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07MANILA531 2007-02-15 08:20:00 UNCLASSIFIED Embassy Manila
Cable title:  

Promoting Biofuels to Reduce Imports, Boost Local

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1. The newly-signed Biofuels Act of 2006 mandates oil companies in
the Philippines to blend minimum levels of biofuels into gasoline
and diesel and offers financial incentives for investment in and
production of biofuels. The bill aims to reduce the Philippines'
dependence on imported fuel, generate income and employment in the
agricultural sector, and improve environmental quality. U.S. oil
distribution and auto manufacturing companies applaud the
legislation but recommend a longer implementation period to ease
adjustment. Despite widespread enthusiasm for biofuel potential,
questions remain about economic efficiency and the impact on coconut
and sugar markets. End Summary.


Provisions of the Biofuels Act


2. The Biofuels Act, signed into law on January 12, 2007, encourages
the evelopment and use of indigenous renewable, clean nergy to
reduce the country's dependence on impoted oil, increase rural
investment and employmen, and decrease greenhouse gas emissions
without hrting the natural ecosystem and agricultural commoity
markets. The law requires that within threemonths all diesel
engine fuels must contain a miimum of 1% biodiesel and within two
years all blnded gasoline must contain a minimum of 5% ethanol.

3. The new law also provides incentives to spurthe production,
distribution, and use of biofuel. These include exemption from
specific tax on ocal or imported biofuels; exemption from Value
dded Tax on the sale of raw biofuels production matrials; and
exemption from wastewater charges forresulting water effluents.
Philippine governmentfinancial institutions will give priority
financng to Filipino citizens and qualified Filipino-ownd
companies engaged in the production, storage, hndling, and
transport of biofuels and feedstock.

4. The Department of Energy (DOE) estimates tha using 1% biodiesel
and 5% bioethanol will save onsumers $167 million annually. The
estimated svings rises to $400 million per year if the mandatoy
blends are increased to 10% for bioethanol and 2% for biodiesel, as
many project, but depend critically on oil and other price
assumptions which are highly speculative. The DOE will chair an
eight-member Biofuel Board to consult other agencies and
stakeholders in formulating the bill's Implementing Rules and
Regulations (IRRs) and monitor the implementation of the National
Biofuel Program.

5. Passage of the Act represents a significant milestone following
several years of USG efforts to promote biofuel as a means to
increase energy security and reduce vehicle emissions in the
country's heavily polluted urban areas. USG efforts, spearheaded in
the Mission by USAID and supported by the U.S. Department of Energy,
will continue with the formulation of the Act's IRRs. Past USG
activities and future plans for support on biofuels will be
described septel.


Biofuel Projects in the Pipeline


6. The Philippine Board of Investments is reviewing 20 biofuel
production plant projects that would bring a total investment of
about $700 million (15 ethanol plants at $40 million each and 5
biodiesel plants at $24 million each). The Department of
Agriculture identified 200,000 hectares of land that could be used
to expand sugar production for ethanol. The $30 million San Carlos
ethanol and power plant in Negros Occidental, constructed in
anticipation of legislated incentives for ethanol use, is expected
to begin producing 100,000 liters per day (30 million liters per
year) this summer. Meanwhile, Manila-based Chemrez Technologies
inaugurated a $13 million biodiesel plant in May 2006 that will
increase its annual production by 60 million liters, also to take
advantage of the expected expansion in local and regional biodiesel

7. The Chinese have invested in five cassava and sugar ethanol
projects in the Philippines for export to China and use in the
Philippines. The Japanese offered ASEAN $2 billion to train 1,500

MANILA 00000531 002 OF 002

engineers and researchers for biofuels research and development of
energy-saving technologies. The
Brunei-Indonesia-Malaysia-Philippines East ASEAN Growth Area
(BIMP-EAGA) has likewise started talks on cooperative biofuel
development projects and harmonizing standards.


Industry Concerns


8. Petron Corporation, a major oil refiner partly owned by the
Philippine government, is seeking a one-year transition period for
the implementation of the Biofuels Act of 2006. The oil firm cited
technical difficulties and liability issues with the untested
introduction of blending biodiesel from coconut. Petron also raised
concerns about the coconut supply and the new law's impact on
coconut prices. Chevron executives publicly applauded the
legislation but shared these concerns, noting that coco methyl-ester
absorbs water so pipelines and tanks must be completely free of
moisture. Chevron tells us it needs at least nine months to deplete
its stockpile of gasoline and replace it with blends. The company
preferred a two-year transition period for biodiesel to coincide
with ethanol and allow time for testing and infrastructure changes.

9. Ford Philippines is pleased with the passage of this law. The
company invested $20 million in 2005 in its plant in Laguna to
introduce a production line for flexible fuel engines. The new cars
can run on unleaded gasoline with ethanol blends of up to 20%.
Chairman Henry Co told econoff he is selling the flex-fuel cars at
the same price as the regular models to encourage the shift to
ethanol. He just received an order for 24 flex-fuel cars from
General Electric so Ford is starting to see tangible benefits from
the company's investment. Co said the GRP should announce any
long-term intention to increase biofuel use so car manufacturers and
owners have time to adjust.