JAKARTA - Some of Indonesia's most influential and politically
connected companies have refocused their business strategies and are joining
hands with foreign investors to push forward the government's multi-billion
dollar ambition to transform the country into the world's leading biodiesel
producer.
But there are major political, financial and environmental
risks to the grand designs, which arguably are being understated and threaten to
complicate the emerging industry's outlook. The same local companies now leading
Indonesia's biofuel drive incurred and defaulted on huge foreign debts in the
wake of the 1997-98 Asian financial crisis. Few fully repaid their debts and
today they still dominate the country's logging, wood-processing and pulp
industries. Several also have highly suspect environmental records.
Now,
they are landing big new foreign joint-venture deals to develop the nascent
biofuel sector, including major investments in palm-oil plantation development
and big new processing facilities that benefit from government incentives and
policies aimed at rapidly developing the sector. For instance, Chinese energy
giant China National Offshore Oil Corp (CNOOC) is among 59 foreign and local
energy investors who in January signed many biofuel-related renewable energy
agreements worth US$12.2 billion.
CNOOC is China's leading energy
company and leads the country's broad strategic efforts to reduce its dependence
on imported crude oil and offset the use of coal. It has recently teamed up with
local plantation giant Sinar Mas Agro Resources and Technology (SMART) and Hong
Kong Energy in what is being billed as the world's largest biofuel project. It
has plans to bring three biodiesel plants online this year and additional
facilities in Papua and West Kalimantan provinces beginning in 2008.
SMART is listed on the Jakarta and Surabaya stock exchanges and is a
subsidiary of the country's largest oil palm grower, Golden Agri-Resources Ltd.
It is also part of the controversial Widjaja family's sprawling business empire,
which includes Asia Pulp & Paper (APP), part of the Sinar Mas Group and Asia
Pacific Resources International Ltd (APRIL), which in turn is controlled by Raja
Garuda Mas International (RGM).
Therein, some analysts contend, lies big
risks. At the height of the Asian financial crisis, Sinar Mas and APP defaulted
on billions of dollars worth of loans, equivalent to more than a tenth of
Indonesia's total foreign debt. Many have put those dark days behind them, but
their reputations as reliable business partners are still in doubt. APRIL owner
Sukanto Tanoto is Indonesia's richest man, according to a recent Forbes magazine
survey, and he is recently on record as referring to palm oil as "green gold".
Global market forces are definitely driving up prices, but the family's
past business practices are still questionable in the minds of certain credit
analysts. Golden Agri-Resources Ltd plans a bond issue in Singapore this year,
but US-based credit-rating agency Moody's has warned that the company's
"complicated family-controlled organizational structure" risks funds being used
to support affiliated companies.
The regionally-oriented RGM Asian Agri,
which defaulted on $1.26 billion of debts owed to a consortium of foreign and
local banks during the financial crisis, now operates over 200,000 hectares of
palm oil, rubber and cocoa plantations across Indonesia, the Philippines,
Malaysia and Thailand. Ranked as one of Asia's largest primary producers of
crude palm oil, the company manages more than 26 plantations totaling 160,000
hectares and 19 palm oil mills with a production capacity of more than 1 million
tons. It also has three refineries processing crude palm oil into end products.
Riau province, home to both APP and APRIL's giant pulp and paper mills,
has more recently become Indonesia's largest crude palm oil producing area. Both
enterprises also have the lion's share of plantation concessions there. Out of a
total of 1,806,533 hectares of plantation concessions, APP holds 679,424 and
APRIL 639,593. APRIL also has concessions for 57,807 hectares in the Riau
islands.
Eyes on the Forest, a coalition of three environmental groups
active in Riau, claimed that an independent investigation they conducted found
that APRIL was involved in questionable forest clearance operations in two
concession areas and that the company did not possess a valid logging license.
APRIL has denied that it was not in "full legal compliance" and no legal action
has been taken against the company.
APRIL announced earlier this month a
plan to spend $60 million on a new biodiesel plant with Texas-based Fulcrum
Power Services and is now building a second paper mill in Sumatra province which
will double its capacity to 800,000 tons per annum by year's end. Meanwhile,
RGM's Asian Agri unit has a
production capacity of about 1 million
tons of crude palm oil per year, which is currently used mainly for food
production, but the company now says it plans to build a palm-based biodiesel
plant in the area.
Another major player is publicly listed PT Bakrie
Sumatera Plantations (BSP), owned by the listed conglomerate PT Bakrie &
Brothers, which is 80% owned by the family of Coordinating
Minister for
People's Welfare Aburizal Bakrie. The family accumulated and defaulted on part
of more more than $1 billion in debts at the height of the Asian financial
crisis related to a broad range of businesses.
