Cablegate: Biofuel Conference Highlights Progress and Obstacles in The

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FM AMEMBASSY PRETORIA
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E.O. 12958: N/A
TAGS: ENRG EAGR SENV ECON EINV SF
SUBJECT: BIOFUEL CONFERENCE HIGHLIGHTS PROGRESS AND OBSTACLES IN THE
AFRICAN BIOFUEL INDUSTRY

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1. SUMMARY. An inaugural Biofuels Markets Africa conference took
place in Cape Town on November 30 - December 1, 2006. The event
attracted over 200 attendees, primarily from African industry and
governments. Key topics included government policies and incentives
to support investment, production quality standards, Africa's
potential for biofuels, and opportunities under the Kyoto Protocol
Clean Development Mechanism (CDM). Most speakers presented an
upbeat view of both the market and Africa's potential within the
market. But almost all also noted the need for regional standards
and policy frameworks, none of which are currently in existence.
The Southern African Development Community (SADC) is working on a
framework which could be in effect within two to four years. END
SUMMARY.

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BIOFUEL CONFERENCE WELL-ATTENDED
--------------------------------

2. Greenergy of the UK sponsored a Biofuels Markets Africa
conference in Cape Town on November 30 - December 1, 2006. Over 200
industry, banking and government representatives attended, well
above planned capacity. The conference had to be moved to a larger
room for its second day. Presenters included CEOs and ranking
government officials. Presentations were technical and geared to an
audience with understanding beyond the basics. The audience also
included many small-scale entrepreneurs. The delegate list is
available upon request from the EST Officer, US Embassy Pretoria.

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AFRICA NEEDS A REGIONAL STRATEGY
--------------------------------

3. The major themes developed at the conference included lessons
learned from biofuels industries in Europe; regulation, development
and facilitation of the African biofuel markets; biofuels and the
CDM; and project financing and management. Various speakers offered
opposing viewpoints on whether or not biofuels would be an
advantageous new market for Africa.

4. Greenergy CEO Andrew Owens opened the conference with a session
on lessons learned from Europe. Greenergy, a European biofuels
company with several biofuel plants in Europe, acquires biofuel from
global sources and sells it to large European consumers. According
to Owens, the company's success is due to Europe's duty exemptions,
use obligations, and tax incentives for the biofuel industry.

5. Owens noted that low-cost exporters are targeting Europe, but
the rise in feedstock should shake out the marginal companies.
Africa must consider whether or not it is globally competitive.
Owens opined that Europe would not be a good export destination for
African exporters. Owens also highlighted increased costs,
including increased terminal costs (biofuels require three times
more tank storage than petroleum). Owens did note that Africa could
benefit from the CDM, which might act as an incentive to enter the
European market.

6. Owens emphasized the need for regional consistency. As Owens
noted, a policy variance throughout the region does not help a
developing industry, and a disconnect between fuel and the
agricultural supply chain is a disaster. Constant revisions in
government policies lead to confusion within the industry. His
remarks were widely applauded by the mostly industrial crowd.

7. South African Biodiesel Managing Director Franz Hugo emphasized
the need for industry and government involvement in the entire fuel
chain. According to Hugo, biofuels could be a key multiplier for
rural development if the fundamentals were right. Subsistence
farmers need cash and could be involved in commercial aspects of
biofuels, but they will need a steady sustainable market for their
products. Hugo noted that the government must be involved in
quality assurance. Backyard production of poor quality fuel will
only cause consumers to lose faith in the product. He emphatically
stated that all African Countries must have the same standards at
the regional level. Ministers need to coordinate with each other to
develop comparable fuel incentives, tax breaks, and quality
standards.

8. SADC Senior Program Manager for Crop Development Simon Mwale
agreed that Southern Africa must act regionally. SADC commissioned
a study on biofuels which was completed at the end of 2005. The
study raised key questions which SADC is trying to answer. These
questions include what institutional framework should be used, what

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standards to use and which technical measures to adopt. SADC is
working with the South Africa Biofuels Association to develop
regional standards and to find R&D solutions to regional obstacles
to the industry. The primary goal of the study is to break down
regional barriers.

