VZCZCXYZ1339
RR RUEHWEB

DE RUEHSF #1320/01 2581055
ZNR UUUUU ZZH
R 151055Z SEP 06
FM AMEMBASSY SOFIA
TO RUEHRC/USDA FAS WASHDC
INFO RUEHC/SECSTATE WASHDC 2553
RUCPDOC/USDOC WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC

UNCLAS SOFIA 001320 
 
SIPDIS 
 
USDA/FAS/OA FOR ROSADAR, CMP FOR NUTTALJ, JARRELLP 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EAGR ENRG ECON ETRD BU
SUBJECT: BULGARIAN BIOFUEL INDUSTRY 
 
REF:  SOFIA 1293 
 
¶1.  SUMMARY:  The Bulgarian biofuels industry is just 
getting off the ground.  Biodiesel and bioethanol (see 
Definitions at bottom) are currently produced only in 
small quantities, although an increasing number of 
investors are constructing facilities for production of 
biofuels, mainly biodiesel.  Local biofuel production 
should reach 350,000 MT within the next two years. 
Constraints to production and trade include a lack of 
access to capital; lack of clear GOB regulations and 
support; a limited local market; and lack of 
appropriate infrastructure investment to facilitate 
trade by other market players (refineries, storage 
houses and retail distributors).  The GOB is in the 
process of drafting EU-harmonized legislation and 
expects to have a regulatory framework in place by end- 
¶2006.  However, the industry faces challenges related 
to official concern about reduced budget revenue, and a 
still-significant gray market in oil and distilled 
spirits.  Recent political scandals involving smuggled 
oil, gray duty-free zones for petroleum imports, and 
the traditionally questionable distilled spirits trade 
are contributing to the shaky business environment. 
END SUMMARY. 
 
Raw materials for biodiesel and bioethanol 
------------------------------------------ 
Biodiesel 
 
¶2.  Currently, investors in the Bulgarian biofuels 
sector generally view biodiesel as a more attractive 
option than bioethanol, for the following reasons: 
 
--  Strong demand for biodiesel in the EU and 
attractive profit margins; 
--  Relatively less start-up capital needed to build a 
biodiesel facility; 
--  Existing regulations which call for no excise tax 
on biodiesel. 
 
¶3.  The current major constraint for biodiesel 
investors is the lack of raw material.  Suitable for 
production in Bulgaria are (in order of best to worst) 
sunflower seeds, rapeseed, and soybeans. 
 
¶4.  Sunflower seeds are traditionally exported in large 
volumes to the regional market, especially Turkey. 
MY2006/2007 sunflower production is likely to reach 
over 950,000 MT.  However, according to industry 
sources, sunflower biodiesel is not in high demand due 
to its lower quality compared to rapeseed biodiesel, 
and because currently it does not meet EU biodiesel 
standards.  In addition, the industry indicates that 
sunflower diesel, as it is produced currently, can be 
used only during the summer, making large-volume 
commercial use unlikely. 
 
¶5.  According to managers in the biofuels sector, 
Bulgaria will need at least 600,000 MT of oilseeds for 
biodiesel production in the next 2-3 years (see the 
list of current investment projects in para 27).  In 
addition to these larger projects, reportedly, there 
are a number of very small installations producing 
biodiesel at various farms.  They process used 
vegetable oils into biodiesel for farm vehicles.  The 
volume and quality of this biodiesel limits its 
suitability to on-farm use.  FAS Office of Agricultural 
Affairs estimates that this production does not exceed 
1,000 MT/year. 
 
¶6.  Bulgaria is not a traditional producer of rapeseed. 
The rapeseed crop in 2006 is likely to be 33,000 MT, a 
51% increase over 2005 but still significantly below 
the capacity of facilities which are being constructed. 
Larger farmers are willing to increase rapeseed area in 
the near future; however, the crop is vulnerable to 
frequent winter cold spells and summer dryness, and is 
less well-suited than sunflower to production in 
Bulgaria.  Currently, several German companies are 
offering farmers rapeseed seeds (96 Euro per a bag for 
seeds to plant 3.0 HA) in return for purchasing the 
crop at a fixed ex-farm price of 400 leva/MT (USD 
263/MT), which is very attractive to farmers. 
According to FAS estimates, rapeseed production should 
double in the near future to 60,000 MT.  However, the 
volume of rapeseed production will remain far below 
what is needed to meet local demand for biodiesel feed 
stocks. 
¶7.  Soybeans are not a particularly good alternative 
due to Bulgaria's relatively dry climate and lack of 
irrigation.  Annual production over the last several 
years has not exceeded 4,000 MT. 
 
