SITC REQUEST FOR BIOFUELS INFORMATION

UNCLAS JAKARTA 003302

SIPDIS

USITC FOR SCHLITT
DEPT FOR EAP/MTS AN EB/ESC/IEC
DEPT PASS OPIC, EXIM, TDA
DOE FOR UTLER/PI-32 AND GILLESPIE/PI-32
COMMERCE FOR 443/BERLINGUETTE

SENSITIVE
SIPDIS



E.O. 12958: N/A
TAGS: ECON ENRG EINV OTRA ID
SUBJECT: SITC REQUEST FOR BIOFUELS INFORMATION

REF: A) Stte 133131 (USTIC Biofuels Request)
B) Jakata 2857 (Biofuels Bonanza?)
C) Jakarta 2611 (U/ Discusses Biofuels)
D)) Jakarta 854 (Engaging Idonesia on Biofuels)
E) 06 Jakarta 9864 (Billios for Biofuels)


1. (U) SUMMARY: This cable respnds to a request for information
(ref A) from th U.S. International Trade Commission regarding
bofuels adoption and researrch in Indonesia. The Goernment of
Indonesia (GOI) is continuing its ambtious 5-year, multi-billion
dollar investment pla to boost biofuel production to 200,000
barrels er day by 2010. On January 9 the GOI signed 58 intial
agreements reporteddly worth $12 billion wit foreign and domestic
biofuels investors. Chinee, Japanese, and Malaysian firms are the
most actve in announcingg deals. When announced in June 206,( the
GOI said it plae d to invest USD 22 billion over the next five years
to boost biofuel production in a bid to cut fosiil fuel consumption.
GOI officials say they wills"pend USD 6 billion for 6 million
hectares of ladd to grow the fuel feedstock with the remaining USQ
16 billion to build factories, roads and other support services.
Few GOI funds are dedicated to rssearch and development in biofuels,
though a smal( program is based at Bogor Agricultural Universit..
More in-depth embassy biofuels reports are foud in refs B, C, D,
and E. End summary.

GOI Biofuel Policy
--------------


2. (U) Ministeroof Energy and Mineral Resource Purnomo YusgiantoroQ
announced the GOI's biofuel initiative in July 2006 along with
biodiesel production targets throuh( 2010: 187,000 kiloliters (KL)
in 2007, 377,000 KL in 2008 and 1.337 million KL in 2010. The GOIhhas subsequently announced the goal to sell 9.84 ml(lion KL by 2015
and 22.26 million KL by 2025. hhe GOI has stated that its goal is
to cut fossilf"uel use in the transportation sector by 10 percent
and by 50 percent in the electricity sector.

.. (U) The vast majority of Indonesian biofuel willc"ome from crude
palm oil (CPO) for biodiesel, bu they are also looking to make
ethanol from suga,( and cassava, both of which are grown in
abundance in Indonesia. The GOI is targeting production of11.67
million KL of ethanol in 2007. However, in November 2006, the
Ministry of Finance raised the excise tax for ethanol to Rp 10,000
per liter from Rp 2500 per liter. Many analysts believe this tax
will inhibit already low levels of ethanol production. The GOI is
also promoting the production of bio-oil, made from pure vegetable
oil, and biogas, made of liquid waste and poultry droppings, both of
which can be used as alternatives to kerosene. Some types of
biofuel are already available in the retail marketplace, such as
E-10, a combination of 10 percent ethanol and 90 percent gasoline,
and B-10, a combination of 10 percent biodiesel and 90 percent
diesel. State oil company Pertamina stopped selling unblended
diesel in Jakarta in August 2006.


4. In August 2007, GOI said it will make biofuel use mandatory for
vehicles beginning in early 2008. Minister Purnomo said that by
2010 biofuels will make up 20 percent of the diesel and gasoline
fuel mix, up significantly from the current 2.5 percent. In
November 2007, Pertamina said it had lost $55 million year-to-date
selling biodiesel due to inadequate government subsidies. The
company unilaterally cut the blend of biodiesel from 5% to 2.5% in
August. The GOI has so far failed to fulfill its 2006 promise to
subsidize the retail sale of biofuels above the existing subsidy for
regular petrol. The GOI also promised in August to prepare a
special biofuel zone in Papua to speed the investment process
related to land acqusition.


5. Effective November 1, the GOI increased the export tax on CPO to
10% from 7.5%, since October's average palm oil price was above $850
per ton. Under Indonesia's progressive CPO export tax system,
tariffs are changed in tandem with international palm oil prices.
Energy Ministry contacts tell us they are advocating repeal of the
CPO export tax to stimulate production.


6. (U) The GOI has also announced several modest policy initiatives
designed to promote biofuels development. On December 20, 2006
Finance Minister Sri Mulyani Indrawati signed memoranda of
understanding (MOUs) with state-owned Bank Mandiri, Bank Rakyat
Indonesia, Bank Bukopin, and two regional banks, to provide up to Rp
25.6 trillion ($2.8 billion) to finance the development of biofuel
feedstock crops and infrastructure. The banks will disburse the
loans in stages over the next few years. Under the terms of the
MOU, interest rates on loans to plantations will be capped at 10%,
with the GOI subsidizing any further interest charges. The GOI
pledged to provide interest-rate subsidies of up to Rp 1 trillion
($108 million) to support the program. The remainder of the money
will go to rural areas to build biofuels processing plants and
roads.


