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Cablegate: Goi to Spend Billions to Boost Biofuels

VZCZCXRO1827
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #9864/01 2190015
ZNR UUUUU ZZH
R 070015Z AUG 06
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 8332
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 9945
RUEHBY/AMEMBASSY CANBERRA 9792
RUEHBJ/AMEMBASSY BEIJING 3550

UNCLAS SECTION 01 OF 03 JAKARTA 009864

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E.O. 12958: N/A
TAGS: ENRG ECON EINV SENV PGOV ID
SUBJECT: GOI TO SPEND BILLIONS TO BOOST BIOFUELS

1. (U) SUMMARY: The Government of Indonesia (GOI) plans to
invest USD 22 billion over the next five years to boost
biofuel production in a bid to cut fossil fuel consumption.
GOI officials say they will spend USD 6 billion to buy
approximately 6 million hectares of land to grow the fuel
feedstock. The remaining USD 16 billion will go toward
building factories, roads and other support services. In
January the GOI said it wanted to increase biofuel's share
of the nation's fuel stock to ten percent. Sustained high
global petroleum prices and the continued slow and steady
decline of Indonesia's domestic production have given
increased urgency toward greater use of alternative and
renewable energy sources. Indonesian officials also want to
promote employment in the agricultural sector as part of the
President's initiative to cut unemployment and boost
economic growth. Economists and environmentalists express
reservations about the manner in which the GOI is seeking to
boost biofuel production and increase energy security. End
summary.

New Biofuel Initiative
----------------------

2. (U) Minister of Energy and Mineral Resource Purnomo
Yusgiantoro announced the GOI's biofuel initiative at a mid-
July government conference on biofuels. He had promised
that his ministry would release a biofuel master plan by the
end of July with detailed financial incentives for small-
and medium-sized companies to produce biofuel, as well as
plans for regulatory relief to streamline the issuance of
permits for large companies. During a 31 July meeting with
industry representatives, however, ministry officials said
the plan was still under development and could offer only
the most general outlines of their initiative.

3. (U) Purnomo did not give concrete details but did say on
July 31 that the Finance Ministry will forumulate taxation
and import duty incentives for biofuel production equipment.
The Agriculture Ministry will seek ways to encourage raw
materials production, while the Industry Ministry will be
charged with streamlining plant licensing procedures,
according to Purnomo. He said his ministry, Energy and
Mineral Resources Ministry, will promulgate new guidelines
on the types of biofuel to be sold. He also called on local
governments to simplify the issuance of land use permits.
Purnomo said the GOI has been conducting detailed
discussions with industry and internally within the
government on the types of the incentives that will be made
available.

4. (U) The Ministry did release interim biodiesel production
targets through 2010: 187,000 kiloliters (KL) in 2007,
377,000 KL in 2008 and 1.337 million KL in 2010. So far in
2006 Indonesia has consumed a monthly average of 3.75
million KL of petroleum-based fuels or 45 million KL on an
annual basis. Many analysts we have talked to say that the
GOI has planned an extraordinarily ambitious program. By
way of comparison, the United States, which began developing
biofuel much earlier than Indonesia, produced only about
280,000 KL of biodiesel in 2005. American consumption of
biofuel, including ethanol, accounts for three percent of
U.S. total fuel demand.

5. (U) Biofuel can be produced from many different raw
materials, including crude palm oil (CPO), sugar, and
cassava, all of which are grown in abundance in Indonesia.
CPO can be used to produce biodiesel, a replacement for
diesel. Sugar and cassava can be used to produce bioethanol
to replace gasoline. The GOI is also promoting the
production of bio-oil, made from pure vegetable oil, and
biogas, made of liquid waste and poultry droppings, both of
which can be used as alternatives to kerosene. Some types of
biofuel are already available in the retail marketplace,
such as E-10, a combination of 10 percent ethanol and 90
percent gasoline, and B-10, a combination of 10 percent
biodiesel and 90 percent diesel. Pertamina announced that
effective August 1 it will cease selling unblended diesel in
Jakarta.


JAKARTA 00009864 002 OF 003


6. (U) To kick off its campaign the GOI said initially on
July 3 that it wanted to build a minimum of eight biofuel
plants within the next few years using government funds.
(Note: Later in the month, Purnomo used a figure of 11
plants. End Note.) Minister of Industry Fahmi Idris
announced the plan after a cabinet meeting with President
Susilo Bambang Yudhoyono in Magelang, Central Java. Fahmi
said that four of the eight biofuel plants will have a
production capacity of up to 7,000 KL a year while the other
four will produce about 350 KL a year. All will use crude
palm oil, cassava or castor oil as raw materials. He said
that his ministry had not yet decided on the locations of
the factories, but that they have offered the plan to all
local administrations in the country. He said the
determining factor will be proximity to plantations that can
be used for feedstock. Construction will cost about about
Rp 60 billion (US$650,000) and will be financed from the
2006 national budget, according to Fahmi. The GOI plans to
hand the facilities over to local administrations within a
year of construction.

7. (U) Early in the year in January, the GOI issued
President Instruction 1/2006 on Biofuel, which created the
National Team for Biofuel Development, chaired by Al Hilal
Hamdi, who was the Minister of Manpower in the Megawati
administration. The team has the mandate to assist with the
formulation of policies to accelerate biofuel development.
Our energy ministry contacts tell us the government will
also issue a Presidential Decree to support the operations
of the team. The team met with President Susilo Bambang
Yudhoyono (SBY) and several cabinet Ministers on July 1 and
July 2 to discuss biofuel development and plan their
strategy.

