VZCZCXRO1827
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #9864/01 2190015
ZNR UUUUU ZZH
R 070015Z AUG 06
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 8332
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 9945
RUEHBY/AMEMBASSY CANBERRA 9792
RUEHBJ/AMEMBASSY BEIJING 3550

UNCLAS SECTION 01 OF 03 JAKARTA 009864 
 
SIPDIS 
 
DEPT FOR EAP/MTS, EB/IFD/OIA 
DEPT PASS OPIC, EXIM, TDA 
DOE FOR TOM CUTLER/PI-32 AND JANE NAKANO/PI-42 
COMMERCE FOR USDOC 4430--GOLIKE 
TREASURY FOR IA-SETH SEARLS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ENRG ECON EINV SENV PGOV ID
SUBJECT: GOI TO SPEND BILLIONS TO BOOST BIOFUELS 
 
¶1. (U) SUMMARY: The Government of Indonesia (GOI) plans to 
invest USD 22 billion over the next five years to boost 
biofuel production in a bid to cut fossil fuel consumption. 
GOI officials say they will spend USD 6 billion to buy 
approximately 6 million hectares of land to grow the fuel 
feedstock.  The remaining USD 16 billion will go toward 
building factories, roads and other support services.  In 
January the GOI said it wanted to increase biofuel's share 
of the nation's fuel stock to ten percent.  Sustained high 
global petroleum prices and the continued slow and steady 
decline of Indonesia's domestic production have given 
increased urgency toward greater use of alternative and 
renewable energy sources.  Indonesian officials also want to 
promote employment in the agricultural sector as part of the 
President's initiative to cut unemployment and boost 
economic growth.  Economists and environmentalists express 
reservations about the manner in which the GOI is seeking to 
boost biofuel production and increase energy security. End 
summary. 
 
New Biofuel Initiative 
---------------------- 
 
¶2. (U) Minister of Energy and Mineral Resource Purnomo 
Yusgiantoro announced the GOI's biofuel initiative at a mid- 
July government conference on biofuels.  He had promised 
that his ministry would release a biofuel master plan by the 
end of July with detailed financial incentives for small- 
and medium-sized companies to produce biofuel, as well as 
plans for regulatory relief to streamline the issuance of 
permits for large companies.  During a 31 July meeting with 
industry representatives, however, ministry officials said 
the plan was still under development and could offer only 
the most general outlines of their initiative. 
 
¶3.  (U) Purnomo did not give concrete details but did say on 
July 31 that the Finance Ministry will forumulate taxation 
and import duty incentives for biofuel production equipment. 
The Agriculture Ministry will seek ways to encourage raw 
materials production, while the Industry Ministry will be 
charged with streamlining plant licensing procedures, 
according to Purnomo.  He said his ministry, Energy and 
Mineral Resources Ministry, will promulgate new guidelines 
on the types of biofuel to be sold.  He also called on local 
governments to simplify the issuance of land use permits. 
Purnomo said the GOI has been conducting detailed 
discussions with industry and internally within the 
government on the types of the incentives that will be made 
available. 
 
¶4. (U) The Ministry did release interim biodiesel production 
targets through 2010: 187,000 kiloliters (KL) in 2007, 
377,000 KL in 2008 and 1.337 million KL in 2010. So far in 
2006 Indonesia has consumed a monthly average of 3.75 
million KL of petroleum-based fuels or 45 million KL on an 
annual basis.  Many analysts we have talked to say that the 
GOI has planned an extraordinarily ambitious program.  By 
way of comparison, the United States, which began developing 
biofuel much earlier than Indonesia, produced only about 
280,000 KL of biodiesel in 2005. American consumption of 
biofuel, including ethanol, accounts for three percent of 
U.S. total fuel demand. 
 
