INDONESIA - SUSTAINABLE PALM OIL PRODUCTION

UNCLAS SECTION 01 OF 03 JAKARTA 001259

SENSITIVE
SIPDIS

DEPT FOR OES AND EAP
OES/ENV FOR JBENFORADO, HLEE
USTR FOR MLINSCOTT, DBROOKS
USAID FOR ANE, EGAT
BANGKOK FOR RDM/A
NSC FOR CEQ CONNAUGHTON, VAN DYKE
USFS FOR CMACKIE
USDA/FAS FOR OSTA, OCBD, OCRA/RIKER

E.O. 12958: N/A
TAGS: EAGR EAID ENRG KGHG SENV PGOV ID
SUBJECT: INDONESIA - SUSTAINABLE PALM OIL PRODUCTION

REF: STATE 065271


1. (SBU) Summary. While unrestrained oil palm expansion is a
potential threat to Indonesia's forests, the right kind of oil palm
production also presents an opportunity. Increasing palm oil
production can be an important vehicle for economic development and
rural poverty reduction. The USG can help tackle the lack of forest
governance and capacity on land use planning, which are the
fundamental failings that have led to many of the environmental
problems associated with palm oil. The USG can also provide
industry-specific technical assistance, helping the industry meet
recently-enacted sustainability criteria and to establish a training
institution to nurture sustainable practices for the long term.
However, this profitable industry should be able to shoulder the
burden of developing its industry in a sustainable fashion. End
Summary.

The Status of Oil Palm Production in Indonesia
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2. (U) Indonesia is the world's largest palm oil producer (45
percent of global production),with increasing acreage and
increasing industry sophistication. In the 2007/2008 marketing year
(MY),USDA estimates crude palm oil (CPO) production will increase
by 4.5 percent to 18.7 million tons, as acreage expansion from 5
years ago comes into production. Forecast production in 2009 will
approach 20 million tons. According to the Indonesia Palm Oil
Commission, there were 6.8 million hectares under oil palm
cultivation in 2007, with associated revenues of $7.4 billion.


3. (U) The combined capacity for biofuel using palm oil as a feed
stock in Indonesia is 1.7 million tons per year and the country
exported an estimated 300,000 tons in 2007, according to data from
the Indonesian Biofuel Producers' Association. Indonesian
production of the other principal biofuel, ethanol, was
approximately 140 million liters in 2007, with a government target
of 3.77 billion liters by 2010. Biodiesel production in 2007 was
approximately 1.55 billion liters, with a target of 5.57 billion
liters by 2010.


4. (U) Palm oil is the most traded vegetable oil in the world.
Supply and price of the world's most productive oilseed crop have
significant impacts on food and industrial use including that for
bio-fuel. The industry is of interest to the U.S. due to palm oil's
role in food and feed stocks and the environmental impact of oil
palm plantations. Palm oil is a critical element of the foreign
trade balance of Indonesia, and will earn an estimated $13.5 billion
in foreign exchange in 2008.


5. (SBU) The palm oil industry is the most viable agricultural
production industry in Indonesia. However, many firms operate
quietly because of the negative environmental attention the industry
has faced recently. The highest net worth individuals and many
powerful political figures in the country are involved in the
industry. Prominent U.S. firms also have a stake in Indonesian oil
palm. They include Cargill, which operates a couple of plantations
in Indonesia, and ADM, which owns a stake in Wilmar International,
the largest palm biodiesel manufacturer in the world and probably
the largest oil palm plantation operator in Indonesia.


6. (U) Indonesian industrial domestic consumption is forecast to
decrease and, despite the hype about biofuels, Indonesian biodiesel
producers cannot cost-effectively process CPO into biodiesel because
of the high cost of CPO. There were 17 Indonesian biodiesel
producers that reportedly suffered $300 million in losses in 2007.
This year, state oil firm Pertamina reduced the percentage of
biofuels in its Biosolar and Biopertamax products from 5 percent to
2.5 percent and then again to 1 percent due to rising palm oil
prices and the lack of a mandatory policy or incentives.


7. (U) However, domestic demand will grow significantly in the
medium to long term, if GOI plans to increase biofuels' share of the
national energy mix to 2 percent by 2010 and 3 percent by 2015 are

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realized. To reach this target, the GOI is considering the staged
introduction of a mandatory biofuel requirement in September 2008,
starting in Jakarta, with 3 percent of fuel sold consisting of
biodiesel and/or bioethanol.