8. (U) SBY also held a limited cabinet meeting on July 24 to
discuss biofuels. Our energy ministry contacts tell us that
Coordinating Minister for the Economy Boediono and
Coordinating Minister for People's Welfare Bakrie, as well
the Ministers for Energy and Mineral Resource, State Owned
Enterprises, Communication and Information, Finance, and
Research and Technology attended. The directors of three
state owned banks, Mandiri, BNI, and BRI, also attended the
meeting and they are expected to provide financing for
biofuel development projects. The GOI is still yet to offer
details on funding, but our sources say it will come at
least partly come from a special budget for alternative
energy which the Coordinating Minister for the Economy is
creating.

New Policies and Financing
--------------------------

9. (U) On July 15, the GOI announced a plan to offer
subsidized loans to palm oil, rubber and cacao plantations
owners to expand their acreage cultivated, according to Bayu
Krisnamurthi, a deputy at the Coordinating Ministry for the
Economy, who announced the incentive scheme without
providing further details. He explained that under the
proposal, expected to come into force in the second half of
2006, a consortium of banks, led by Bank Rakyat Indonesia
(BRI), will provide loans to the three sub-sectors at a
fixed interest rate of 10 percent. The GOI will make up the
difference between the fixed rate and the prevailing market
rate through a subsidy payment to the banks. He also said
that the GOI may allocate up to Rp 10 trillion (US$ 1.1
billion) to subsidize increased lending to the plantation
sector.

10. (U) During the 31 July meeting with industry
representatives, Minister Purnomo said the GOI will need to
issue new policies in five key areas: land supply,
infrastructure, manufacturing, distribution, and financing.
He said that the development of biofuels as an energy
alternative to replace fossil fuel will also serve economic
development and employment goals, too. He lauded the
industry's potential to create jobs, saying it is expected
to absorb 3.5 million in the workforce through 2010.

Biofuel Producers

JAKARTA 00009864 003 OF 003


-----------------

11. (U) Even before the July announcements, four Indonesian
companies had already said they will have biofuel plants up
and running by the end of 2006. They include PT Sumiasih
which is constructing a biofuel plant with an annual
capacity of 70,000 KL. PT Sinar Mas is planning a facility
with an annual capacity of 117,000 KL, as is PT Musimas. PT
Mopoli has said it will build a plant with a capacity of
175,000 KL a year. The association of the Indonesian
Oleochemical Producers (Apolin) chairman Kris Hadisubroto
told reporters in June that the biodiesel plants will be
located in Bekasi and Medan. He said that the total
investment for the four plants will be around USD 25
million. They will use CPO as the raw material. Hadisubroto
said the plants will cut into Indonesia's CPO exports, which
he estimated would reach 12.5 million tons in 2006, but
would not affect the country's overall CPO production.
Indonesia is the world's second-largest palm oil producer
and plans to develop another 9.0 million hectares (22.2
million acres) of plantations in the next five years, six
million of which will be used to meet biofuel demand.

12. (U) Wilmar Holdings Ltd, a Singapore-based edible oil
producer and refiner, said on July 3 that it will build a
biodiesel plant to begin operations by 2007. The USD 20
million biodiesel plant in Riau will have an initial annual
capacity of 250,000 tons with the potential for further
expansion. Feedstock for this project will be mainly CPO,
according to a Wilmar spokesman. Wilmar's plant will be
racing to come on-stream ahead of a USD 25 million joint
venture between plantation company PT Bakrie Sumatera
Plantation and local construction firm PT Rekayasa Industri.
Their plant is scheduled to begin operations in the middle
of 2008 with an annual capacity between 60,000-100,000 tons.

13. (U) The GOI has also been looking for ways to
collaborate with its neighbor and chief CPO competitor
Malaysia. In a June 22 news conference, Indonesian and
Malaysian state oil and gas companies Pertamina and Petronas
said they will establish a joint research project to produce
CPO-based biodiesel. Economic Coordinating Minister
Boediono announced the plan for the Indonesians on the
margins of a meeting between the leaders of the two
neighboring countries.

Comment
-------

14. (SBU) The push to ramp up biofuels use in Indonesia has
significant implications for Indonesia's national energy
security, agricultural sector employment, rural development,
export revenue, and environmental protection. The costs of
the many subsidies that the GOI says it intends to offer
will be massive if they all come to fruition. A successful
biofuels program will bring significant new employment in
rural areas, perhaps millions of new jobs, according to the
GOI, but at a significant cost to the treasury. At the same
time, the plan calls for over six million hectares of land
to be cleared. If not managed carefully, this may bode ill
for Indonesia's already beleaguered biodiversity and
alarming rates of deforestation. The GOI will also face
significant challenges in running a massive land acquisition
program without corruption. A Presidential advisor told us
he was very worried about corruption related to the projects
and was advising President Yudhoyono to proceed more
cautiously. Given all the costs and uncertainties, it
remains an open question whether Indonesia's energy security
would be better served by continuing to phase out retail
fuel subsidies, rather than embark on a heavily subsidized
biofuel campaign.

PASCOE

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