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Cablegate: Colombia Biofuels Update: Promise Despite

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RR RUEHWEB

DE RUEHBO #8092/01 3192207
ZNR UUUUU ZZH
R 152207Z NOV 07
FM AMEMBASSY BOGOTA
TO RUEHC/SECSTATE WASHDC 0126
INFO RUEHBR/AMEMBASSY BRASILIA 7868
RUEHCV/AMEMBASSY CARACAS 9547
RUEHPE/AMEMBASSY LIMA 5637
RUEHZP/AMEMBASSY PANAMA 0827
RUEHQT/AMEMBASSY QUITO 6293

UNCLAS BOGOTA 008092

SIPDIS

SIPDIS
SENSITIVE

EEB/ESC FOR MCMANUS & HANDLER; WHA/EPSC FOR CORNEILLE

E.O. 12958: N/A
TAGS: ENRG EAGR ECON EAID PGOV CO
SUBJECT: COLOMBIA BIOFUELS UPDATE: PROMISE DESPITE
UNCERTAINTY

REF: A. (A) BOGOTA 4956

B. (B) BOGOTA 7171

1. (SBU) SUMMARY: The opening of Colombia's first biodiesel
plant, establishment of a biodiesel free trade zone, and
increasing blending mandates reinforce the GOC's commitment
to adopt biofuels to diversify energy supplies and promote
rural job creation. However, while growers expand palm oil
cultivation for biodiesel, traditional sugarcane growing
areas needed for ethanol have reached capacity. Likewise,
although the GOC promised the biofuels sector will not
destroy native habitat and private sector-environmental NGO
cooperation is growing, analysts agree Colombia needs a
national environmental impact assessment to obtain
certification for its biofuels. END SUMMARY.

Biodiesel: Promising Outlook
----------------------------

2. (U) The GOC forecasts Colombia's diesel consumption will
grow nine times faster than gasoline consumption over the
next 15 years. In this context, the GOC seeks to develop a
robust biodiesel industry based on Colombia's growing palm
oil industry. Colombia currently ranks as the world's fifth
largest palm oil producer with 200,000 hectares in production
and another 100,000 hectares in development. Although
traditionally utilized in food and cosmetics, palm oil has
become a principal feedstock for biodiesel due to its
cost-effectiveness (seeds harvested year-round for 25 years),
productivity (produces 3.7 tons of oil per hectare--nine
times the oil produced by soybeans) and energy efficiency
(twice as much energy per unit as soy). The journal
Environmental Science and Technology recently identified
Colombia as one of the top five countries for capacity to
sustainably develop a biodiesel industry, based on its strong
agroindustrial sector, investment climate, and agricultural
characteristics. Colombia's national palm growers'
association, Fedepalma, estimates Colombia will have one
million hectares in cultivation by 2010 producing 1.2 million
tons of palm oil a year with one-half going to biodiesel.

3. (U) To foster the palm-biodiesel sector, on November 11
the GOC approved the creation of Colombia's first biodiesel
free trade zone in Magdalena Department. The Colombian
investor, Caribbean Sustainable Biofuels, expects to produce
100,000 tons of biodiesel for sale to the state-owned
hydrocarbons company Ecopetrol, creating 748 new direct jobs
and supporting 900 family farmers. The free trade zone
follows the July inauguration of Colombia's first biodiesel
plant, one of at least five biodiesel projects expected to
come on-line by mid-2008 (ref A) at a cost of approximately
USD 100 million each. Altogether the five plants will
process fuel from 69,000 hectares of palm oil and produce
315,000 tons of biodiesel. Production from the five plants
should fully supply the GOC mandate to blend biodiesel into
five percent of the domestic diesel supply by January 1,
2008.

Ethanol: Profits To Be Had, But Sugar Supply Stretched
--------------------------------------------- ---------

4. (SBU) In addition to biodiesel, Colombia is developing its
sugar-based ethanol industry. Colombia's sugar growers are
the most efficient in the world, producing 2.4 million tons
of sugar per year on 197,000 hectares concentrated in Valle
del Cauca Department. Colombia's high productivity results
from a 12-month harvest season (versus 10 months in Brazil
and 2 months in Argentina) and well-developed irrigation
methods. The sector consists of 14 sugar mills and supports
250,000 direct and indirect jobs. Colombian sugar producers
currently dedicate 10 percent of their harvest to ethanol
production at five distilleries. Together the five plants
produce one million liters of ethanol a day covering
two-thirds of the GOC's current mandate to blend ethanol into
10 percent of the national gasoline supply. Colombia's
National Biofuels Federation forecasts 25 more ethanol plants
are needed to produce the 2.3 million liters of ethanol a day
necessary when the blending mandate rises to 15 percent in
2010 and the 4.4 million liters per day needed to fulfill the
20 percent mandate by 2015.

