To invest upstream, downstream, or to take the mid-point and focus on processing, and therefore on a brokering role, is already a big decision. To locate where there is supply of feedstock, or demand for final product, is also a big decision. To locate a major biofuel processing plant in Singapore with no feedstock and a limited local market is therefore a long-term gamble.

This is what Finland s Neste Oil have just done. They are building the world s biggest bio-diesel plant in the city-state at a cost of $1.2 billion, with an annual capacity of 800,000 tons of high quality biodiesel. (AFP and Jakarta Post 07.03.09)

There is no doubting it is easier to set up a major investment in Singapore. The NExBTL renewable diesel product is said to be one of the cleanest fuels in the world. The plant can make biodiesel from palm oil, vegetable oil and animal fat, and with some beefing up of the technology could also produce jet fuel.

The plant was originally planned to supply the European market said Jarmo Honkamaa, and part of the output will already go to North America, to Canada. Does that mean there is already the hint that the EU market might not be the easiest option? The company is also looking at markets in South Korea, Japan and Singapore itself.

Honkamaa continued, “I don’t see the marketing of the product is very challenging. The main challenge will be on the raw material side”. Neste Oil Chairman and Chief Executive Matti Lievonen said Singapore was chosen because it was close to Indonesia and Malaysia, the world s two leading producers of palm oil.

But that is where the complications may begin.

With biofuel production and marketing, production and sales risks are linked to supply risks in several ways. First you need a steady supply of feedstock to run a plant. Second to export you need to certificate your product so that the EU and United States, and others, will accept imports. This means that the feed stock reaching a processing plant should be properly certificated so that downstream products can in turn comply with certification requirements, which involve quite complex environmental and climate change undertakings and documentation, working with emerging specialist certification agencies.

The rush to biofuel in Indonesia depended heavily initially on the comparative advantage of CPO as feed stock.

No clash with food production

Indonesia is and will remain the biggest producer of CPO in the world for the foreseeable future. But is not clear how far CPO will be the main source of biofuel rather than Jatropha which also makes bio-diesel, or ethanol from sugar cane or other feedstocks. Moreover second generation bio-fuel technology is not so far off, opening up a wider range of technologies and feedstocks with much more efficient use of land, plus wider use of technologies not requiring much land allocation, such as algae.

CPO competes with the food chain, and has multiple uses so there will always be intense competition for CPO. In addition Indonesia and Malaysia will both need CPO to supply the domestic bio-diesel market.

Given fluctuations in export prices both Malaysia and Indonesia will probably need to bring in domestic supply obligation to maintain domestic biodiesel security of supply for vehicles and power stations.

New bio-fuel feed-stocks like Jatropha does not clash with food production. It has been assumed that most Jatropha production would be at provincial SME scale or at village scale rather than via big plantations, but Indonesia has already announced its first mega Jatropha project, reportedly involving a million hectares of land in Papua, although such an ambitious proposal seems larger than life in present conditions.

The bold investment in biodiesel production in Singapore may well work out, but there is a danger that such projects could fall between the devil and the deep blue sea, competing harder and harder for feedstock against internal and other markets for CPO, and fighting hard to get into EU and US markets with verification restrictions constraining the supply chain of feedstock to factory, or its industrial processes, so that differently certificated products can go to different destinations.

A complex multi layered international CPO export market may come into place with higher prices for more stringent certification required by the US and the EU, and less stringent requirements in the Asian and ASEAN markets. Not as easy as falling off a log !

TERRY LACEY is a development economist who writes from Jakarta on modernization in the Muslim world, investment and trade relations with the EU and Islamic banking.