B100 Dilemma

KOMPAS/ICHWAN SUSANTO

Trial of B20 In Malaysia, starting in 2020, it wants to start using B20 or a mixture of 20 percent palm vegetable oil in diesel / solar fuels. Two test cars for the program appeared on the sidelines of the implementation of the Malaysia Palm Oil Board: International Palm Oil Congress and Exhibition (PIPOC 2019) at the Kuala Lumpur Convention Center, Malaysia, on Tuesday (19/11/2019).

Indonesia is able to produce fuel from palm oil that can completely replace diesel (B100).

The bio-diesel oil is produced by Pertamina Research and Technology Center (RTC). The vegetable diesel is made through a trans-esterification process, by reacting palm oil with alcohol, for example methanol, to produce pure vegetable diesel, also known as fatty acid methyl ester (FAME). To be fully used as a substitute for B100, FAME must be treated to make it as similar as possible to diesel.

Also read: Making Farming ‘Go Viral’

The bio-diesel challenge

The bio-diesel policy still leaves several questions. First, what is the economic feasibility? What is the impact on energy prices in the country? Does it need to expand oil palm plantations?

The bio-diesel idea is expected to bridge two big challenges. First, reducing the need for fuel imports and thus helping Indonesia\'s trade balance. And second, the use of bio-diesel will increase domestic demand for palm oil, thereby increasing the world price of palm oil and ultimately benefit palm oil exporters like Indonesia.

Indonesia\'s petroleum production continues to decline. Production increased to 283 million barrels (778,000 barrels per day) in 2018, while Indonesia\'s demand for petroleum-based fuel, including bio-diesel, in 2018, reached 466 million barrels per year. The shortage of 120 million barrels per year must be met through imports. The use of B20 in 2019 was claimed to have helped Indonesia reduce diesel imports by up to 45 percent compared to 2018 and save US$5.5 billion in foreign exchange. In May 2019, CN 48 diesel imports were stopped even though the long-term purchase contract could not be terminated. More than 6 billion liters of FAME is used to mix diesel to meet the B20 stage.

Also read: Why is Pertamina Losing?

Second, the palm oil industry is overshadowed by the persistently gloomy global price of palm oil. Moreover, there are threats from a number of export destination countries to stop imports of palm oil from Indonesia. The world palm oil price on the Malaysian stock exchange today actually shows a slight strengthening at 2,550 ringgit, or slightly below US$600 per ton, after falling to the range of 2,207 ringgit (US$517) per ton in early May 2020. Early January 2020, the price had reached 2,829 ringgit (US$663) per ton.

Domestic use of bio-diesel will create domestic and world demand, and will raise prices.

The Indonesian palm oil industry boomed in 2017 with the highest export value in history, US$22.97 billion, when the price of crude palm oil averaged US$714.3 per ton. However, there is still a dilemma. Domestic use of bio-diesel will create domestic and world demand, and will raise prices. When equilibrium is created, palm oil producers will enjoy the high volume and price.

However, won\'t the increase in world palm oil prices also increase biofuels made from palm oil? The current world crude oil price is still low US$40.59 (around Rp 600,000) per barrel, or around Rp 3,778 per liter.

The price increased to US$63.54 on 5 January 2020. On 21 April 2020, due to reduced demand because of the pandemic, the first time in history the oil price in America (West Texas Intermediate) for May delivery fell to negative US$37.63 per barrels (meaning, the buyers will be paid to carry oil). The futures price for gasoil diesel for the world industry is currently around US$365 per ton, or around Rp 5,292.5 per liter.

In Indonesia, today\'s dex diesel price is Rp 10,200, dexlite is Rp 9,500, and bio-diesel oil is Rp 9,400. Many argue that the fuel price should be even lower. Meanwhile, the selling price of bio-diesel oil may reach Rp 14,000 or more, higher than the price of diesel oil. Without subsidies, the mixture of diesel fuel with bio-diesel will actually be more expensive than ordinary diesel oil.

RENDRA HERNAWAN/GREENPEACE

Greenpeace activists, on Tuesday (25/9/2018) controlled a ship suspected of supplying palm oil from Kalimantan and Papua. Greenpeace\'s action that same day took control of the palm oil refinery of PT Multi Nabati Sulawesi (PT MNS, Wilmar Group). They protested against the destruction of forests and peatlands caused by the Singapore-based company\'s palm oil plantations.

This price difference is usually covered by funds from the Oil Palm Plantation Fund Management Agency (BPDP-KS) with funds collected from export quotes on palm oil and its derivatives. Lower world oil prices due to reduced market demand will result in an increase in the need for subsidies for bio-diesel oil to make it competitive against diesel.