9. When questioned further by the audience about SADC's timetable,
Mwale commented that he could not be specific. If the first biofuel
meeting can be held in the first quarter of 2007, then the policy
framework might be ready for country consideration by the end of
2007. The countries would then amend or adopt the framework and
return it for SADC consideration. Mwale concluded that adoption of
a regional framework would probably not occur for at least three to
four years. AFDB Renewable Energy Expert Youseel Araoui admitted
that the AFDB had no biofuel projects and had put no resources into
the area yet. Their focus has been on wind and hydropower.

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WHY CARBON CREDITS ARE NOT WORKING
----------------------------------

10. The Clean Development Mechanism (CDM) is a flexible mechanism
from the Kyoto Protocol. This mechanism was designed to make it
easier for industrial nations to meet greenhouse gas emission
reductions and to assist developing countries with sustainable
development. The CDM is a market-based instrument. To qualify for
CDM credits, projects must meet certain criteria, one of which is
the additionality test. This test requires that projects are given
credits only if they would not have been implemented under a
business-as-usual scenario. In other words, the project must add
something additional.

11. EcoSecurities South African Country Director Henk Sa zeroed in
on one key problem for CDM, especially in South Africa. He noted
that South Africa does not have a one-stop shop for CDM, although
the country is working on it. Only one percent of all CDM is even
located within Africa and over fifty percent of that one percent is
within South Africa. Sappi (an international South Africa-based
forestry product company) CDM Project Leader Grant Little expanded
on this theme. South Africa does have a designated national
authority (DNA) sited within the Department of Mines and Energy
(DME). The process to achieve CDM certification is similar to that
used for environmental impact assessments. Many South Africa
companies are exploring CDM projects, but little has been
formalized. According to Little, the numbers tell the story. India
has 450 projects; China has 177; Brazil has 190. There are only
four registered projects for South Africa. Little asked: is CDM
working in South Africa? He answered himself with a resounding
"No."

12. Little explained that there are positive aspects to doing
business in Africa that should make CDM feasible. These factors
include availability of financing, political and economic stability,
advanced technology and a government that is pushing renewable
energy. According to Little, negative influences outweigh these
positive aspects. South Africa and the UN both have seemingly
endless red tape. Transaction costs are high. Many African
companies are worried about what will happen after 2012, especially
if large projects are involved. Additionality seems to be a
particular hurdle that South Africa cannot surmount. Finally, South
Africa has extremely low energy costs so there is no push for CDM.

13. Little offered no "off-the-shelf" solutions because different
communities require different solutions. He noted that many of
these obstacles can be overcome. Every country has to deal with the
UN's red tape; every country has concerns about 2012. Little
emphasized that South Africa's manufacturing infrastructure is a
huge enabler for the development of the industry, but the energy and
government infrastructures are bigger brakes. Many South African
projects face what Little called the "Catch 22 of CDM" - to get bank
financing the project must be viable but to get the carbon credit,
the project must prove it needs the credit to become viable.

-------------------------------------------DE VELOPING AN LARGE-SCALE
AFRICAN PRODUCER MARKET
-------------------------------------------

14. Engen Petroleum Refinery Strategic Planner Ian Baxter discussed
the role of refineries in building a market for biofuels in Africa.
He noted that a five percent ethanol mixture is currently permitted
in South Africa where standards are already aligned with the EU.
Baxter then refuted earlier comments that biofuels could replace

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petroleum in South Africa. He noted that petroleum is a finished
product that is easy to replace with imported product if a shortage
arises. There are no additional changes needed to add more
petroleum. Biofuels require extensive logistical changes by
refineries, especially in transportation planning. Refineries
require completely separate logistics systems to transport biofuel.
(Comment. Petroleum in South Africa is transported primarily by
pipeline until the last few kilometers to the pump when tankers are
employed. Biofuels require transport by road from the refinery to
the pump. End Comment.)

15. SASOL Alternate Energy Group manager Brian Tait agreed that
there was little likelihood of profit with biofuels. SASOL has
concluded that until crude reaches a minimum of USD 89 per barrel,
there will be no profit in this market. Tait noted that even at
this price, SASOL would need high tax incentives to make the market
work.