5. (SBU) In the face of growing domestic demand for ethanol,
the sector confronts a supply challenge. Sugar production in
the Cauca valley currently operates at full capacity with
little additional land for cultivation. Moreover, growers


have proven hesitant to divert a larger percentage of their
production away from the more lucrative refined sugar market.
As a result, growth in the Colombian ethanol industry
depends largely on developing other feedstocks such as
sugarbeet and yucca production. On November 5, in the
presence of President Uribe, British firm ED&FMan inaugurated
a $270 million investment in a 10,000 hectare project in
Boyaca Department that will produce 900,000 liters a day of
sugarbeet-derived ethanol. ED&FMan selected Boyaca for its
soil and climate characteristics, which the firm estimates
will provide a 30 percent increase in productivity over its
sugarbeet facility in Chile. The project is expected to
create 6,000 direct and indirect jobs. ED&FMan is currently
looking at a second project on the Caribbean Coast with
sugarbeet varieties adapted to tropical climates.

Energy Diversification Good, Job Creation Better
--------------------------------------------- ---

6. (SBU) While keen to diversify the nation's energy supply
amid diminishing domestic oil production, the GOC views
biofuels first and foremost as a rural development mechanism
and a promising alternative to illicit crop production. The
GOC calculates that biofuels will create 1.5 million formal
sector jobs and support 6 million Colombians over the next
ten years. In order to reach that goal, the GOC set a target
of cultivating 3 million hectares in biofuels feedstock by
2017 (1 million for ethanol and 2 million for biodiesel). At
the moment, ethanol production supports approximately 25,000
direct and indirect jobs in Colombia while palm cultivation
supports an estimated 80,000 direct jobs. Colombia currently
is not an exporter of biofuels, but the GOC would eventually
like to export to Europe and the U.S. The Andean Trade
Preferences Act (ATPA) provides Colombian biofuels duty free
access to the U.S., which the pending Colombia-U.S. Trade
Promotion Agreement would make permanent.

Aggressive Incentives & Mandates
---------------------------------

7. (SBU) Much of the growth of Colombia's biofuels industry
stems from GOC incentives since 2001 to promote biofuels
development, including a value-added tax exemption, tax
exemptions for production facilities, free trade zones, and
price bands. Aggressive blending mandates have also helped
stimulate domestic demand. The ethanol mandate originated in
large cities in 2005 to reduce car emissions and will rise to
20 percent nationwide by 2015. In July the GOC issued a
decree raising the nation-wide biodiesel blending mandate
from five percent in 2008 to 10 percent in 2010 and 20
percent by 2012. The GOC is currently testing up to 50
percent biodiesel blends in Bogota's Transmilenio public bus
system.

8. (SBU) Although Colombia's ambitious incentives reflect the
government's strong interest in making Colombia a leader in
biofuels, the blending mandates will require a rapid
expansion in biofuels production to meet local demand. Such
an expansion of ethanol production may prove particularly
difficult. The Ministry of Mines and Energy estimates the 10
percent national ethanol mandate will require 60,000 hectares
of sugarcane dedicated to ethanol production--approximately
three times the current amount. Conversely, the oil palm
acreage and five biodiesel plants coming on-line in 2008
should fully cover the initial 5 percent biodiesel blending
mandate and the GOC estimates the 100,000 hectares of oil
palm needed for the 10 percent biodiesel mandate will be
on-line by 2010. However, palm oil prices have risen 90
percent since 2004, placing cost pressures on biodiesel
manufacturers that could cause supply challenges in the near
term.

Environmental and Land Challenges
---------------------------------

9. (SBU) Despite Colombian biofuels' potential, environmental
and land issues, if not managed properly, could limit the
sector. Environmental NGOs are concerned the GOC cannot
fulfill its commitment to expand biofuels production without
harming the environment. To address concerns about palm
production, Fedepalma has engaged NGOs directly and through
the Zurich-based Roundtable for Sustainable Palm Oil, which
established a set of eight principles and 38 criteria for
sustainable palm oil development. Likewise, the sugar
industry has developed innovative practices to recycle

ethanol distillery byproduct (vinasse) as fertilizer, utilize
sugarcane organic waste (bagasse) for electricity
co-generation, and optimize irrigation water usage.
Nevertheless, differences remain between the GOC, industry,
and environmentalists regarding areas to cultivate feedstocks
without deforestation or biodiversity destruction.
Environmental experts, including a Conservation International
biologist who recently surveyed the Colombian biofuels sector
as part of an Embassy-sponsored visit (ref B), have urged the
GOC to commission an independent environmental impact
assessment as well as press biofuels producers to pursue
international certifications for their products.

10. (SBU) Separately, human rights NGOs have linked palm
production in the Choco and Tumaco Departments to Colombia's
armed conflict and the land rights of Afro-Colombians. NGOs
have accused the palm growers of illegally occupying lands in
which Afro-Colombians were displaced by the conflict and
preventing the populations from recovering their land. While
less than 10 percent of Colombia's palm cultivation lies
within disputed areas and the vast majority of the industry
has not been subject to such land issues, slow progress in
resolving the disputes risk tarnishing the broader industry.
Brownfield

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