¶5. (U) Biofuel can be produced from many different raw 
materials, including crude palm oil (CPO), sugar, and 
cassava, all of which are grown in abundance in Indonesia. 
CPO can be used to produce biodiesel, a replacement for 
diesel.  Sugar and cassava can be used to produce bioethanol 
to replace gasoline.  The GOI is also promoting the 
production of bio-oil, made from pure vegetable oil, and 
biogas, made of liquid waste and poultry droppings, both of 
which can be used as alternatives to kerosene. Some types of 
biofuel are already available in the retail marketplace, 
such as E-10, a combination of 10 percent ethanol and 90 
percent gasoline, and B-10, a combination of 10 percent 
biodiesel and 90 percent diesel.  Pertamina announced that 
effective August 1 it will cease selling unblended diesel in 
Jakarta. 
 
 
JAKARTA 00009864  002 OF 003 
 
 
¶6. (U) To kick off its campaign the GOI said initially on 
July 3 that it wanted to build a minimum of eight biofuel 
plants within the next few years using government funds. 
(Note: Later in the month, Purnomo used a figure of 11 
plants.  End Note.)  Minister of Industry Fahmi Idris 
announced the plan after a cabinet meeting with President 
Susilo Bambang Yudhoyono in Magelang, Central Java.  Fahmi 
said that four of the eight biofuel plants will have a 
production capacity of up to 7,000 KL a year while the other 
four will produce about 350 KL a year. All will use crude 
palm oil, cassava or castor oil as raw materials.  He said 
that his ministry had not yet decided on the locations of 
the factories, but that they have offered the plan to all 
local administrations in the country.  He said the 
determining factor will be proximity to plantations that can 
be used for feedstock.  Construction will cost about about 
Rp 60 billion (US$650,000) and will be financed from the 
2006 national budget, according to Fahmi.  The GOI plans to 
hand the facilities over to local administrations within a 
year of construction. 
 
¶7. (U) Early in the year in January, the GOI issued 
President Instruction 1/2006 on Biofuel, which created the 
National Team for Biofuel Development, chaired by Al Hilal 
Hamdi, who was the Minister of Manpower in the Megawati 
administration.  The team has the mandate to assist with the 
formulation of policies to accelerate biofuel development. 
Our energy ministry contacts tell us the government will 
also issue a Presidential Decree to support the operations 
of the team.  The team met with President Susilo Bambang 
Yudhoyono (SBY) and several cabinet Ministers on July 1 and 
July 2 to discuss biofuel development and plan their 
strategy. 
 
¶8. (U) SBY also held a limited cabinet meeting on July 24 to 
discuss biofuels.  Our energy ministry contacts tell us that 
Coordinating Minister for the Economy Boediono and 
Coordinating Minister for People's Welfare Bakrie, as well 
the Ministers for Energy and Mineral Resource, State Owned 
Enterprises, Communication and Information, Finance, and 
Research and Technology attended.  The directors of three 
state owned banks, Mandiri, BNI, and BRI, also attended the 
meeting and they are expected to provide financing for 
biofuel development projects.  The GOI is still yet to offer 
details on funding, but our sources say it will come at 
least partly come from a special budget for alternative 
energy which the Coordinating Minister for the Economy is 
creating. 
 
New Policies and Financing 
-------------------------- 
 
¶9.  (U) On July 15, the GOI announced a plan to offer 
subsidized loans to palm oil, rubber and cacao plantations 
owners to expand their acreage cultivated, according to Bayu 
Krisnamurthi, a deputy at the Coordinating Ministry for the 
Economy, who announced the incentive scheme without 
providing further details.  He explained that under the 
proposal, expected to come into force in the second half of 
2006, a consortium of banks, led by Bank Rakyat Indonesia 
(BRI), will provide loans to the three sub-sectors at a 
fixed interest rate of 10 percent.  The GOI will make up the 
difference between the fixed rate and the prevailing market 
rate through a subsidy payment to the banks.  He also said 
that the GOI may allocate up to Rp 10 trillion (US$ 1.1 
billion) to subsidize increased lending to the plantation 
sector. 
 
