ENGAGING INDONESIA ON BIOFUELS POLICY

UNCLAS SECTION 01 OF 04 JAKARTA 000854

SIPDIS

DEPT FOR EAP/MTS, EB/IFD/OIA, and E Special Advisor Manuel
DEPT PASS OPIC, EXIM, TDA
DOE FOR TOM CUTLER/PI-32 AND C. GILLESPIE/PI-42
COMMERCE FOR 4430-BERLINGUETTE

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ENRG ECON EINV SENV PGOV ID
SUBJECT: ENGAGING INDONESIA ON BIOFUELS POLICY

REF: 06 JAKARTA 9864 (Billions for Biofuels)


1. (U) This is an action request; see para 17.


2. (SBU) Summary. The Government of Indonesia (GOI) is continuing
its ambitious 5 year, multi-billion dollar investment plan to boost
biofuel production to 200,000 barrels per day by 2010. At a
high-profile media event on January 9 the GOI signed 58 initial
agreements reportedly worth $12 billion with foreign and domestic
biofuels investors. Chinese, Japanese, and Malaysian firms are the
most active in announcing deals. The huge price tags attached to
the public announcements mask the tentative status of many of the
deals, however. Despite the land grab quality of some of these
projects, the GOI has announced modest and sensible biofuel policies
to date, including a $108 million fund to create incentives for
biofuels investments and $1.08 billion to improve agricultural and
rural infrastructure. Although Indonesia has a history of dramatic
policy programs, many of which never come to fruition, the GOI's
biofuel initiative appears to be here to stay. The U.S. Trade
Development Agency has agreed to fund a 10-person GOI biofuels
delegation to visit the United States in the near future, and we are
currently coordinating trip details with the GOI. On March 23 the
national biofuels team chief expressed enthusiasm for the TDA trip
and said he hoped to combine the U.S. trip with a previously
accepted invitation to travel to Brazil in May. The GOI is eager to
learn from the U.S. experience, and we recommend Washington agencies
meet with the GOI biofuels delegation in Washington for policy
discussions, possibly under the auspices of our Bilateral Energy
Dialogue. This report uses an exchange rate of Rp 9200. End
summary

Billion Dollar Bandwagon; Deals Still Tentative
-------------- --


3. (U) On January 9, dozens of foreign and domestic companies signed
agreements with the GOI to develop 58 biofuel projects. The GOI
said the agreements totaled more than $12 billion and will be key in
supporting the GOI's plan to boost biofuel production to 200,000
barrels per day by 2010, reducing fossil fuel use by 10 percent.
AlHilal Hamdi, chairman of the National Biofuels Development Team,
told reporters that the projects under development will include
biofuel crop plantations and processing plants. He said Indonesia
plans to use crude palm oil (CPO),jatropha curcas, cassava, and
sugar cane as feedstock. Local analysts tell us these projects have
large price tags but are very far away from being done deals.


4. (U) Hamdi said that the GOI will make available 6.5 million
hectares of land for biofuel crop development: three million
hectares for oil palm, 1.5 million hecatres for jatropha curcas,
500,000 hectares for sugarcane, and 1.5 million hectares for
cassava. He added that the GOI estimated that investment per
hectare will be as follows: Rp 30 million ($3260) for oil palm, Rp
15 million ($1630) for sugarcane, Rp 3 million ($326) for jatropha
curcas and Rp 3.5 million ($380) for cassava. He noted that the GOI
has ambitious rural employment objectives for the plan, as well, and
had projected it will give jobs to three million Indonesians. The
GOI said it is seeking to develop 11 biofuel processing plants to
produce 187 million liters in 2008 and 1.3 billion liters by 2010,
equivalent to the country's total fuel consumption of 41 million
kiloliters in 2005. Its goal is to cut fossil fuel use in the
transportation sector by 10 percent and by 50 percent in the
electricity sector.

Chinese Looking For New Growth and Tech Transfer
-------------- ---


5. (U) China National Offshore Oil Corp (CNOOC),China's dominant
offshore oil and gas producer, made the biggest splash of the day
with its signing of a memorandum of understanding with companies
controlled by the Indonesian conglomerate the Sinar Mas Group to
invest $5.5 billion in biofuels. CNOOC may team up with Sinar Mas
Agro Resources and Technology to develop biodiesel from crude palm
oil and bioethanol from sugar cane or cassava in Papua and
Kalimantan. According to a Sinar Mas press release, the three
companies will develop the project in three phases and over eight
years. Papua and Kalimantan regional governments have reserved
approximately one million hectares of land (2.4 million acres) for
the consortia. If the project comes to fruition, in terms of
investment value it would roughly equal BP's $5 billion Tangguh LNG

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project in Papua and supercede China's biggest overseas oil
acquisition, the $4.2 billion PetroKazakhstan acquisition in 2006.


6. (U) CNOOC officials told reporters that the project, if it goes
forward, would open up a potential new growth avenue and give
valuable experience to transfer back to China. Also during the
event, the partners reportedly signed financing deals with
state-owned banks Bank Mandiri and BNI, though they refused to
release any details on financing arrangements. In fact, the
partners disclosed few details of the deal at all and were careful
not to call them contracts, stressing they were merely "like
memoranda of understanding". The partners gave no project
milestones nor did they say how the investment will be apportioned.
CNOOC spokesmen emphasized that they will conduct feasibility
studies at each stage of the venture before deciding whether to
proceed to the next stage. Local industry analysts say that success
in this project would help Sinar Mas Group begin to repair its
reputation, which has been sullied by the massive bond default of
its Asia Pulp and Paper unit.