BSP currently has
concessions on 53,000 hectares of mixed plantations, the majority of them
planted with oil palms. The company recently acquired another 25,500 hectares in
Sumatra and expects to boost crude palm oil production to 180,000 tons this
year, up from 158,000 in 2006. The company also operates three palm oil
refineries in West Java and Sumatra and holds a 70% stake in Bakrie Rekin
Bio-Energy, a joint venture with state-owned contractor Rekayasa Industri, with
whom it has started building a biodiesel plant in Batam with a capacity of
100,000 tons per year
The Widjaja and Bakries are not the only ones
bidding to rehabilitate their businesses and restore their family fortunes
through biofuel-related businesses. For instance, the Salim Group's publicly
listed Indofood Agri Resources Ltd, with investments in oil palm plantations,
commands a 60% share of Indonesia's cooking oil sector. It recently raised $275
million in a share sale in Singapore to be partially used for biofuel-related
outlays. The group was founded by Liem Sioe Liong, a renowned business associate
of former strongman president Suharto.
Meanwhile, PT Astra Agro Lestari,
owned by Indonesia's giant auto maker Astra International, is the country's
largest crude palm oil producer. Founded by Suharto associate and former trade
minister Bob Hasan, the company controls some 205,000 hectares of plantation
area in Sumatra, Kalimantan and Sulawesi provinces. Hasan was convicted on
corruption charges in February 2001 for causing the Indonesian government to
lose $244 million in a fraudulent forest-mapping project. He was released on
parole in February 2004.
Although criticized for their past cozy
relations with senior politicians, Indonesia's emerging biofuel tycoons are
almost universally taking their corporate cues from the government. The chairman
of the government's biofuel development committee, Alhilal Hamdi, says current
planning envisages production of about 200,000 barrels of oil equivalent in
biofuel per day by 2010.
Towards that end, the government has ordered
provincial governments to simplify arrangements for land-use permits, urged the
Agriculture Ministry to encourage more raw material production, goaded the
Industry Ministry to simplify plant-licensing procedures and passed a new
investment law that gives foreigners control over land for as long as 90 years.
Most of the new land to be made available by the government will be used
to nurture palm oil, the government's most favored basic feedstock for
biodiesel. Palm oil production hit 16 million tonnes last year, with about 60%
of that total exported both as finished product known as RBD palm olein and
crude palm oil. Total output is expected to grow by 500,000 tons to 750,000 tons
a year for the foreseeable future as more acreage comes on stream.
One
obvious controversial aspect of the master plan is the need for vast new land
banks for plantation expansion, which some environmental groups say is
accelerating already rapid deforestation. Indonesia currently has an estimated
5.5 million hectares of palm oil plantations, and the government now plans to
more than double the total area under cultivation through the development of
another 6.1 million hectares in Kalimantan, Papua and other provinces.
Currently, decisions on the maximum and minimum area to be used for palm
oil and other commercial crop plantations are in the hands of the minister of
agriculture. Plantation companies are licensed by local administrations in the
respective provinces, which officially dispense 35-year renewable concessions
based on the availability of land, population density and other factors.
Environmentalists say the expansion of oil palm plantations continues to
come at the expense of natural forests rather than the conversion of already
denuded land because of the better soil conditions fresh-cut forest lands
provide. The annual forest fires that rage through Indonesia and frequently
smother neighboring countries in smog are started mainly by palm growers to
clear land for new planting.
More significantly, perhaps, the biofuel
industry's economics are less than clearcut. Energy analysts note that biofuel
projects around the world - even those benefiting from fat government subsidies
- would be uncompetitive should crude oil prices fall to about $50 per barrel.
Energy consultant Rudy Salim told Asia Times Online that any incentive for
making and selling biodiesel produced with Indonesian palm oil will essentially
disappear when crude palm oil prices reach levels above $650 per tonne.
He emphasizes that biodiesel is in any case never going to be more than
a "drop in the ocean" in terms of overall supply compared to fossil fuel-based
diesel. He figures that based on an average price of crude palm oil under $500
per tonne, the break-even point for palm oil versus crude oil would be $40 per
barrel of oil. Crude prices now hover around $62 a barrel, while commodity
analysts expect palm oil will average $564 a tonne this year compared to between
$400 and $500 last year.
It's not only industry analysts who are raising
red flags. United Nations environment program executive director Achim Steiner
last month warned attendees at a global business summit for the environment in
Singapore that businesses run the risk of a public backlash if the globally in
vogue green business model is hijacked by industries who engage in
environmentally destructive practices. That may have been a veiled reference to
the personalities leading Indonesia's biofuel development.
Bill Guerin,
a Jakarta correspondent for Asia Times Online since 2000, has been in Indonesia
for more than 20 years, mostly in journalism and editorial positions. He
specializes in Indonesian political, business and economic analysis, and hosts a
weekly television political talk show, Face to Face, broadcast on two
Indonesia-based satellite channels. He can be reached at
soft...@prima.net.id
.
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