AFRICAN BIOFUEL INDUSTRY SHOWS MIXED RESULTS ACROSS THE

UNCLAS SECTION 01 OF 04 PRETORIA 005043

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SUBJECT: AFRICAN BIOFUEL INDUSTRY SHOWS MIXED RESULTS ACROSS THE
CONTINENT


1. SUMMARY. An inaugural Biofuels Markets Africa conference took
place in Cape Town on November 30 - December 1, 2006. Several case
studies on Africa biofuels industries highlighted the status of the
industry on the continent. Individual countries have created
biofuel industries, but the lack of any regional agreements or
frameworks hampers development of the industry. END SUMMARY

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CAN AFRICA SUSTAIN A BIOFUEL INDUSTRY?
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2. Suid Afrikaanse Steenkool en Olie - South African Coal and Oil
(SASOL) Managing Director for Alternative Energy Brian Tait noted
that Africa has many favorable characteristics needed for a
successful biofuel industry. These include large tracts of land,
excellent climate, cheap energy, basic farm skills, and better soil
than that found in Europe for fuel crops. He remarked that biofuel
plants could easily be located in several countries.


3. Tait offered an overview of several countries. Angola is a huge
country with a five and a half-million-member labor force. Tanzania
is also large with the possibility of producing 40,000 tons per
year. Zambia is self-sufficient in maize, with fields producing 13
tons per hectare compared to four tons per hectare in South Africa.
Zimbabwe could be an excellent location once stability returns. The
biggest obstacle to the industry in Africa is that there are no
markets, according to Tait.


4. D1 Oils Chief Executive Officer Demetri Pappadopoulos described
his company's entry into the African industry. D1 Oils, a
successful UK-based biofuel producer, moved into Africa in 2002,
establishing projects in Madagascar, Swaziland, Zambia and South
Africa. The company recently signed a 50,000 hectare project
agreement with the Swazi government. The Swazi project involves an
MOU with the government and World Vision to establish a model farm.
Approximately 200 people will be employed on the farm itself, with
many more to be employed in spin-off industries. The company has
another 174,000 hectare project expected to employ 700 people with
the government of Zambia. D1 Oils expects to have a biodiesel plant
in South Africa by 2007.

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SOUTH AFRICA IS CAUTIOUS ABOUT BIOFUELS
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5. Frost and Sullivan Research Analyst Ulrich Taylor summarized the
South Africa's advantages as a biofuel center. It has a favorable
regulatory environment and fiscal support. The geographic location
and climate permits excellent harvests. Fuel stock is readily
available. There is growing diesel consumption within the country.



6. Engen Petroleum Refinery Strategic Planner Ian Baxter listed
South Africa's disadvantages. First, the government, not the oil
companies, sets the prices, and they are too low. The tax in Europe
is higher than the total pump price in South Africa. Second, the
current tax rates on extremely low. The South African tax is only
one rand per liter. Baxter concluded that even if the government
adopted tax incentives similar to those found in Germany, the market
would still not be viable. Third, Baxter noted that South Africa is
a net importer of vegetable oils. The price of those oils is more
than the cost of diesel in South Africa. Fourth, South Africa, a
coal-based economy, has never had to develop a successful
petrochemical industry. The existing petroleum industry in South
Africa cannot use the biofuel residual byproducts as is done in the
US or Europe.


7. SASOL Managing Director Brian Tait noted that large scale
production might be feasible with proper economies of scale in South
Africa. South Africa has three inherent advantages. First the
plants could be located inland. This would foster rural development
and resolve rural fuel shortages. Second, a biofuel industry would
help dispose of South African surplus grains. Third, the industry
would provide a platform for expanding biofuel into other SADC
countries. Tait noted that obstacles remain, including the
availability of fuel stocks, i.e., vegetable oil. Tait concluded
that until crude oil reaches a minimum of USD 89 per barrel, there
will be no profit in the biofuel market. He noted that even at that
price, SASOL would need high tax incentives to make the market work.