7. (U) In January 2007 the GOI issued a regulation granting tax
incentives for Indonesian domestic investments in certain business
sectors, including biofuels. The new regulation provides:

-- Accelerated depreciation of fixed assets at twice the rate under
normal circumstances;

-- Tax loss carry-forward up to 10 years (instead of 5);

-- Investment tax credit reduction of net income by 30% of capital
(land, buildings, equipment) invested to be pro-rated over six
years, at 5% per year.

Though they have taken no official action to date, the GOI also
announced in November 2006 it was considering granting a five to ten
year tax holiday for biofuels investors.


8. (U) The Japan Bank for International Cooperation (JBIC) said in
February it is ready to fund GOI or private sector biofuel projects
in Indonesia. JBIC said that it has unlimited lending authority
from Tokyo, according to press interviews with JBIC's Toyoaki
Fujita. Fujita said JBIC would offer fixed-rate terms that undercut
commercial rates currently on offer in Indonesia.

Research and Development
--------------


9. In January, coal mining firm PT Berau Coal signed agreements with
Berau regency administration and the Ministry of Agriculture's
Center of Plantation Research and Development to develop jatropha
curcas projects. Also to develop jatropha curcas as a source of
biofuel, Sinar Mas will cooperate with the Bogor Institute of
Agriculture and the Agriculture Ministry to establish a 500 hectares
research center in Deltamas, Kerawang, West Java.


10. (U) USAID is also funding a biofuels pilot project in Flores.
As part of its Agribusiness and Marketing Support Activity project
(AMARTA) USAID is developing a 50 - 70 hectare pilot project to
cultivate and process crude jatropha oil to partially meet the
energy needs of remote fishing villages. USAID offers grants to the
villages as part of the three year project to fund purchase of plant
materials, planting and maintenance, harvesting and post-harvesting
equipment, and processing of crude jatropha oil. USAID is also
paying for training, education, and demonstrations on uses of
jatropha oil as a kerosene substitute, as well as developing a soap
making cottage industry with the extracted glycerin byproduct.


11. Local biofuels producers will be hosting a conference in
Jakarta from January 23 - 25, 2008 where industry leaders and
academic researchers will present papers and discuss current topics.
http://www.futureenergyevents.com/jatropha/


Biofuel Producers
--------------


12. In November 2007, Astra Agro Lestari, the biggest agricultural
company by market value in Indonesia, said it will increase the size
of its oil palm plantations by 13 percent to meet demand from India
and China and provide for the use of palm oil as an alternate fuel.
The company will add 30,000 hectares of CPO plantations in Aceh,
East Kalimantan, and Sulawesi, according to press reports. Astra
Agro had 228,000 hectares under cultivation currently.


13. (U) China National Offshore Oil Corp (CNOOC),China's dominant
offshore oil and gas producer, has announced the largest venture to
date in January when it signed a $5.5 billion MOU with Indonesian
conglomerate Sinar Mas. CNOOC may team up with Sinar Mas to develop
biodiesel from crude palm oil and bioethanol from sugar cane or
cassava in Papua and Kalimantan. The companies will develop the
project in three phases and over eight years. If the project comes
to fruition, in terms of investment value it would roughly equal
BP's $5 billion Tangguh LNG project in Papua and supercede China's
biggest overseas oil acquisition, the $4.2 billion PetroKazakhstan
acquisition in 2006. As of December 3, however, the two parties
were still engaged in tough negotiations, according to several
embassy contacts.


14. (U) Malaysia's Genting, one of the country's leading
corporations, also inked a plan to invest as much as $3 billion for
biofuels plants in Papua, according to local press. They will
invest via their Singapore-based Genting Biofuels Asia. Meanwhile,
compatriot MultiVest Corp. announced a partnership with several
Indonesian parties to build a $1 billion biofuel production center
in West Kalimantan, where the company already has 100,000 hectares
of plantation land.


15. (U) Indonesian firms also announced new partnership agreements
at the conference. PT Medco Etanol Indonesia, a subsidiary of
national energy firm PT Medco Energi International, signed an
agreement with state plantation firm PTPN VIII to develop
cassava-based bioethanol projects in Garut and Cianjur, West Java.
Separately, State electricity company PLN signed an MOU during
February with the International Finance Corporation for a
feasibility study on the development of biofuel-based power plants.
Singapore's Wilmar Energy subsidiary, PT Bukit Kapur Reksa (BKR)
started operations in May 2007 for its one million liters per year
biodiesel plant in Dumai in Riau province.

Key Policy and R&D Contacts
--------------

-- Mr. Hilal Hamdi, Chair, GOI National Biofuel Promotion Committee

-- Ms. Rosediana, Chair, Indonesia Palm Oil Commission

-- Dr. Erliza Hambali, Head of Surfactant and Bioenergy Research,
Bogor Agricultural University

Embassy Point of Contact
--------------


16. (U) Energy and Mineral Resources Officer Kurt van der Walde,
email: vanderwaldek@state.gov, telephone: +62-21-3435-9066.


HUME