COLOMBIA BIOFUELS UPDATE: PROMISE DESPITE

UNCLAS BOGOTA 008092 SIPDIS SIPDIS SENSITIVE EEB/ESC FOR MCMANUS & HANDLER; WHA/EPSC FOR CORNEILLE E.O. 12958: N/A TAGS: ENRG EAGR ECON EAID PGOV CO SUBJECT: COLOMBIA BIOFUELS UPDATE: PROMISE DESPITE UNCERTAINTY REF: A. (A) BOGOTA 4956 ¶B. (B) BOGOTA 7171 ¶1. (SBU) SUMMARY: The opening of Colombia's first biodiesel plant, establishment of a biodiesel free trade zone, and increasing blending mandates reinforce the GOC's commitment to adopt biofuels to diversify energy supplies and promote rural job creation. However, while growers expand palm oil cultivation for biodiesel, traditional sugarcane growing areas needed for ethanol have reached capacity. Likewise, although the GOC promised the biofuels sector will not destroy native habitat and private sector-environmental NGO cooperation is growing, analysts agree Colombia needs a national environmental impact assessment to obtain certification for its biofuels. END SUMMARY. Biodiesel: Promising Outlook -------------- ¶2. (U) The GOC forecasts Colombia's diesel consumption will grow nine times faster than gasoline consumption over the next 15 years. In this context, the GOC seeks to develop a robust biodiesel industry based on Colombia's growing palm oil industry. Colombia currently ranks as the world's fifth largest palm oil producer with 200,000 hectares in production and another 100,000 hectares in development. Although traditionally utilized in food and cosmetics, palm oil has become a principal feedstock for biodiesel due to its cost-effectiveness (seeds harvested year-round for 25 years), productivity (produces 3.7 tons of oil per hectare--nine times the oil produced by soybeans) and energy efficiency (twice as much energy per unit as soy). The journal Environmental Science and Technology recently identified Colombia as one of the top five countries for capacity to sustainably develop a biodiesel industry, based on its strong agroindustrial sector, investment climate, and agricultural characteristics. Colombia's national palm growers' association, Fedepalma, estimates Colombia will have one million hectares in cultivation by 2010 producing 1.2 million tons of palm oil a year with one-half going to biodiesel. ¶3. (U) To foster the palm-biodiesel sector, on November 11 the GOC approved the creation of Colombia's first biodiesel free trade zone in Magdalena Department. The Colombian investor, Caribbean Sustainable Biofuels, expects to produce 100,000 tons of biodiesel for sale to the state-owned hydrocarbons company Ecopetrol, creating 748 new direct jobs and supporting 900 family farmers. The free trade zone follows the July inauguration of Colombia's first biodiesel plant, one of at least five biodiesel projects expected to come on-line by mid-2008 (ref A) at a cost of approximately USD 100 million each. Altogether the five plants will process fuel from 69,000 hectares of palm oil and produce 315,000 tons of biodiesel. Production from the five plants should fully supply the GOC mandate to blend biodiesel into five percent of the domestic diesel supply by January 1, ¶2008. Ethanol: Profits To Be Had, But Sugar Supply Stretched -------------- -------------- ¶4. (SBU) In addition to biodiesel, Colombia is developing its sugar-based ethanol industry. Colombia's sugar growers are the most efficient in the world, producing 2.4 million tons of sugar per year on 197,000 hectares concentrated in Valle del Cauca Department. Colombia's high productivity results from a 12-month harvest season (versus 10 months in Brazil and 2 months in Argentina) and well-developed irrigation methods. The sector consists of 14 sugar mills and supports 250,000 direct and indirect jobs. Colombian sugar producers currently dedicate 10 percent of their harvest to ethanol production at five distilleries. Together the five plants produce one million liters of ethanol a day covering two-thirds of the GOC's current mandate to blend ethanol into 10 percent of the national gasoline supply. Colombia's National Biofuels Federation forecasts 25 more ethanol plants are needed to produce the 2.3 million liters of ethanol a day necessary when the blending mandate rises to 15 percent in 2010 and the 4.4 million liters per day needed to fulfill the 20 percent mandate by 2015. ¶5. (SBU) In the face of growing domestic demand for ethanol, the sector confronts a supply challenge. Sugar production in the Cauca valley currently operates at full capacity with little additional land for cultivation. Moreover, growers have proven hesitant to divert a larger percentage of their production away from the more lucrative refined sugar market. As a result, growth in the Colombian ethanol industry depends largely on developing other feedstocks such as sugarbeet and yucca production. On November 5, in the presence of President Uribe, British firm ED&FMan inaugurated a $270 million investment in a 10,000 hectare project in Boyaca Department that will produce 900,000 liters a day of sugarbeet-derived ethanol. ED&FMan selected