Scrutinizing the Biodiesel Project
In various state speeches, President Joko Widodo has made it known that the government is building energy self-sufficiency by developing the B20 and B30 (palm oil) biofuel as an energy source.
In various state speeches, President Joko Widodo has made it known that the government is building energy self-sufficiency by developing the B20 and B30 (palm oil) biofuel as an energy source.
After successfully implementing in early January 2020 the policy on the use of B20 biodiesel, comprised of fatty acid methyl ester (FAME) derived from 20 percent palm oil and 80 percent diesel oil, the government has increased the palm oil content of biodiesel to 30 percent palm oil and 70 percent diesel oil (B30).
If properly implemented, the palm oil content of biodiesel will be increased in phases to B50. The use of diesel oil will be cut further and the state budget will save Rp 110 trillion (from a B30 production volume of 9.5 million kiloliters). This policy is stipulated in Presidential Regulation No. 66/2018 on the obligation of nonsubsidized sectors to use biodiesel, including the mining transportation, railways and heavy equipment sectors.
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Biodiesel development weighs three considerations. First, it is alternative energy. Biodiesel is renewable energy and environmentally friendly. All countries need renewable energy because fossil energy is being depleted as energy consumption continues to rise. Biofuel is therefore a necessity. Palm oil is a renewable energy source because oil palms can be cultivated (as a timeless resource).
Second, biodiesels reduce dependence on fossil fuels. National oil production has been declining in line with the exploitation of oil fields from the New Order era up to the present. Our oil fields are already old and it is hard to increase production. If production must be increased, Pertamina must undertake deep-sea exploration or overseas expansion, both of which require huge investments. The decline in oil production has had an effect by increasing imports of petroleum-based fuel (BBM) like gasoline, automotive diesel oil and industrial diesel oil. This will contribute to the trade deficit.
Third, it involves the paradigm of processing. Indonesia is entering a new era, shifting from selling raw basic materials at low prices to the processing industry, including processing palm oil into biodiesel to produce economic value added. This process of turning palm oil into biodiesel is an urgent need amid the slump in palm oil price as a result of the European Parliament’s negative campaign, which will eventually cut producers’ income and state revenue. The question is, who does the biodiesel program benefit?
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Collusive culture of quotas
Indonesia’s oil palm sector is different from the mineral mining or oil and gas industries. In mineral mining, land ownership is monopolized by foreign companies, national private companies and the state. The ups and downs in mining production and receipts from the sector depend on company performance. The same is true of the energy sector. Both small and large oil and gas fields are operated by a state-owned enterprise (Pertamina), as well as Indonesian and foreign private companies. Pertamina purchases the oil that is exploited by national and foreign companies for processing at its refineries into BBM (gasoline, automotive diesel oil, aviation fuel and industrial diesel oil).
This ownership structure is different from that of oil palm estates. Since the New Order, companies have not fully monopolized land ownership in the oil palm sector. Independent farmers own vast tracts of land. Data from the Agriculture Ministry (2018) found that the sector had 2.6 million farming households.
Oil palm plantations cover a total of 14.3 million ha: private companies control 54 percent (7.7 million ha), state-owned enterprises (SOEs) own 7 percent (715,000 ha) and independent farmers own 41 percent (5.8 million ha). Extensive land control certainly aligns with production performance. Palm oil production at private companies amounts to 26.5 million tons (51 percent), SOEs 2.5 million tons (6 percent) and smallholder plantations produce 14 million tons (33 percent). Productivity at private companies is 4,070 kilograms/ha, SOEs 3,681 kilograms/ha and smallholders 3,006 kilograms/ha.
In this way, oil palm farmers have a major role in developing the production of crude palm oil (CPO) and economic growth. On serious examination, smallholder oil palm plantations can be a pillar of state revenue and boost the upstream sector in supporting the sustainable biodiesel program. The palm oil used for processing biodiesels should not only come from biodiesel producers that have a fixed quota set by the state, but also from smallholder farmers.
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However, the reality is very different. The fates of oil palm farmers and companies are not the same. The biodiesel policy is geared more towards palm oil plantation companies. These companies always benefit from the political infrastructure the state grants them through public policy. In the context of biodiesels, the government has granted the palm oil quota to just 18 companies through the Trade Ministry.
The fate of hundreds of small companies and smallholder farms is uncertain as to whether or not they can sell their palm oil to these 18 companies. Farmers have a very narrow opportunity for selling their palm oil to these companies, which control both the upstream and downstream processes of the oil palm sector.
There are no open tenders in determining the quota. The biodiesel quota is granted in the way the quota for imported garlic and other commodities are determined. The quota allocation smacks highly of collusion, because it is not transparent and only one or two companies are allotted large quotas. The government argues that it has granted the quota to only18 companies more because of their infrastructure readiness in terms of biodiesel refineries. As a matter of fact, some of these companies have only just started building their biodiesel refineries.
