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Indonesia could become self-sufficient in gasoil with new mandate

By Mriganka Jaipuriyar in Singapore

September 23, 2013 - Indonesia's new biodiesel mandate could see the country -- currently one of the region's largest gasoil importers -- become self-sufficient in the fuel over the next 10 to 12 years, but smooth implementation of the mandate hinges on several factors including subsidies and the price of gasoil and crude palm oil in the international market.

"For such a high level of blending to be implemented, we have to watch out for two things -- whether this will have an impact on the end-users' engine and machinery, and the price of biodiesel. If the price of biodiesel shoots up, it will be cheaper to use gasoil," a Jakarta-based analyst tracking the local biodiesel industry said Tuesday.

Oil imports account for a significant portion of Indonesia's total imports, and the recent widenining of the country's current account deficit and consequent depreciation of the Indonesian rupiah has forced the government to look at ways in which it can cut oil imports.

Since the government recently raised the price of subsidized gasoil and gasoline, another price hike would have been political suicide.

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Under the new decree on biodiesel mandate, a copy of which was obtained by Platts, the proportion of biodiesel blending in gasoil is being gradually raised starting this month and will eventually reach 25% in the transport, industrial and commercial sectors by 2025, and 30% in the power sector by 2016.

At current gasoil demand of 37 million kiloliters/year (232.7 million barrels), this means that if all goes as per plan Indonesia would substitute 9.25 million kl (58 million barrels) of gasoil with biodiesel by 2025.

This is significantly higher than the 36 million barrels/year of gasoil it currently imports.

According to information obtained by Platts, monthly gasoil imports are typically around 2.5 million-3 million barrels, with higher volumes seen in peak demand periods such as Ramadan.

Susilo Siwoutomo, Indonesia's deputy energy minister, recently said that following the new biodiesel mandate, the government is targeting to cut gasoil imports by around 8 million barrels over September-December 2013, and import reduction could reach 27.5 million barrels next year.

Biodiesel production capacity

Indonesia has made it clear that all the biodiesel required to meet the new blending mandate will have to be sourced domestically and imports will not be allowed.

The government and the country's biofuels association APROBI are both confident that there will be enough domestic biodiesel to meet the new mandate.

"If we have issued a regulation, of course we have calculated carefully," said Dadan Kusdiana, director general for renewable energy at the Energy and Mines Ministry.

In a recent interview with Platts, Kusdiana said that the ministry has held detailed discussions with APROBI and other stake holders in the industry and concluded that Indonesia had sufficient biodiesel production capacity to meet the needs of the new mandate.

Indonesia has current biodiesel production capacity of 5.6 million kl (35.22 million barrels)/year and the government estimates that domestic demand in 2014 will likely reach only 24.5 million barrels, he said.

But a source at a domestic biodiesel producer Tuesday cautioned that Indonesia may not be able to produce enough biodiesel to meet the 10% blending mandate for this year.

"However, Indonesia has good [biodiesel production] technology and will be fast able to meet the target [set out by the mandate]," the source said.

The analyst said that Indonesia had ample spare capacity to boost biodiesel production.

"The [production capacity] numbers I get ranges from 4-5 million kl/year. Hence, this means we should still have some capacity since we only produce about 2 million kl of which majority is exported," the analyst said, declining to be named.

Indonesia's state-owned oil company Pertamina recently announced that it would issue a tender inviting bids from domestic biodiesel producers to supply 3.3 million kl/year of biodiesel in 2014 and 2015.

Biodiesel subsides

Biodiesel subsidies will, meanwhile, play a critical role in the swift implementation of the mandate.

Indonesia has a fixed biodiesel subsidy of Rupiah 3,000/kl and the energy ministry will ask parliament to maintain it at that level for 2014, Kusdiana said.

The subsidy is given to Pertamina to compensate for the difference between the market price for biodiesel and the retail price of subsidized gasoil, which is currently set at Rupiah 5,500/liter.

"Unfortunately, this subsidy is fixed at Rupiah 3,000 (26 cents)/liter and does not follow the biodiesel/Crude Palm Oil price. Hence, it is not profitable [for Pertamina to blend high amounts of biodiesel into gasoil] when biodiesel/CPO price shoots up and becomes more expensive than oil," the analyst said.

Currently, the CPO price is low, which makes the market price of biodiesel cheaper than the subsidized price of gasoil, and therefore requires less subsidy, but this situation could change should the price of CPO shoot up.

"In September, the price of biodiesel was below [subsidized price of] gasoil so we didn't use biodiesel subsidy allocation at all for this month," Kusdiana said, adding that in 2013, the government only used Rupiah 400/liter on average from the subsidy allocation and in 2012 only used Rupiah 1,200/liter on average.

The analyst, meanwhile, pointed out that even if Indonesia had to spend more on biodiesel subsidies, it will have to pay in the local currency instead of using foreign exchange to import oil, and thus the pressure on the rupiah would be less.

Differences between industry and government

Meanwhile, some signs of differences between the local biodiesel industry and the government have already surfaced.

Kusdiana said that the government has no plans to provide any more incentives to the local biodiesel industry, saying that the new blending mandate in itself can be considered an incentive.

But APROBI secretary, Paulus Tjakrawan, said that his association will ask the government to review domestic pricing of biodiesel to allow producers to make a higher profit.

"The government refers to an export price in the Southeast Asia market.

The formula has been applied since 2010 and is no longer valid in the domestic market," he told Platts.

Separately, the source at the domestic biodiesel producer said that it was important for the government to do away with gasoil subsidies so that gasoil and biodiesel can compete freely.

Related data: Southeast Asia biodiesel FOB ($/mt): July 15, 2013 - September 15, 2013

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