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SMALL-SCALE PRODUCERS ARE A VIABLE OPTION
-----------------------------------------

16. Growing Fuels Managing Director Willie van der Westhuizen felt
there was a niche for small-scale biofuel producers, especially in
Africa. His company has been piloting a small-scale biodiesel plant
near Stellenbosh in the Western Cape province of South Africa, in
partnership with Spier and AGAMA Energy. Licensing is still in
process and they hope to begin production in 2007. They market to
local trucking fleets, a niche market. The goal of the project is to
produce a replicable project for the rural areas. He envisions
small-scale producers (under 1000 tons per year) producing
exclusively for local farmers and truckers.

17. Van der Westhuizen sees small-scale production not as
replacement fuel production, but as a development strategy. Small
plants can stimulate the local economy. Large obstacles remain
including the cost for quality control. At this time, the cost of
testing a batch of biofuel is equal to the cost of producing that
fuel. His company is considering new testing equipment from
Germany, or asking the government for subsidies for small producers.
Stabilizing the fuel stock supply chain is critical for small-scale
success. Van der Westhuizen says, "there is no value in starting if
the agricultural sector is not involved in development of the
industry."

18. African Alternative Energy CEO Thomas Munn provided information
on micro-scale production. His firm operates a pilot farm near the
Lesotho border. The goal is to develop a completely self-sufficient
farm. Munn's farm investigated using jatropha as a fuel source, but
it had too large harvest costs and required too much manual labor.
The farm managers have developed farming, irrigating, welding and
rock crushing vehicles that operate on biofuel. Munn says he wants
"fuel used where it is made and made where it is needed." He
envisions new fuel companies every 50 kilometers along the roads,
with all control over production and fuel stock harvesting vested in
the local communities.

19. Three micro pilots are in production. A feedstock company
outside of Pinetown, near Durban, produces 450 liters per eight
hours of operator time. An organic farm near Ficksburg operates an
entire range of farming equipment on biofuel made primarily from
sunflower oil. The extra revenue was used to pay for the
installation of the biofuel machinery. A soybean pressing plant in
the Free State province is currently pressing 75,000 liters of
soybean fuel per year. The crops are planted in rotation with maize
and farming costs are reduced by using biofuel generated from those
plants. Munn concluded that the technology and the will are
available in South Africa, but the legislation is missing.

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CAN BIOFUELS BE PROFITABLE?
---------------------------

20. Barclay's Agribusiness Specialist Fazel Moosa explained that
the South African sugar industry is protected and that sugar prices
are established by the government. The state-owned power company
ESKOM will not pay the government-established prices for fuel
stocks. Moosa said the banks were concerned about potential
surpluses and unusable byproducts. Barclay's market analysis showed
that even when crude oil is at USD 60 per barrel, the biodiesel
industry would operate at a loss unless the government provides
support.

PRETORIA 00005042 004.2 OF 004

21. According to Moosa, the University of Pretoria, in conjunction
with the University of Missouri, modeled the biofuel industry in
South Africa. The results showed that a large-scale industry would
need 45 percent import tariffs and rebates on fuel to become
profitable. It might be possible to create a viable industry using a
"massification" scheme of linking small scale farmers to ensure a
steady supply chain.

22. AGAMA Energy Managing Director Glynn Morris concurred, noting
that rural electrification is a key goal for biofuels. His company
has one project operating in Lesotho, another at a rural school in
the KwaZulu Natal province of South Africa. Each uses a small
household (or school-sized) digester to generate biomass energy.

-----------------------------
US TAKES OPPORTUNITY TO SPEAK
-----------------------------

23. When a Finnish speaker failed to appear, Organic Fuels' Josh
Steward took his place in the conference agenda. Organic Fuels of
the U.S. has production locations throughout the U.S. in the
Midwest, South and central California. The trend is for larger
facilities because of economies of scale. He described two
projects, including one in Denton, Texas, where landfill gas is used
to generate enough fuel to take Denton's public buildings off the
electric grid. Steward also seized the opportunity to speak on
ethanol standards, urging the African audience not to simply adopt
European standards at the exclusion of U.S. and other standards.

24. COMMENT. The conference generated excitement and provided
biofuel experts across the continent and across specialties an
opportunity to exchange views. The audience appeared frustrated by
the lack of regional cooperation among African governments and
grasped the necessity for regionally harmonized incentives if this
industry is to prosper. END COMMENT

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