If these companies are ready, why has the government offered them incentives in the form of large funds for business and biodiesel development through the Oil Palm Estate Fund Management Agency? In 2017, for instance, the Wilmar Group received Rp 4.16 trillion and Musim Mas received Rp 1.54 trillion, whereas these large companies have profited heavily from the palm oil business. The combined income of seven companies that enjoy the palm oil quota (Sinarmas Agro, Astra Agro Lestari, Salim Ivomas, Sampoerna Agro, Tunas Baru Lampung, Eagle High Plantation and Dharma Satya Nusantara) totaled Rp 42.1 trillion in 2019.
Even without government incentives and funding, these big companies can expand their businesses, including the development of biodiesel refineries. They should be able to observe the market’s movement and perceive that the future of palm oil is not sales of its crude form, but rather processing it into biodiesel or cooking oil.
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The state gives biodiesel companies easy access to not just funding, but also potential buyers. Their lobbying power makes it easy for these companies to gain market access. Businesses everywhere compete to capture their markets. But these companies, without the trouble of launching promotional activities, have had their markets handed to them. Pertamina is the biggest buyer of biodiesels. In 2020, Pertamina was allocated a biodiesel procurement quota of 8.3 million kiloliters, with the remainder designated for procurement by AKR Corporindo (498,683 kiloliters) and Exxonmobil Lubricants Indonesia (139,631 kiloliters). Pertamina has been forced to become the main buyer of biodiesels from large companies.
This has reminded the public of Pertamina’s procurement of BBM from oil traders operating under PT Pertamina Energy Trading (Petral). Pertamina needed gasoline, automotive and industrial diesel oil to meet the domestic consumption demand. The traders then sold BBM to Pertamina at high prices. This made Pertamina incapable of building domestic refineries for producing gasoline and automotive diesel oil.
Without criticism, a palm oil “mafia” could manipulate the biodiesel quota policy. This would be more dangerous, because the policy comes from the state. The government lacks the political will to make Pertamina diversify its downstream businesses so it has the capacity to produce biodiesels, gasoline, automotive diesel oil and aviation fuel. Pertamina should build biodiesel processing plants in cooperation with state-owned estates and independent oil palm farmers, so that producers do not determine the prices and the state does not make losses. Pertamina will remain unchanged indefinitely with this business model, to serve as a host to corporate parasites. All this happens because of the companies’ political lobbies.
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There is still another serious issue that requires the government’s attention. The biodiesel market is as yet unprepared to accept the change in fuel type. In the automotive industry, for example, the use of B20 only increases the risk of damage to several components of diesel combustion engines. Without evaluating the B20 program, the same risk will also arise in the development of B30 and B50 biodiesel.
The absorption of B20 and B30 is also still very low. Only a few companies like Pertamina consume B20 and B30. Large supply with small demand will cause a drop in the prices of CPO derivative products. This is even more the case in view of the government’s policy on accelerating the production and use of electric cars, geothermal energy, solar power and hydropower generators. The existence of these alternative and environmentally friendly energy sources will also increase energy supplies and likely add pressure to the biodiesel market.
The Covid-19 pandemic also offers a valuable lesson to the world economy, as well as national economies. The pandemic should not only be viewed from the economic perspective but also more broadly from the environmental perspective, which has been ignored at every step of progress. The 2020 report of the World Economic Forum (WEF) shows that the risk of environmental damage from industrialization is very great. The Industrial Revolution, even with its technological advancements, has proved incapable of minimizing the risk of environmental destruction. The cycle of growth will be corrected if the environmental aspect is not calculated.
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The expansion of oil palm concession areas to support the B20 and B30 biodiesel development program has certainly had a major impact on the environment. Expanding oil palm plantations harms the environment because the plantations are built by clearing millions of hectares of primary forests. It destroys millions of germ plasms and harms biological diversity, as well as disrupts ecosystem equilibrium. Unless the government makes an accurate calculation of biodiesel development, the risk of environmental damage is only likely to grow bigger.
Involving farmers
Pertamina can build biodiesel processing plants while oil palm farmers and state-owned estate companies are upstream suppliers.
The government needs to mandate to state-owned estate companies to buy the oil palm products of independent famers at a regulated price. It should not refer to the global CPO price, but instead use a price based on a valuation of biodiesel derivative products. Independent farmers should be empowered to produce biodiesel derivatives through government subsidies for production equipment and knowledge transfers from companies. The government could also impose a rule similar to the domestic market obligation on mining companies, so palm oil companies with quota allocations are obligated to procure 30-40 percent of their palm oil for biodiesel processing from farmers.
In addition, Pertamina needs to enter into a cooperation with oil palm farmers. Pertamina can build biodiesel processing plants while oil palm farmers and state-owned estate companies are upstream suppliers. Pertamina should seriously consider transforming its downstream business so that it will not be a mere buyer in the downstream sector. Pertamina should become a key player so it can compete. Without transforming, Pertamina will repeat the same fate that befell it as a BBM buyer from traders or it will become like state electricity company PLN, only in charge of procuring coal from mining companies without being granted state access to manage the upstream sector.
Ferdy Hasiman, Researcher, Alpha Research Database, Indonesia.