Tue, 22 May 2007
From: Asia Times
By Bill Guerin
JAKARTA - Some of Indonesia's most influential and politically connected companies have refocused their business strategies and are joining hands with foreign investors to push forward the government's multi-billion dollar ambition to transform the country into the world's leading biodiesel producer.

But there are major political, financial and environmental risks to the grand designs, which arguably are being understated and threaten to complicate the emerging industry's outlook. The same local companies now leading Indonesia's biofuel drive incurred and defaulted on huge foreign debts in the wake of the 1997-98 Asian financial crisis. Few fully repaid their debts and today they still dominate the country's logging, wood-processing and pulp industries. Several also have highly suspect environmental records.

Now, they are landing big new foreign joint-venture deals to develop the nascent biofuel sector, including major investments in palm-oil plantation development and big new processing facilities that benefit from government incentives and policies aimed at rapidly developing the sector. For instance, Chinese energy giant China National Offshore Oil Corp (CNOOC) is among 59 foreign and local energy investors who in January signed many biofuel-related renewable energy agreements worth US$12.2 billion.

CNOOC is China's leading energy company and leads the country's broad strategic efforts to reduce its dependence on imported crude oil and offset the use of coal. It has recently teamed up with local plantation giant Sinar Mas Agro Resources and Technology (SMART) and Hong Kong Energy in what is being billed as the world's largest biofuel project. It has plans to bring three biodiesel plants online this year and additional facilities in Papua and West Kalimantan provinces beginning in 2008.

SMART is listed on the Jakarta and Surabaya stock exchanges and is a subsidiary of the country's largest oil palm grower, Golden Agri-Resources Ltd. It is also part of the controversial Widjaja family's sprawling business empire, which includes Asia Pulp & Paper (APP), part of the Sinar Mas Group and Asia Pacific Resources International Ltd (APRIL), which in turn is controlled by Raja Garuda Mas International (RGM).

Therein, some analysts contend, lies big risks. At the height of the Asian financial crisis, Sinar Mas and APP defaulted on billions of dollars worth of loans, equivalent to more than a tenth of Indonesia's total foreign debt. Many have put those dark days behind them, but their reputations as reliable business partners are still in doubt. APRIL owner Sukanto Tanoto is Indonesia's richest man, according to a recent Forbes magazine survey, and he is recently on record as referring to palm oil as "green gold".

Global market forces are definitely driving up prices, but the family's past business practices are still questionable in the minds of certain credit analysts. Golden Agri-Resources Ltd plans a bond issue in Singapore this year, but US-based credit-rating agency Moody's has warned that the company's "complicated family-controlled organizational structure" risks funds being used to support affiliated companies.

The regionally-oriented RGM Asian Agri, which defaulted on $1.26 billion of debts owed to a consortium of foreign and local banks during the financial crisis, now operates over 200,000 hectares of palm oil, rubber and cocoa plantations across Indonesia, the Philippines, Malaysia and Thailand. Ranked as one of Asia's largest primary producers of crude palm oil, the company manages more than 26 plantations totaling 160,000 hectares and 19 palm oil mills with a production capacity of more than 1 million tons. It also has three refineries processing crude palm oil into end products.

Riau province, home to both APP and APRIL's giant pulp and paper mills, has more recently become Indonesia's largest crude palm oil producing area. Both enterprises also have the lion's share of plantation concessions there. Out of a total of 1,806,533 hectares of plantation concessions, APP holds 679,424 and APRIL 639,593. APRIL also has concessions for 57,807 hectares in the Riau islands.

Eyes on the Forest, a coalition of three environmental groups active in Riau, claimed that an independent investigation they conducted found that APRIL was involved in questionable forest clearance operations in two concession areas and that the company did not possess a valid logging license. APRIL has denied that it was not in "full legal compliance" and no legal action has been taken against the company.

APRIL announced earlier this month a plan to spend $60 million on a new biodiesel plant with Texas-based Fulcrum Power Services and is now building a second paper mill in Sumatra province which will double its capacity to 800,000 tons per annum by year's end. Meanwhile, RGM's Asian Agri unit has a production capacity of about 1 million tons of crude palm oil per year, which is currently used mainly for food production, but the company now says it plans to build a palm-based biodiesel plant in the area.

Another major player is publicly listed PT Bakrie Sumatera Plantations (BSP), owned by the listed conglomerate PT Bakrie & Brothers, which is 80% owned by the family of Coordinating Minister for People's Welfare Aburizal Bakrie. The family accumulated and defaulted on part of more more than $1 billion in debts at the height of the Asian financial crisis related to a broad range of businesses.