GOI Biofuels Policies Sensible to Date
--------------


7. (U) In addition to the spate of biofuels projects described above
and below, the GOI has also announced a trio of 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 according to plantations'
needs. 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 in its Fiscal Year 2007
budget 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. In January 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.


Malaysians May Pony Up $4 Billion
--------------


8. (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. A Genting
spokesman said 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.


9. (U) Malaysia and Indonesia, which are the world's top palm oil
producers, decided last year to allocate nearly 40 per cent of their
crude palm oil output for biodiesel production. The move helped
drive palm oil prices to $560 per ton in January from around $340 in
January 2006, a 65% jump. The GOI has estimated the biodiesel
industry will use 600,000 tons of crude palm oil this year. A
leading trade publication editor forecast this month that Indonesia
will produce 17.1 million tons of palm oil in 2007, surpassing
Malaysia as the biggest supplier for the first time. Malaysia is
targeting output of 16.5 million tons this year.

Local Companies Also Sign Deals
--------------


10. (U) Indonesian firms also announced new partnership agreements

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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.
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. To develop jatropha curcas as a source of biofuel,
Sinarmas will cooperate with the Bogor Institute of Agriculture and
the Agriculture Ministry to establish a 500 hectares research center
in Deltamas, Kerawang, 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.


11. (U) A spokesman for Singapore's Wilmar Energy subsidiary, PT
Bukit Kapur Reksa (BKR),told reporters at the January signing
conference that it is set to start operations in May 2007 for its
biodiesel plant (see ref A). The facility, located in Dumai in Riau
province, will have a capacity of one million liters of crude palm
oil (CPO) per year.

JBIC Offers "Unlimited" Biofuels Loans
--------------


12. (U) The Japan Bank for International Cooperation (JBIC) said in
February it is ready to fund GOI or private sector biofuel projects.
"The Japanese Prime Minister has instructed JBIC to extend loans
for the development of bio-fuel. The amount of loans that JBIC will
provide is unlimited," said JBIC's Toyoaki Fujita in Jakarta on
February 6 at a biofuels conference. Fujita said JBIC would offer
fixed-rate terms that undercut commercial rates currently on offer
in Indonesia.


13. (U) Japan's Kanematsu Corp. is reportedly considering building a
biofuel plant using cassava as a feedstock, according to Industry
Minister Fahmi Idris who spoke to reporters on January 19. He said
Kanematsu was studying building a 100,000 liters per day-capacity
bioethanol plant. Idris added that the company was also looking for
50,000 hectares (123,600 acres) of land to plant cassava for
feedstock. Kanematsu has already broken ground on a 200,000 liter
per day cassava-based bioethanol plant in Thailand, according to the
company's website.


14. (U) Biofuels chief Hamdi told a local news agency on February 28
that Britain's BP planned to invest about $50 million in a jatropha
oil project with an annual capacity of 350,000 tons from 100,000
hectares of jatropha plantations. Hamdi claimed, also according to
press reports, that Sweden Bioenergy planned a similar sized
investment, also using jatropha. BP confirmed to press that it does
have a similar-sized jatropha oil-based biofuel investment in India,
but denied they have agreed to an Indonesian deal. BP said it still
studying investment opportunities all over the world.

TDA Funds Biofuels Delegation to U.S.
--------------


15. (SBU) The U.S. Trade Development Agency has offered to fund
approximately ten Indonesian delegates to visit the United States
within the next six months. We are currently working with biofuels
Chief Hamdi to determine the GOI's terms of reference for the visit.
On March 23 Hamdi told us that he was enthused by the idea of
visiting the U.S. and hoped that he could combine our trip with a
previously accepted invitation to travel to Brazil in May. The TDA
has notionally scheduled visits to Minnesota, the only state that
requires biodiesel use, to meet with biofuels producers and
regulators and to Colorado to visit the DOE's National Renewable
Energy Laboratory. We have invited Hamdi to lead the delegation and
have tentatively penned in representatives from the Directorate
General of Oil and Gas, Pertamina's downstream operations, the
Indonesian Palm Oil Commission, as well local companies that will be
building biofuels processing plants.


16. (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 will offer grants to
the villages as part of the three year project to fund purchase of

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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.


17. (SBU) ACTION REQUEST: The GOI's biofuel development program is
the Yudhoyono Administration's most prominent economic policy
initiative at the current time, and Indonesia has the potential to
be a very large player on world biofuels markets. The GOI does face
large hurdles in meeting its program goals, but the GOI is eager to
learn from the U.S. experience with biofuels. TDA has allotted
several days for delegates to stop in Washington for policy
discussions with USG agencies. We accordingly recommend that
Washington agencies agree to receive the delegation for discussions
on biofuels policy and possible avenues of further bilateral
collaboration, possibly under the rubric of our Bilateral Energy
dialogue. The GOI would be very interested in hearing USG views on
biofuels policy implementation, including fiscally and
environmentally sound biofuels subsidy and regulatory policies,
promoting biofuels research and development, and policies that
balance food-versus-fuel trade offs in an economically sustainable
manner.

HEFFERN