8. Tait touched briefly on other issues affecting the market,
including the possibility that the rising cost of fuel stocks would
distort the local economy and increase domestic food costs.
Indigenous non-food stocks such as jatropha might be feasible, but
they are currently too labor-intensive. Sugar cane is not a South
African option, according to Tait, but it would work well in other

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African countries. (Comment. Sugar is a protected domestic
industry and prices are set by the government, not the market. End
Comment.) South Africa's maize potential is enormous; there are
approximately 4.5 million hectares available for maize production.



9. Barclay's Agribusiness Specialist Fazel Moosa explained that
agribusiness in South Africa is a R15 billion (USD 2 billion)
business. Fuel stock and feed stock lending issues are similar.
Supply is determined by gross farm income. Farm income is affected
by climate as there are various climatic zones in South Africa,
ranging from semi-arid to sub-tropical. According to Moosa, Eskom
will not pay the government-regulated sugar prices. Maize tonnage
has increased to the point where too many farmers are engaging in
maize farming.


10. Moosa said that biodiesel has a small footprint in South
Africa. Sunflower and soybean oil are the most important fuel
stocks. South Africa could expand into canola if there was a price
incentive. Moosa says the banks are concerned about potential
surpluses and byproducts. She provided a Barclay's price analysis
showing that even when crude oil is at USD 60 per barrel, the
biodiesel industry would operate at a loss, unless the government
provides support. According to Moosa, the University of Pretoria,
in conjunction with the University of Missouri, modeled the biofuel
industry in South Africa. The results showed that a large-scale
industry would need 45 percent import tariffs and rebates on fuel to
become profitable. It might be possible to create a viable industry
using a "massification" scheme linking small-scale farmers to ensure
a steady supply chain.


11. The South African Cabinet recently approved a plan to establish
a biofuel industry. This plan, which will be financed by the
government and private investors, consists of a task force that will
meet and draw up a more detailed proposal to be submitted to the
Cabinet in May 2007. The task force will talk with industry prior
to submitting any final recommendations. South African NGOs
Sustainable Energy and Climate Change Project (SECCP) and Citizens
United for Renewable Energy (CURES) both expressed disappointment
that the plan as drafted made no provisions for small-scale
producers. The South African Industrial Development Corporation
(IDC) previously said that it would consider spending approximately
USD 800 million to develop ethanol plants. Ethanol Africa of South
Africa announced that it will spend R7 Million (USD 1 million) on
building maize-to-ethanol plants.

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GHANA: PUSHING AHEAD WITH BIOFUELS
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12. Ghanaian Energy Commission Principal Program Officer Christine
Asser described the development of the biofuel industry in Ghana.
Rising fuel prices, not environmental concerns, led to the increased
use of biofuel. Petroleum products currently marketed in Ghana
include premium gasoline, kerosene, gas oil, residual fuel oil, LPG,
and premix. Seventy percent of all products are produced by the
Tema Oil Refinery (TOR) which is completely owned by the Ghanaian
government. The remaining thirty percent comes from imports. TOR's
production capacity is approximately 45,000 barrels per day.
Consumption of petroleum products was 1.787 million tons in 2005.
Overall consumption of petroleum products increased by about 17.4
percent between 2000 and 2005. Quality control is governed by the
Standards Board which must certify all samples before the product
can go to the Energy Commission for approval.


13. Asser noted that biofuels include both ethanol and biodiesel.
The government has discussed various fuel stocks but is
concentrating on developing ethanol from cassava, jatropha, oil palm
and soybeans. One biofuel activist has about 500 hectares of
jatropha in cultivation. The government prefers ethanol because its
characteristics allow it to be used in cars currently in use in
Ghana.


14. Asser commented that the lessons learned in Ghana could be
useful for other African countries. One major mistake was for the
government to wait for the private sector to get organized, and not
stimulate the industry. When the government finally got involved,
it conducted product demonstrations to prove the reliability of the
fuel. Asser noted that the original timetable called for
legislation to be in place by the end of December, but this has not
been feasible. The framework is ready but policy decisions need to
be made. She anticipates that the government will decide to waive
taxes completely.

