Promoting Biofuels to Reduce Imports, Boost Local

UNCLAS SECTION 01 OF 02 MANILA 000531 SIPDIS SIPDIS STATE FOR OES, EB/IFD/OIA, EB/ESC AND EAP/PMBS DOE FOR TOM CUTLER TREASURY FOR JVELTRI STATE PASS USAID FOR AA/ANE, AA/G STATE PASS EXIM, OPIC AND USTR USDOC FOR 4430 ITA/MAC/ASIA & PAC/KOREA & SE ASIA/ASEAN TREASURY FOR OASIA E.O. 12958: N/A TAGS: ENRG SENV EINV RP SUBJECT: Promoting Biofuels to Reduce Imports, Boost Local Agriculture and Investment -------------- SUMMARY -------------- ¶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 markets. ¶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. KENNEY