BSP currently has concessions on 53,000 hectares of mixed plantations, the majority of them planted with oil palms. The company recently acquired another 25,500 hectares in Sumatra and expects to boost crude palm oil production to 180,000 tons this year, up from 158,000 in 2006. The company also operates three palm oil refineries in West Java and Sumatra and holds a 70% stake in Bakrie Rekin Bio-Energy, a joint venture with state-owned contractor Rekayasa Industri, with whom it has started building a biodiesel plant in Batam with a capacity of 100,000 tons per year

The Widjaja and Bakries are not the only ones bidding to rehabilitate their businesses and restore their family fortunes through biofuel-related businesses. For instance, the Salim Group's publicly listed Indofood Agri Resources Ltd, with investments in oil palm plantations, commands a 60% share of Indonesia's cooking oil sector. It recently raised $275 million in a share sale in Singapore to be partially used for biofuel-related outlays. The group was founded by Liem Sioe Liong, a renowned business associate of former strongman president Suharto.

Meanwhile, PT Astra Agro Lestari, owned by Indonesia's giant auto maker Astra International, is the country's largest crude palm oil producer. Founded by Suharto associate and former trade minister Bob Hasan, the company controls some 205,000 hectares of plantation area in Sumatra, Kalimantan and Sulawesi provinces. Hasan was convicted on corruption charges in February 2001 for causing the Indonesian government to lose $244 million in a fraudulent forest-mapping project. He was released on parole in February 2004.

Although criticized for their past cozy relations with senior politicians, Indonesia's emerging biofuel tycoons are almost universally taking their corporate cues from the government. The chairman of the government's biofuel development committee, Alhilal Hamdi, says current planning envisages production of about 200,000 barrels of oil equivalent in biofuel per day by 2010.

Towards that end, the government has ordered provincial governments to simplify arrangements for land-use permits, urged the Agriculture Ministry to encourage more raw material production, goaded the Industry Ministry to simplify plant-licensing procedures and passed a new investment law that gives foreigners control over land for as long as 90 years.

Most of the new land to be made available by the government will be used to nurture palm oil, the government's most favored basic feedstock for biodiesel. Palm oil production hit 16 million tonnes last year, with about 60% of that total exported both as finished product known as RBD palm olein and crude palm oil. Total output is expected to grow by 500,000 tons to 750,000 tons a year for the foreseeable future as more acreage comes on stream.

One obvious controversial aspect of the master plan is the need for vast new land banks for plantation expansion, which some environmental groups say is accelerating already rapid deforestation. Indonesia currently has an estimated 5.5 million hectares of palm oil plantations, and the government now plans to more than double the total area under cultivation through the development of another 6.1 million hectares in Kalimantan, Papua and other provinces.

Currently, decisions on the maximum and minimum area to be used for palm oil and other commercial crop plantations are in the hands of the minister of agriculture. Plantation companies are licensed by local administrations in the respective provinces, which officially dispense 35-year renewable concessions based on the availability of land, population density and other factors.

Environmentalists say the expansion of oil palm plantations continues to come at the expense of natural forests rather than the conversion of already denuded land because of the better soil conditions fresh-cut forest lands provide. The annual forest fires that rage through Indonesia and frequently smother neighboring countries in smog are started mainly by palm growers to clear land for new planting.

More significantly, perhaps, the biofuel industry's economics are less than clearcut. Energy analysts note that biofuel projects around the world - even those benefiting from fat government subsidies - would be uncompetitive should crude oil prices fall to about $50 per barrel. Energy consultant Rudy Salim told Asia Times Online that any incentive for making and selling biodiesel produced with Indonesian palm oil will essentially disappear when crude palm oil prices reach levels above $650 per tonne.

He emphasizes that biodiesel is in any case never going to be more than a "drop in the ocean" in terms of overall supply compared to fossil fuel-based diesel. He figures that based on an average price of crude palm oil under $500 per tonne, the break-even point for palm oil versus crude oil would be $40 per barrel of oil. Crude prices now hover around $62 a barrel, while commodity analysts expect palm oil will average $564 a tonne this year compared to between $400 and $500 last year.

It's not only industry analysts who are raising red flags. United Nations environment program executive director Achim Steiner last month warned attendees at a global business summit for the environment in Singapore that businesses run the risk of a public backlash if the globally in vogue green business model is hijacked by industries who engage in environmentally destructive practices. That may have been a veiled reference to the personalities leading Indonesia's biofuel development.

Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000, has been in Indonesia for more than 20 years, mostly in journalism and editorial positions. He specializes in Indonesian political, business and economic analysis, and hosts a weekly television political talk show, Face to Face, broadcast on two Indonesia-based satellite channels. He can be reached at softsell@prima.net.id.



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