¶8.  If the Bulgarian agricultural sector is not able to 
satisfy demand for agricultural feedstocks for 
biodiesel, it is likely that biodiesel manufacturers 
will import crude vegetable oil for processing. 
Finally, depending on relative prices and supply 
uncertainties, it is expected that some manufacturers 
will import pure, ready-to-mix biodiesel. 
 
Bioethanol 
 
¶9.  Bulgarian wheat and corn production have 
traditionally exceeded domestic consumption.  In very 
dry years corn production suffers, but supply is 
usually sufficient to meet local demand.  On average, 
Bulgaria exports about 1.0 MMT of wheat and 100,000 MT 
to 400,000 MT of corn annually.  Exported wheat and 
corn tend to be of relatively lower quality, suitable 
for industrial use.  Prices are competitive.  These are 
the primary advantages to using wheat and corn to 
expand in bioethanol manufacturing.  As with biodiesel 
production, however, it is still unclear if locally- 
produced ethanol will be more competitive than imported 
ethanol. 
 
¶10.  A significant disadvantage facing all local 
biofuels operations is their relative inefficiency and 
small size.  For bioethanol production, for example, 
local industry estimates show corn and wheat conversion 
rates (grains into ethanol) at 3.4-3.8, compared to 
around 2.0 for most U.S. bioethanol plants. 
 
¶11.  We estimate that in 2007 total Bulgarian 
consumption of biofuels (biodiesel and bioethanol) will 
be 150,000 MT.  Taken together, production from all 
current and short-term investment capacity (in the next 
2-3 years) should amount to 350,000 MT of biofuels, 
substantially exceeding local market demand.  All 
managers in the biofuel industry are expecting to 
export at least 80% of their final product to the EU. 
 
¶12.  Commercial demand in Bulgaria for biodiesel and 
bioethanol is limited to one major buyer, the Russian 
company LukOil, on the Black Sea port of Bourgas.  The 
LukOil refinery in Bourgas is the only refinery in 
Bulgaria, and has good technology for mixing petroleum 
products with biodiesel and/or bioethanol. 
 
¶13.  The other major player, which is the country's 
largest oil distributor, Petrol, imports oil, diesel, 
and propane and distributes these fuels via its own 
distribution and retail network.  These two companies 
together have 539 retail gas stations in Bulgaria. 
 
¶14.  There are at least 20 other companies which 
independently import and trade smaller volumes of oil 
and diesel.  Some of them have their own distribution 
networks, and some sell to other distributors.  Aside 
from LukOil and Petrol, other major distributors are 
OMV, Shell, and Opet.  These companies buy regular 
petroleum-based fuels from LukOil or Petrol, or import 
on their own. 
 
¶15.  Some of these companies have the technical ability 
to mix biofuels with petroleum products at their 
storage warehouses.  Currently, however, there are only 
a few gas stations in Bulgaria equipped for retail 
sales of mixed fuels.  Although the number in Sofia is 
growing, GOB sources indicate that the oil industry 
will welcome increased use of biofuels in Bulgaria if 
clear and transparent regulations are written and 
enforced.  Reportedly, the oil industry prefers to see 
government regulations which give preferences to 
mixtures of up to 5 percent biofuels, rather than to 
pure biofuels.  Currently there are no flex-engine 
vehicles in the country. 
 
¶16.  Bulgarian biofuel prices are lower than EU prices 
due to different excise duties and to other 
regulations.  The average price of biodiesel in the EU 
is Euro 1.07/liter, about 10% less than the price of 
petroleum diesel at 1.18 Euro/liter.  In Bulgaria, the 
few stations selling biodiesel are charging Euro 0.75- 
0.86/liter, which is about 7% lower than the price of 
petroleum diesel at Euro 0.91/liter. 
¶17.  Bulgarian retail biodiesel prices are therefore 
about 20% below EU retail prices.  The lower Bulgarian 
prices appear to reflect production costs fairly 
accurately, since the subsidies and other preferences 
provided to EU farmers and refiners are largely 
unavailable to Bulgarian producers. 
 
Agricultural feedstocks:  Biomass 
----------------------------------- 
 
¶18.  Currently, no Bulgarian manufacturer uses biomass 
from field crops to produce fuel.  Local farmers still 
burn fields after the harvest to destroy stalks and 
straw in order to reduce fuel expenses for farm 
equipment.  Recent local research shows that 30 percent 
of local wheat straw, 65 percent of corn stalks and 80 
percent of sunflower stalks and shells could be used 
for energy production. 
 
