling new highs in the international market,
the promise of bio-fuels has never shone brighter. But risks lurk
behind the Philippines' recent decision to require t he shift to
alternative fuels, ranging from farmland inflation to food scarcity,
according to pundits.

Early this year, the government began implementing the Bio-fuels Act
of 2006, the first legislation of its kind in Asia. The law mandates a
minimum blend of locally sourced bio-fuels into all regular vehicle
fuels. Starting with 1 percent blend in all diesel products this year,
and 5 percent in all gasoline products by 2009, the required mix will
be increased in subsequent years.

Bio-fuels are relatively cleaner substitutes for regular gasoline and
diesel. However, locally available feedstock is limited to coconut for
bio-diesel and sugarcane for bio-ethanol. Since the crops targeted for
bio-fuels production are used to feed the population, some quarters
have raised concerns about the potential impact that demand for the
alternative would have on local pump prices and food supply.

"For now bio-diesel, unless subsidized, is more expensive to make than
diesel," Peter Lee, dean of the University of Asia and the Pacific
School of Economics, said.

While bio-ethanol is cheaper, "its downward effect on oil prices may
not be significant enough," he said.

Proponents of the Bio-fuels Act have claimed that based on last year's
average oil prices and foreign-exchange rate, about P35 billion will
be saved each year from the full shift to bio-fuel.

"Ethanol is cheaper as long as oil is pegged at $40 a barrel. But it
has not gone down beyond this," Lee said.

Global shift needed

Industry officials agree that bio-diesel derived from coconut is about
P0.30 per liter more expensive than diesel, adding it would take a
global shift toward bio-ethanol use before the alternative can pull
down world oil prices, which last week rose to fresh records above $82
a barrel.

An alternative and cheaper feedstock that the government is pushing
through state-owned Philippine National Oil Co.-Alternative Fuels
Corp. (PNOC-AFC) is the jatropha plant. PNOC-AFC is looking to plant
over 700,000 hectares of the shrub and set up bio-diesel refineries
under a five-year program. The catch is it would take PNOC-AFC two
years to grow and harvest the shrub.

Industry estimates show local coconut production can meet demand for
bio-diesel but it would need government support to rehabilitate crops
damaged earlier by storms to maximize yields.

Bio-ethanol remains a concern because of fears it may affect the
country's food chain despite its being one of the world's top producer
of the sweet commodity.

"Food versus fuel is a recognized issue that is included as a concern
in the road map for bio-fuel development that needs to be addressed,"
Rafael Coscol-luela, Sugar Regulatory Administration (SRA)
administrator, said.

Only a trickle of investments

SRA is part of an inter-agency body, the National Bio-fuels Board
(NBB), which is mandated to oversee the implementation of the law.
Tasked to ensure the supply and quality of bio-fuels, and to recommend
changes in the volume to be blended with regular fuel products, the
NBB however has a measly budget of only P90 million for next year.

Observers say the body would require more if it were to exercise its
authority and boost production to meet the law's blending schedule.

"Our situation is more complicated because of the difficulty of
putting contiguous areas under one ethanol plant. We're struggling
with complying with setting up new ethanol projects because we have to
match investors with feedstock developers," Coscolluela said.

For 2009, the country's demand for bio-ethanol is seen to reach 300
million liters per day and in 2011, rise to 600 million. Because of
this projected growth in demand for bio-ethanol, the country would
need 15 to 20 processing plants.
So far, only two plants are under construction with a combined
capacity of 75 million liters per year. The San Carlos and the First
Bukidnon facilities are expected to start commercial operations next
year and by 2009, respectively.

No less than the law's principal author scored the Department of
Energy for not having a clear program of implementation, which saw
only a trickle of investments flow into the fledgling bio-fuels

Coscolluela warned that if local bio-ethanol production does not catch
up with demand, the country would have to import from other countries
which would defeat one of the law's objectives; that is, cutting down
on fuel import costs.

Escalation in farm prices

Even if a strong push is made for bio-fuels use, the Philippines may
see another risk in the form of an escalation in prices of prime
agricultural land over the long run.

Rick M. Santos, CB Richard Ellis Ltd. managing director, said there is
a big possibility that prices of farm land may go up as demand for
bio-fuels like
ethanol grows.

"You've seen [prices] of farmland in the US drive up because of
ethanol. The Philippines has a lot of agricultural land and China
needs a lot of food and fuel. It could be a positive upside," Santos

He however rules out any possible conflict among the industrial,
residential and agricultural sectors with regard to land use,
especially in the countryside.

"I see the things work hand-in-hand as you graduate from raw land to
agricultural to industrial," he said.

Liborio S. Cabanilla, University of the Philippines-Los Baños College
of Economics and Management dean, said the upward pressure on land
prices due to bio-fuel demand is an "over-reaction."

"What happened in the US is that they have planted corn [a source of
ethanol] in areas where it has not been planted before. In the
Philippines, the sugar plantations remain sugar plantations. It's just
that the end-product has changed. There is no land substitution so to
speak," the agricultural economist said.

Besides utilizing existing sugar plantations, other sources of
bio-fuel like cassava and jathropa do not require prime land.

Based on initial data gathered by Cabanilla, the plantation owners and
investors are looking for marginal areas like hillsides and other
unproductive land not used for growing food crops.

"If there is any impact on land prices, it would not be significant.

[Still], we are conducting further studies on this to verify [earlier
projections]," he said.

With the law's implementation in full swing, the government has a lot
to do to address the concerns plaguing its implementation. But time
may no longer be crucial if too much demand for too little oil again
throws the global economy into recession and sends the price of crude
plummeting. By then, bio-fuels would prove to be too expensive, and
its promised benefits too late.


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