Boyaca for its soil and climate characteristics, which the firm estimates will provide a 30 percent increase in productivity over its sugarbeet facility in Chile. The project is expected to create 6,000 direct and indirect jobs. ED&FMan is currently looking at a second project on the Caribbean Coast with sugarbeet varieties adapted to tropical climates. Energy Diversification Good, Job Creation Better -------------- --- ¶6. (SBU) While keen to diversify the nation's energy supply amid diminishing domestic oil production, the GOC views biofuels first and foremost as a rural development mechanism and a promising alternative to illicit crop production. The GOC calculates that biofuels will create 1.5 million formal sector jobs and support 6 million Colombians over the next ten years. In order to reach that goal, the GOC set a target of cultivating 3 million hectares in biofuels feedstock by 2017 (1 million for ethanol and 2 million for biodiesel). At the moment, ethanol production supports approximately 25,000 direct and indirect jobs in Colombia while palm cultivation supports an estimated 80,000 direct jobs. Colombia currently is not an exporter of biofuels, but the GOC would eventually like to export to Europe and the U.S. The Andean Trade Preferences Act (ATPA) provides Colombian biofuels duty free access to the U.S., which the pending Colombia-U.S. Trade Promotion Agreement would make permanent. Aggressive Incentives & Mandates -------------- ¶7. (SBU) Much of the growth of Colombia's biofuels industry stems from GOC incentives since 2001 to promote biofuels development, including a value-added tax exemption, tax exemptions for production facilities, free trade zones, and price bands. Aggressive blending mandates have also helped stimulate domestic demand. The ethanol mandate originated in large cities in 2005 to reduce car emissions and will rise to 20 percent nationwide by 2015. In July the GOC issued a decree raising the nation-wide biodiesel blending mandate from five percent in 2008 to 10 percent in 2010 and 20 percent by 2012. The GOC is currently testing up to 50 percent biodiesel blends in Bogota's Transmilenio public bus system. ¶8. (SBU) Although Colombia's ambitious incentives reflect the government's strong interest in making Colombia a leader in biofuels, the blending mandates will require a rapid expansion in biofuels production to meet local demand. Such an expansion of ethanol production may prove particularly difficult. The Ministry of Mines and Energy estimates the 10 percent national ethanol mandate will require 60,000 hectares of sugarcane dedicated to ethanol production--approximately three times the current amount. Conversely, the oil palm acreage and five biodiesel plants coming on-line in 2008 should fully cover the initial 5 percent biodiesel blending mandate and the GOC estimates the 100,000 hectares of oil palm needed for the 10 percent biodiesel mandate will be on-line by 2010. However, palm oil prices have risen 90 percent since 2004, placing cost pressures on biodiesel manufacturers that could cause supply challenges in the near term. Environmental and Land Challenges -------------- ¶9. (SBU) Despite Colombian biofuels' potential, environmental and land issues, if not managed properly, could limit the sector. Environmental NGOs are concerned the GOC cannot fulfill its commitment to expand biofuels production without harming the environment. To address concerns about palm production, Fedepalma has engaged NGOs directly and through the Zurich-based Roundtable for Sustainable Palm Oil, which established a set of eight principles and 38 criteria for sustainable palm oil development. Likewise, the sugar industry has developed innovative practices to recycle ethanol distillery byproduct (vinasse) as fertilizer, utilize sugarcane organic waste (bagasse) for electricity co-generation, and optimize irrigation water usage. Nevertheless, differences remain between the GOC, industry, and environmentalists regarding areas to cultivate feedstocks without deforestation or biodiversity destruction. Environmental experts, including a Conservation International biologist who recently surveyed the Colombian biofuels sector as part of an Embassy-sponsored visit (ref B),have urged the GOC to commission an independent environmental impact assessment as well as press biofuels producers to pursue international certifications for their products. ¶10. (SBU) Separately, human rights NGOs have linked palm production in the Choco and Tumaco Departments to Colombia's armed conflict and the land rights of Afro-Colombians. NGOs have accused the palm growers of illegally occupying lands in which Afro-Colombians were displaced by the conflict and preventing the populations from recovering their land. While less than 10 percent of Colombia's palm cultivation lies within disputed areas and the vast majority of the industry has not been subject to such land issues, slow progress in resolving the disputes risk tarnishing the broader industry. Brownfield