¶19.  The Bulgarian rural population traditionally uses 
biomass - firewood and coal - for heating.  In 2003, 
energy produced from biomass was 7.4% of total energy 
consumption.  Biomass energy output for the same period 
was 3 times more than the production of hydroelectric 
energy.  The major consumer of biomass energy was the 
population (86%) vs. industry (14%).  For the period 
1997-2004, biomass used by the population has increased 
3.4 times while consumption of all other types of 
energy and oils has stagnated. 
Further expansion in new biomass sources for energy 
production will be well received by consumers. 
Currently, a few foreign investment funds are active in 
Bulgaria, and at least two American firms are looking 
at investing in biomass facilities on the coast. 
However, the new technology is still unaffordable for 
most local businesses and no serious prospects for 
affordable solutions are visible over the next few 
years. 
 
Government regulations 
------------------------ 
 
¶20.  Although the biofuels phenomenon is the subject of 
lively debate among investors, farmers, processors, 
traders, and oil companies, public information about 
this market is scarce.  No written policies, action 
plans, studies, data, or other materials about the 
biofuels industry have been made available by the GOB. 
Information about market developments in this 
unregulated sector is disseminated informally rather 
than via transparent interactions between buyers, 
sellers and regulators. 
 
¶21.  In mid-2006, the GOB accelerated its work on 
harmonization of EU legislation and started drafting 
the Renewable Energy Sources Law (RESL) and 
implementing regulations (reftel).  Most likely, the 
law will be passed by the Bulgarian Parliament in 
October, followed by the regulations which are likely 
to be approved in November.  The GOB's goal is to have 
the necessary legislation in place by the end of this 
year. 
 
¶22.  According to the Bulgarian EU Accession Treaty and 
harmonized local legislation, the share of biofuels in 
domestic fuel consumption should reach 5.75 percent by 
2010, and 20 percent by 2020 (EU Directive 2003/30). 
The draft RESL is likely to introduce mandatory 5 
percent use of biofuel in 2007.  The requirements will 
cover national annual biofuel consumption, and will not 
specify the type of fuel (biodiesel, bioethanol) to be 
used.  For now, regulations will treat all biofuels 
equally and will not seek to favor one over the other. 
Reductions or re-ordering of excise duties will be the 
major policy tool.   It is expected that excise duties 
will be graduated, and that 5 percent content biofuel 
will be subject to the lowest duty. 
 
¶23.  Biodiesel was exempted from excise duties in July 
2006 (official gazette 391 (art.32), of November 15, 
2006, in effect since July 1, 2006).  However, this 
regulation applies only when pure biodiesel is sold. 
Excise tax is currently applied when biodiesel is mixed 
with petroleum. 
 
¶24.  Excise tax exemptions for bioethanol were approved 
by the Budget Commission of the Parliament as a part of 
the latest revision of the Excise Tax Act on August 3, 
2006, but the revised law has not been entirely passed 
yet.  So far the GOB has been reluctant to accept 
reduced tax receipts by offering the industry fiscal 
incentives. 
 
¶25.  Another challenge for local biofuel manufacturers 
is the current treatment of biofuel as an "excise tax 
product" even though the excise tax is zero.  This 
designation means that biofuel can be produced only at 
a "licensed excise storage/warehouse."  Such licensing 
requires that a company have registered capital of 
500,000 leva (USD 333,000) (art.47/1, Excise Law), an 
amount unaffordable for small and medium farmers.  In 
addition, the Ministry of Environment has the authority 
to grant special permission to biofuel producers under 
regulations for waste management; this process usually 
takes about a year and a half, during which the company 
cannot operate.  A third challenge to local producers 
is presented by competition from informal imports of 
some bioefuels.  Lack of transparent supply 
arrangements and tough pricing tend to reduce 
incentives to produce locally. 
 
¶26.  Currently, there are four Bulgarian associations 
of biofuel producers.  Some of these associations have 
representatives on the working groups under the 
Ministry of Economy that are drafting the RESL. 
However, there is some concern that they do not 
actually represent the most significant players on the 
market. 
 
Investment support 
-------------------- 
 
¶27.  There are several state and private programs which 
provide various types of support for development of 
bioenergy projects.  Among these are: 
 
-- European Bank for Reconstruction and Development: 
credit lines to 5 local commercial banks for energy 
efficiency and renewable energy projects; 
 
--  Bulgaria Ministry of Environment via its Enterprise 
for Environment Management; 
 
--  EU-SAPARD investment program, with 21 projects for 
biofuels which have been approved and are in process of 
implementation; 
 
--  Bulgarian National EcoFund; 
 
--  Dutch Government program (PSO) for investment in 
eco-energy projects; 
 
--  EU-Nordik Funds; 
 
--  Bulgarian Government Energy Efficiency Fund. 
According to preliminary GOB information, it is likely 
that this fund will start giving soft loans to biofuel 
producers after the RESL is passed. 
 