¶10. (U) During the 31 July meeting with industry 
representatives, Minister Purnomo said the GOI will need to 
issue new policies in five key areas: land supply, 
infrastructure, manufacturing, distribution, and financing. 
He said that the development of biofuels as an energy 
alternative to replace fossil fuel will also serve economic 
development and employment goals, too.  He lauded the 
industry's potential to create jobs, saying it is expected 
to absorb 3.5 million in the workforce through 2010. 
 
Biofuel Producers 
 
JAKARTA 00009864  003 OF 003 
 
 
----------------- 
 
¶11. (U) Even before the July announcements, four Indonesian 
companies had already said they will have biofuel plants up 
and running by the end of 2006.  They include PT Sumiasih 
which is constructing a biofuel plant with an annual 
capacity of 70,000 KL. PT Sinar Mas is planning a facility 
with an annual capacity of 117,000 KL, as is PT Musimas.  PT 
Mopoli has said it will build a plant with a capacity of 
175,000 KL a year.  The association of the Indonesian 
Oleochemical Producers (Apolin) chairman Kris Hadisubroto 
told reporters in June that the biodiesel plants will be 
located in Bekasi and Medan.  He said that the total 
investment for the four plants will be around USD 25 
million.  They will use CPO as the raw material. Hadisubroto 
said the plants will cut into Indonesia's CPO exports, which 
he estimated would reach 12.5 million tons in 2006, but 
would not affect the country's overall CPO production. 
Indonesia is the world's second-largest palm oil producer 
and plans to develop another 9.0 million hectares (22.2 
million acres) of plantations in the next five years, six 
million of which will be used to meet biofuel demand. 
 
¶12. (U) Wilmar Holdings Ltd, a Singapore-based edible oil 
producer and refiner, said on July 3 that it will build a 
biodiesel plant to begin operations by 2007.  The USD 20 
million biodiesel plant in Riau will have an initial annual 
capacity of 250,000 tons with the potential for further 
expansion.  Feedstock for this project will be mainly CPO, 
according to a Wilmar spokesman.  Wilmar's plant will be 
racing to come on-stream ahead of a USD 25 million joint 
venture between plantation company PT Bakrie Sumatera 
Plantation and local construction firm PT Rekayasa Industri. 
Their plant is scheduled to begin operations in the middle 
of 2008 with an annual capacity between 60,000-100,000 tons. 
 
¶13. (U) The GOI has also been looking for ways to 
collaborate with its neighbor and chief CPO competitor 
Malaysia.  In a June 22 news conference, Indonesian and 
Malaysian state oil and gas companies Pertamina and Petronas 
said they will establish a joint research project to produce 
CPO-based biodiesel.  Economic Coordinating Minister 
Boediono announced the plan for the Indonesians on the 
margins of a meeting between the leaders of the two 
neighboring countries. 
 
Comment 
------- 
 
¶14. (SBU) The push to ramp up biofuels use in Indonesia has 
significant implications for Indonesia's national energy 
security, agricultural sector employment, rural development, 
export revenue, and environmental protection.  The costs of 
the many subsidies that the GOI says it intends to offer 
will be massive if they all come to fruition.  A successful 
biofuels program will bring significant new employment in 
rural areas, perhaps millions of new jobs, according to the 
GOI, but at a significant cost to the treasury.  At the same 
time, the plan calls for over six million hectares of land 
to be cleared.  If not managed carefully, this may bode ill 
for Indonesia's already beleaguered biodiversity and 
alarming rates of deforestation.  The GOI will also face 
significant challenges in running a massive land acquisition 
program without corruption.  A Presidential advisor told us 
he was very worried about corruption related to the projects 
and was advising President Yudhoyono to proceed more 
cautiously.  Given all the costs and uncertainties, it 
remains an open question whether Indonesia's energy security 
would be better served by continuing to phase out retail 
fuel subsidies, rather than embark on a heavily subsidized 
biofuel campaign. 
 
PASCOE