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Malaysia and Indonesia’s palm oil bonanza: implications for alternative energy security

Updated On: Jan 12, 2007

Analysts are predicting commodities boom and a promising drive towards the alternative energy front in the year ahead for Malaysia and Indonesia, particularly in the palm oil sector and biodiesel industry.

Such a trend has come about through an increasing need for governments to source for cheaper energy alternatives following the global oil price hike last year, active bilateral cooperation between Malaysia and Indonesia with strong investment and policy commitments, mergers between plantation companies in Malaysia and those between local governments and state-oil firms in Indonesia at an unprecedented scale, as well as new foreign investment boosts such as those recently from China.

On July 21 last year, the Business Times and Star Biz (Malaysia) reported of bilateral agreements between Malaysia and Indonesia to allocate 40% of their crude palm oil (CPO) output for biodiesel production, to generate a targeted six million tons of crude palm oil a year from each country, as feedstock for the production of biofuel and biodiesel. In the same year, Prime Minister Datuk Seri Abdullah Ahmad Badawi launched the first made-in-Malaysia “Envo Diesel,” while companies began to export palm oil-based biodiesel on a larger scale.

The three plantation company giants in Malaysia, Golden Hope Plantations Bhd, Kumpulan Guthrie Bhd and Sime Darby Bhd, kick-started the landmark merger near the end of last year, followed by PPB Oil Palms Bhd’s and Singapore-based Wilmar International’s subsequent announcement of merger plans as well.

An RHB analyst explained that “to become a global player, merging is the way to go to control palm oil's upstream and downstream sectors as well as dictate prices.” A Malaysian Palm Oil Association official concurred by saying that mergers are “one of the many ways Malaysian plantation companies can fast-track plans to become global companies.” He also urged local palm oil companies to work together with commodity giants such as Archer Daniels Midland Co and Cargill to become stronger world players.

Elsewhere, Indonesia’s bid to become one of the world's top biofuel producers has led to plans to designate up to 6.5 million hectares of uncultivated land for the development of biofuel-feedstock plantations in an effort to produce enough biofuel by 2010 to replace 10 percent of the country's total oil-based fuel consumption, which reached 70 million kiloliters last year.

Furthermore, the government has set aside Rp 1 trillion in its 2007 budget to cover the cost of subsidizing interest payments on agriculture-related loans and the cost of procuring seedlings, with another Rp 10 trillion being earmarked for improving agricultural infrastructure.

According to the chairman of the government's biofuel development committee, Alihilal HamdiIndonesia aims to “produce 200,000 barrels of oil equivalent in biofuels per day by 2010.” Hamdi also revealed that many local companies, such as Riau-based Wilmar Energy and the Sugar Group, are poised to begin production of biodiesel and bioethanol later this year. The former for example, aims to produce one million tons of biodiesel by the end of this year, making it among the world's largest biodiesel producers. Others include the Eterindo Group (120,000 tons of biodiesel per year), Bumi Asih and Platinum (30,000 tons of bioethanol per year), and Mulindo Raya Industrial (10,000 tons of bioethanol per year).

Another promising development comes from new initiatives forged between the local governments of Papua, Pacitan in East Java and Wonogiri in Central Java, and state-owned firms to develop biofuel feedstock plantations in their respective regions, which are major producers of palm oil, cassava and sugarcane -- the basic feedstocks for bioethanol and biodiesel production.

The Chinese factor also plays an integral role in both Malaysia’s and Indonesia’s palm oil and biofuel future, especially with its intent to build its first palm oil-based biodiesel plant in the country. Currently, China is already a top buyer of Malaysia's palm oil, and the China National Offshore Oil Corporation (CNOOC) also embarked on its first foray into the overseas biofuels sector by teaming up with Indonesia’s Sinar Mas Agro Resources and Technology and Hong Kong Energy on January 9 to invest a total of $5.5 billion in the development of plantations covering an area of about 1 million hectares in Papua and Kalimantan.

The signing ceremony on January 9 between the three companies also witnessed the participation of a number of financial firms, including local banks, which have committed themselves to providing a total of Rp 50 trillion (US$5.4 billion) in loans to support Indonesia’s green energy fund, along with 47 other agreements in the alternative energy sector worth a total of $12.4 billion. 

Such developments will not only support the region’s resolve to push for greater energy security and to rely less on fossil fuels, but will also create a new global imprint for Southeast Asia in alternative energy development.

Sources:

Chinese, Hong KongRI companies to invest $5.5 billion in biofuel production (Antara, 9 January 2007)

Mergers and biodiesel the commodity buzzwords (The Business Times, 10 January 2007)

RI moving fast on biofuel development (The Jakarta Post, 10 January 2007)

CNOOC to join biofuel project in Indonesia (TODAY, 10 January 2007)