The greater the amount of bio-diesel oil used in Indonesia, the higher the world price of palm oil and, in turn, the higher the price of bio-diesel oil in Indonesia will be. Prices for food products and other products that use palm oil will also increase. When palm oil producers enjoy a better price, consumers of fuel and other materials must be willing to pay higher prices for the bio-diesel oil, or the government provides a larger subsidy.

What are the implications of the increasing use of bio-diesel oil in our palm oil industry? In 2019, Indonesia\'s diesel oil consumption was approximately 16 million kiloliters (16.2 billion liters), larger than the 2019 State Budget quota of 14.5 million kiloliters. The quota for the volume of subsidized diesel oil in the 2020 State Budget is 15.3 kiloliters.

Before the pandemic, diesel oil consumption was expected to increase. With the Covid-19 pandemic, the consumption of diesel oil and other fuels has dropped dramatically. Diesel oil consumption in May 2020 was 818,224 kiloliters, down by about 40 percent from 1,355,120 kiloliters in May 2019. Looking at current trends, it seems that the 2020 State Budget quota will not be exceeded by the end of the year. However, the pandemic is a temporary extraordinary state. In the post-pandemic era, consumption will increase again. In some places, it has even started to go up.

According to data from the Indonesian Palm Oil Producers Association (Gapki), in 2019 Indonesia produced 47.2 million tons of CPO and 4.6 million palm kernel oil, which is a by-product of CPO. This production was generated by 14.7 million hectares of total oil palm plantations in Indonesia, with an average productivity of 3.2 tons of CPO per hectare.

Out of the total production in 2019, 37.4 million tons were for export, 20 percent were in the form of CPO and the remaining 80 percent were in the form of derivative products, including oleochemicals (8 percent) and bio-diesel oil (3 percent). The remaining 16.67 million tons were for domestic consumption. Total consumption in 2019 increased by 23.57 percent compared to the previous year, 3.49 million tons.

KOMPAS/SYAHNAN RANGKUTI

T Ramajaya Pramukti, a Sinar Mas group\'s oil palm plantation, is ready to be rejuvenated on Wednesday (2/10/2019).

About a third (35 percent), namely 5.75 million tons, of the 16.7 million tons of Indonesia\'s total domestic palm oil consumption in 2019 was for bio-diesel oil. Meanwhile, consumption for food was 9.86 million tons and for oleochemicals 1.05 million tons, with an estimated foreign exchange savings of US$3.8 billion from reduced diesel oil imports. The target for absorption of bio-diesel oil this year is expected to reach 9 million-10 million kiloliters, partly because of the push to start using B30. If this is achieved, it will save foreign exchange imports by US$5.4 billion.

Land productivity

In 2019, 5.75 million tons of bio-diesel oil was produced from 1.8 million hectares of oil palm plantations, with an average productivity of 3.2 tons per hectare. In 2020, 10 million tons of palm oil consumption for bio-diesel oil will be produced from 3.1 million hectares of oil palm plantations. With the same productivity assumption, to meet all demand for diesel oil of as much as 15 million kiloliters, or 15 million tons entirely with bio-diesel fuel, it will require 4.8 million hectares of oil palm plantations. This is nearly a third of the existing oil palm plantation area.

This means that to meet existing needs, the only way is to increase productivity.

Presidential Instruction No. 8/2018 regarding Suspension and Evaluation of Licensing and Increasing Productivity of Oil Palm Plantations (known as the "Palm Oil Moratorium", signed on 19 September 2018) limits the opening of new oil palm plantations. This means that to meet existing needs, the only way is to increase productivity. To be able to produce an additional 10 million tons of palm oil production from 47.2 million tons to around 57 million tons without adding new plantations, plantation productivity must be increased from 3.2 tons to 3.9 tons per hectare, or an increase in productivity of more than 21 percent.

In 2019, it was estimated that 8 million hectares or 54.7 percent of plantations in Indonesia would be managed by large private companies that produced 27.3 million tons. Meanwhile, 6 million hectares or 40.9 percent are managed by smallholders which produce 16.2 million tons. For the remainder, 0.63 million hectares or 4.3 percent, were from state-owned plantations that produce 0.63 million tons. This means productivity of the state plantations is the highest, namely 3.67 tons per hectare, followed by large private plantations with 3.39 tons and smallholder plantations 2.69 tons per hectare. By comparison, plantation productivity in Malaysia is 3.7 tons per hectare.

ASIACLEANENERGYFORUM.ORG

Agus Sari

Does this mean that the demand to expand oil palm plantations cannot be avoided? If this need is met by shifting export supplies for domestic needs, there will be no need for new plantations, but this will significantly increase the price of diesel oil. If exports do not change, and this increase in domestic consumption is met with additional production, the production of 15 million tons of palm oil specifically for bio-diesel oil will require 4.7 million hectares of plantations. Biofuels have always been claimed as environmentally friendly fuels. However, the decision to expand oil palm plantations must consider the social and environmental impacts that seem to be significant.

Agus Sari, environmentalist