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NIGERIA: ANOTHER GIANT WAKING UP TO BIOFUELS
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15. Nigerian Energy Commission Chief Science Officer Abdussalam
Yusuf provided an overview of the biofuel industry in Nigeria.
Nigeria has a population of approximately 130 million persons, and a
land area of 923,768 square kilometers, of which about 56 percent is
arable. Vegetation ranges from the savanna in the extreme north, to
swamp forest in the coastal south. Most parts of Nigeria are
suitable for the biofuel crops of cassava, sugarcane, and jatropha.
Nigeria is currently the leading producer of cassava in the world,
producing about 30 million tons annually. The average yield is 15
tons per hectare which can be doubled with improved varieties.
Cassava is seen by most Nigerians as a food crop, not an industrial
crop. Sugar cane stocks represent one of the most
photosynthetically efficient crops in the world. Nigerian sugarcane
production has declined due to poor performance of local sugar
companies. Potential sugar cane fields exist along the entire
length of the Niger and Benue rivers.


16. The Nigerian government has decided to deliberately intervene
to produce biofuels. The government has begun developing policy and
regulatory frameworks, selecting land for the biofuel crops,
developing business plans for piloting biofuel plants, and engaging
the financial community. The government intends to jump-start the
industry by initially importing fuel from Brazil. The objective of
the Nigerian ethanol program is to produce fuel grade ethanol that
will be blended with petrol in proportions not exceeding 10 percent
by volume. Reducing domestic use of petrol and improving auto
exhaust emissions are also key goals. Two target crops have been
identified for the fuel ethanol initiative - cassava and sugarcane.


17. According to Yusuf, Nigeria can provide sufficient markets to
meet industry needs. Current petroleum consumption is 9.5 billion
liters per year. The government projects demand will rise to 28
billion liters in 2025. The government hopes that bioethanol can
replace a minimum of twenty percent of petroleum demand within five
years. To meet these goals, Nigeria has established a time table
calling for the implementation of an ethanol import program and the
creation of a domestic seeding program within five years. The
government also hopes to boost local production of cassava and sugar
cane, to build two to four distillery plants by end of 2007, and to
encourage public awareness and acceptance.


18. Nigeria has already established three sugarcane projects with
total ethanol capacity of 225 million liters per year and a total
cultivation area of 60,000 hectares. It is now seeking a partner
for a large biofuel project. MOUs have been signed with Petrobras
of Brazil and COIMEX of Mexico for both technology and supply
exchanges. A National Energy Policy that strongly supports
biofuels is in place. A draft Renewable Energy Master Plan contains
targets for biofuel. Specific biofuel policy and incentives are
being considered. These include tax and financial incentives for
agricultural and related industries, and land ownership incentives
for cassava and sugar producers.


19. Yusuf admits that challenges remain. Farming practices must be
improved to enhance both quality and yield. The power and road
infrastructures needed to boost production need work. Distribution
and retail facilities have not been arranged. Quality control
issues have not been implemented.

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MALAWI: ACHIEVING AS MUCH AS IT CAN ALONE
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20. Daniel Liwimbi, CEO of a Malawian ethanol company, related the
history of biofuel in Malawi. The country began producing biofuel
in 1982 with two companies. They used molasses and sugar from local
sugar mills. Malawi opened its second ethanol plant approximately
two or three years ago. Malawi is currently producing all the
biofuel it can use and is considering exporting it to Tanzania,
Kenya, Uganda, Mozambique, Zambia, and Botswana.


21. According to Liwimbi, regionalism is key for Malawi. To
increase demand for biofuels, Malawi is attempting to introduce new
flexible fuel cars. Several flex cars have been ordered and are on
their way across the Atlantic. Liwimbi rightly notes that Malawi is
too small to drive the region on any economic issue. He commented
that the countries "need to get South Africa involved."
Seventy-five percent of all cars driven in Malawi are manufactured
in South Africa. Thus, if South Africa would make biofuels a
priority, this would help the Malawi biofuels industry as well


22. COMMENT. Conflicting information from a variety sources left
the audience unclear as to the viability of the biofuel industry in
Africa. Some countries have proven they can create and maintain
small scale industries, while others, notably South Africa, remain
reluctant to commit to the industry without further study and
analysis. END COMMENT.

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