Expected effects on the agricultural market 
-------------------------------------------- 
 
¶28.  The growing European market for biofuels will spur 
significant changes in traditional agricultural 
production patterns in Bulgaria.  Within the next three 
years, FAS/Sofia expects to see the following changes: 
 
- Corn:  Corn area and produQon should increase to 
about 2.0 MMT.   More changes are expected in corn 
production than in any other area.  Over the next two 
years, EU demand for price-competitive Bulgarian 
ethanol from corn is expected to be strong.  Expansion 
in planted areas is likely to come from currently idle 
agricultural land, or from reduced wheat acreage, 
mainly in Northern Bulgaria.  Irrigation is likely to 
be tried for the first time. 
 
- Rapeseed:  Bulgarian farmers may also expand areas 
under rapeseed.  Total additional area will not be 
large due to the climate and other limitations. 
However, good prices are likely motivate large farmers 
to start planting more rapeseed in the fall of 2006. 
Production should rise to 50,000 MT-60,000 MT, or 
double the current volume.  Growth in rapeseed area may 
come with reductions in wheat or, more rarely, in 
sunflower area. 
 
- Sunflowers:  If producers are offered attractive 
prices, a portion of sunflower exports will be 
converted to local biodiesel production.  However, the 
proximity of the huge Turkish market with its enormous 
demand for vegetable oil, and the easy access that 
small and medium suppliers have to foreign buyers, will 
present supply challenges to local biofuels processors, 
especially in Southern Bulgaria. 
 
¶29.  Despite expected increases in local supplies for 
processing of sunflower and rapeseed into biodiesel, 
imports of supplementary stocks and alternative raw 
materials are inevitable.  Crude sunflower oil, 
rapeseeds, soybeans, soy and palm oil are the most 
likely feedstocks for import into Bulgaria.  Better 
opportunities exist for those buyers who are located on 
the Danube or Black Sea ports and have cheaper access 
to sea/river shipments. 
 
¶30.  In the future, bioethanol may prove to be a better 
solution for local agriculture compared to biodiesel - 
the opposite of the current situation.  Bulgarian 
farmers tend to produce higher volumes of lower quality 
grains which do not meet EU quality standards for 
intervention stocks but are appropriate for industrial 
use.  Due to relatively frequent dry years and lack of 
irrigation, wheat is the most stable local crop and the 
only one which can provide steady and abundant supply. 
As technology improves, bioenergy producers' demand for 
Bulgarian corn, sunflower, wheat should put some upward 
pressure on prices and contribute to improved farm 
incomes. 
 
Definitions 
------------- 
 
¶31.  Biodiesel:   a clean-burning alternative fuel 
produced from fats or oils.  Biodiesel contains no 
petroleum, but it can be blended at any level with 
petroleum diesel to create biodiesel blend.  It is 
biodegradable, nontoxic, and essentially free of sulfur 
and aromatics.   It is typically produced by a reaction 
of a vegetable oil or animal fat with an alcohol such 
as methanol or ethanol in the presence of a catalyst to 
yield mono-alkyl esters and glycerin, which is removed. 
Biodiesel can be used in compression-ignition (diesel) 
engines with no major modifications. 
 
¶32.  Bioethanol:  Basically alcohol, bioethanol is made 
from starch plants (grain, corn, wheat, and tubers like 
cassava); or sugar (sugar beet or sugar cane). 
Research into bioethanol from cellulose plants (e.g. 
trees) is still in an early stage.  Bioethanol is 
obtained using fermentation and enrichment by 
distillation/rectification and dehydration.  Ethanol or 
ethyl alcohol (C2H5OH) is a clear colorless liquid, 
which is biodegradable and low in toxicity, and causes 
little environmental pollution if spilt.  Ethanol burns 
to produce carbon dioxide and water.  Ethanol is a high 
octane fuel and has replaced lead as an octane enhancer 
in petrol.  Blending ethanol oxygenates the fuel 
mixture so it burns more completely and reduces 
polluting emissions. Ethanol fuel blends are widely 
sold. The most common blend is 10% ethanol and 90% 
petrol (E10). Vehicle engines require no modifications 
to run on E10 and vehicle warranties are unaffected 
also. Only flexible fuel vehicles can run on up to 85% 
ethanol and 15% petrol blends (E85). 
KARAGIANNIS