Indonesia’s biodiesel mandate—the long road ahead: Fuel for Thought

The Indonesian government should be congratulated for keeping its biodiesel blending mandate afloat despite a prolonged period of low oil prices. But the road to full B20 implementation is a long one and several factors including a recovery in oil prices, biodiesel exports and logistics will play an important role.

Indonesia in late 2013 mandated that by 2016, the proportion of biodiesel blending in gasoil is to be 20% for subsidized and non-subsidized gasoil sold to transport, industries, and commercial sectors and 30% for gasoil sold to power plants.

The mandate serves two purposes—lower gasoil demand and hence lower reliance on imports; and support for the biodiesel industry reeling from the effects of low oil prices and Europe’s anti-dumping duties.

Since the government was implementing B20 at a time of low oil prices, industry observers were convinced that Indonesia will not be able to foot the bill of a mandate that looked expensive—in the billions of dollars for a full B20 implementation—to fulfill.

Despite skepticism, the government seems to have, at least partially, overcome the key hurdle of a rising price tag for biodiesel blending in the face of low oil prices.

The Indonesian government has financed the mandate with a $50/mt levy imposed on crude palm oil exports. Funds collected through this levy are used to subsidize state-owned biodiesel buyers Pertamina and AKR Corporindo so they do not need to pass on the blending cost to the end user.

The export levy generated an income of Rupiah 1.72 trillion ($130 million) collected by the Indonesia Estate Crop Fund, or IECF from January to September 2016, according to an estimate by Rabobank.

But the funds collected depends on export volumes, which in turn depends on weather and policies in Europe and the US. For example, recent EU court rulings could kick anti-dumping duties out the door, resulting in the EU market opening widely to imports from Indonesia.

Meanwhile in 2017, palm oil production from Indonesia is projected to bounce back after a production crippling El Nino in 2016. This could mean a jump in exports and levy collection, which can be used to finance a much larger biodiesel blending program, said Caroline Midgley, Head of Biofuels Research at LMC International.

Logistical hurdles

According to a Pertamina source, the company is blending biodiesel in non-subsidized gasoil as well, but other industry players in Indonesia believe that it is not fully meeting the B20 mandate in this segment due to the costs involved.

Although the blending mandate has been going reasonably well, logistics for the mandate are extremely slow and complex.

Regulations for non-subsidized blending are more stringent than for subsidized gasoil since approximately half of the non-subsidized blending is done on customers’ facilities by Pertamina instead of at its own terminals.

This creates an additional safety risk and Pertamina’s biodiesel suppliers are not willing to back safety guarantees asked for by the company.

Pertamina terminals, which are located all over the country, do not have enough storage for the incoming biodiesel, therefore the company uses the barges which deliver the biodiesel as floating storage. This creates long delays and large demurrage bills for the suppliers, according to one biodiesel supplier. Pertamina does not pay for those bills, which then cut into the profitability of the suppliers.

Industry observers estimate that actual blend volume currently could range anywhere from B7 to B12, while government sources claim a B16 blend percentage across the country, said a major Indonesian producer.

Pertamina and AKR have procured 3.2748 million kiloliters (20.6 million barrels) of biodiesel via tenders in 2016. Biodiesel procurement data for private petroleum companies like Shell and Total, who also participate in the blending mandate, is not publicly available.

The blending mandate may be supporting the local biodiesel industry, but it is yet to make a significant dent in Indonesia’s gasoil demand and imports. Gasoil imports have come off by a modest 2.7% year on year to 3.73 million mt over January-September 2016, according to official data. At the same time, gasoil demand is estimated to be flat at around 23 million kl (145 million barrels) this year compared with 2015.