Are Sustainable Systems of Production in Place?
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8. (SBU) Lack of forest governance and capacity on land use planning
has been the fundamental failing that has allowed this trend. Oil
palm is a profitable crop which can grow on degraded lands.
However, it is easier and more profitable to clear natural forests
(by logging the site, then burning the remaining vegetation) for oil
palm. While unbridled oil palm expansion is a threat to
Indonesia's forests, properly accomplished increases in productive
capacity also present an opportunity. Many oil palm companies are
beginning to respond to criticism -- and worry about market
pressures -- and are seeking ways to develop plantations in more
environmentally sustainable ways. The Roundtable on Sustainable
Palm Oil (RSPO) demonstrates that there are significant
opportunities to influence private sector investments in Indonesia's
oil palm sector, both through keeping up the pressure for more
sustainable practices, and providing industry with the technical
guidance it requires.


9. (SBU) A promising -- and recent - development is the RSPO
Executive Board's approval on May 27, 2008 of the Indonesian
National Interpretation (NI) of RSPO Principles and Criteria (P&C).
The Indonesia Palm Oil Association (GAPKI),which has effectively
implemented sustainable palm oil outreach and training, initiated
the National Interpretation process in July 2006 by establishing a
Consultative Working Group (CWG). The CWG submitted the final
document to RSPO secretariat on November 30, 2007. Indonesian RSPO
members held a meeting on June 25, with the theme "Together towards
sustainable palm oil", to discuss the challenges of RSPO audits and
the implementation of the RSPO P&C.


10. (SBU) RSPO audits are commencing in Indonesia following the
endorsement of the National Interpretation. RSPO says that there
has been progress involving smallholders in the RSPO process, and
the Indonesian Smallholder Working Group is planning to undertake
trial audits and trial certification with smallholders in Indonesia.
The number of Indonesian producers applying for RSPO membership has
also been increasing steadily. Several companies expect to be able
to meet RSPO standards in the near term. For the most part, the
foreign-owned companies have the best chance of meeting the
standards sooner. Although some practices could be implemented
after a plantation is established, many of the principles regarding
sustainable palm oil involve measures that must be taken while
establishing the plantation. This could affect what can be
considered reasonable expectations for plantations being certified
as sustainable.

Promoting the Growth and Use of Sustainable Palm Oil
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11. (SBU) With this in mind, Post recommends:
-- Sustained (and increased) technical assistance for improving
forest governance and capacity on land use planning; and
-- Technical assistance for industry-specific and relevant education
(and possibly helping to establish an industry research and training
institution) to nurture sustainable practices for the long term.

Technical Assistance (TA) for Land Use Planning:


12. (SBU) The USG already supports forest governance and land use
planning through multiple agencies. This should be sustained and
increased given the scale of the challenge. In one example of
current/projected assistance, USAID has reached an agreement with
the Governor of Papua on the terms of providing assistance for both
the Integrated Spatial Plan for the Province of Papua as well as for
biofuels/palm oil. USAID will assist the Governor in the creation
of Local Regulations that will determine the process and criteria
for approval of investment and land use dedicated to sustainable

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biofuel crops. This type of activity should be replicated in other
key provinces of Indonesia.

Education:


13. (SBU) The Indonesia Palm Oil Association (GAPKI) is a well
managed industry association that understands the risks of
international opprobrium for failure to properly develop
plantations. GAPKI is now looking at an industry-sponsored
technical school or center to train the next generation of leaders
and managers in the industry and take in-country technical expertise
to the next level. The USG could assist this effort, working
together with GAPKI and RSPO and linking commercial with
environmental interests. Any USG participation could hinge on a
guarantee by large industry players to support the institute and its
trust fund. In addition to U.S. companies like ADM and Cargill, we
could also look to firms such as Dow Chemical that have found high
value uses of vegetable oils.


14. (SBU) With ongoing oil palm expansion, the entry point is the
industry's need for an educated class of professional technical
managers, capable of running large-scale agribusinesses in remote
locations. The managers must be able to develop and apply agronomic
skills as well as financial and managerial skills, while taking into
account environmental sustainability. (Note: A well-designed school
or center might be connected to an existing Indonesian agricultural
university or school, and affiliated with major U.S. university
programs in vegetable oils and seeds. End Note.)


HUME