As Indonesia is today the world’s largest producer of crude palm oil (CPO) - a desirable feedstock for biodiesel production - it has the potential to grow into a world biodiesel leader and a model for plantation sustainability.
Biodiesel has the potential to become a significant industry sector in Indonesia, supported by two of its most valuable assets: its oil palm plantations, and more importantly, its people. Indonesia currently produces approximately 20 million tons of CPO per year from 7 million hectares of oil palm plantation, of which approximately 80 percent is exported.
In terms of revenue, CPO exports provide Indonesia with its biggest non-petroleum source of export income, and this is expected to grow in the future.
Beyond revenue generation, oil palm plantations also currently provide a livelihood for more than three million Indonesian families. This, too, is also expected to grow in the future.
By 2015, the area of Indonesian oil palm is expected to increase to 10 million hectares, of which three million hectares have already been approved.
Studies have shown that the total amount of land that is suitable for growing oil palms, but which has not yet been approved, may be as high as 44 million hectares.
Using conservative yield estimates, this area of oil palm plantation would produce 145 billion litres per year of biodiesel, or 10 percent of current fossil diesel demand. Beyond this significant biodiesel potential is the possibility of providing income to an additional 19 million Indonesian families.
While these 44 million hectares are considered suitable for oil palm plantations, it is imperative to consider the long-term environmental consequences - including the overall, or life-cycle carbon dioxide emissions - before pursuing any development.
Conscious of the potential environmental impact of oil palm plantation development, new crops which grow on marginal land are being investigated. This greatly reduces the required land-clearing and concomitant “carbon dioxide debt” from the forest destruction.
One example of such a crop is Jatropha, which has been studied extensively by the Indonesian centre for Estate Crops Research and Development. Recent estimates from the Indonesian National Team for Biofuel Development suggest that as much as 15 million hectares of land in Indonesia are suitable for Jatropha plantations.
With conservative yield estimates, this land would produce 40 billion litres per year of biodiesel.
From a feedstock perspective, Indonesia certainly has the potential to become a world biodiesel hub, but there are two additional elements that need to be in place - sufficient biodiesel processing capacity and adequate demand, either domestically or internationally.
As with any other investment, biodiesel processing capacity will only develop if it results in a profitable business. With the spot price of CPO close to US$700 /t, it is not currently economical to produce biodiesel, explaining the large proportion of idle capacity in Indonesia’s current biodiesel production capacity of nearly 3 billion litres per year.
Feedstock cost represents the majority of biodiesel production costs and is the only lever for affecting significantly the profitability of biodiesel production. Securing feedstock supply contracts is an option to lower feedstock cost but prices will still be subject to market volatility, and will also include some margin for the plantation.
Even with a profitable biodiesel business in place, sufficient demand must exist for any biodiesel that is produced. Current demand is driven largely by government biofuel blending mandates, which are currently set at 2.5 percent. This demand will increase only if the government accelerates the biodiesel blending mandate, or if crude oil prices increase relative to CPO prices, which is unlikely given the recent high correlation between the two.
A third way to accelerate domestic short- to mid-term biodiesel demand while also increasing biodiesel export demand, however, does exist. Recent advances in biodiesel processing technology have made it possible to use CPO to produce so-called “green diesel” which has superior fuel properties compared to both biodiesel and fossil diesel. This technology uses a hydrogenation process, similar to that found in modern oil refineries, to upgrade vegetable oil to green diesel.
The superior fuel properties of green diesel means that it can be used as a blending agent to upgrade the quality of the fossil diesel pool at a traditional refinery, and this allows for the possibility of increasing the overall refinery margins in some cases. Domestically, this means that green diesel can be used in large quantities in place of fossil diesel, thus reducing Indonesia’s dependence on fossil diesel imports. The implementation of increasingly stringent Euro IV and Euro V fuel specifications in Europe also increases the possibility for the export of green diesel as a blending agent.
While Indonesia has great potential to become a major world player in biodiesel, it is unlikely to be fulfilled unless sustainable plantation practices are followed. The location where palm plantations are established and the manner in which new palm plantation land is cleared, have a large effect on life-cycle carbon dioxide emissions.
Indonesia is in a strong position to further develop its already significant CPO production into a much larger and more profitable biodiesel industry.
The combination of a rich natural resource base, a dedicated and knowledgeable people and recent advances in biodiesel technology, combine to form a strong base on which to develop Indonesia as a major world player in biodiesel.
Dr. Bernd Waltermann is a BCG senior partner and managing director and Dr. Henning Streubel is a BCG partner and managing director. Both are based in Southeast Asia.
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