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FM AMEMBASSY PRETORIA
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UNCLAS SECTION 01 OF 04 PRETORIA 005042 
 
SIPDIS 
 
DEPT FOR OES/PCI; AF/S 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ENRG EAGR SENV ECON EINV SF
SUBJECT: BIOFUEL CONFERENCE HIGHLIGHTS PROGRESS AND OBSTACLES IN THE 
AFRICAN BIOFUEL INDUSTRY 
 
PRETORIA 00005042  001.2 OF 004 
 
 
¶1.  SUMMARY.  An inaugural Biofuels Markets Africa conference took 
place in Cape Town on November 30 - December 1, 2006.  The event 
attracted over 200 attendees, primarily from African industry and 
governments.  Key topics included government policies and incentives 
to support investment, production quality standards, Africa's 
potential for biofuels, and opportunities under the Kyoto Protocol 
Clean Development Mechanism (CDM).  Most speakers presented an 
upbeat view of both the market and Africa's potential within the 
market.  But almost all also noted the need for regional standards 
and policy frameworks, none of which are currently in existence. 
The Southern African Development Community (SADC) is working on a 
framework which could be in effect within two to four years.  END 
SUMMARY. 
 
-------------------------------- 
BIOFUEL CONFERENCE WELL-ATTENDED 
-------------------------------- 
 
¶2.  Greenergy of the UK sponsored a Biofuels Markets Africa 
conference in Cape Town on November 30 - December 1, 2006.  Over 200 
industry, banking and government representatives attended, well 
above planned capacity.  The conference had to be moved to a larger 
room for its second day.  Presenters included CEOs and ranking 
government officials.  Presentations were technical and geared to an 
audience with understanding beyond the basics.  The audience also 
included many small-scale entrepreneurs.  The delegate list is 
available upon request from the EST Officer, US Embassy Pretoria. 
 
 
-------------------------------- 
AFRICA NEEDS A REGIONAL STRATEGY 
-------------------------------- 
 
¶3.  The major themes developed at the conference included lessons 
learned from biofuels industries in Europe; regulation, development 
and facilitation of the African biofuel markets; biofuels and the 
CDM; and project financing and management.  Various speakers offered 
opposing viewpoints on whether or not biofuels would be an 
advantageous new market for Africa. 
 
¶4.  Greenergy CEO Andrew Owens opened the conference with a session 
on lessons learned from Europe.  Greenergy, a European biofuels 
company with several biofuel plants in Europe, acquires biofuel from 
global sources and sells it to large European consumers.  According 
to Owens, the company's success is due to Europe's duty exemptions, 
use obligations, and tax incentives for the biofuel industry. 
 
¶5.  Owens noted that low-cost exporters are targeting Europe, but 
the rise in feedstock should shake out the marginal companies. 
Africa must consider whether or not it is globally competitive. 
Owens opined that Europe would not be a good export destination for 
African exporters.  Owens also highlighted increased costs, 
including increased terminal costs (biofuels require three times 
more tank storage than petroleum).  Owens did note that Africa could 
benefit from the CDM, which might act as an incentive to enter the 
European market. 
 
¶6.  Owens emphasized the need for regional consistency.  As Owens 
noted, a policy variance throughout the region does not help a 
developing industry, and a disconnect between fuel and the 
agricultural supply chain is a disaster.  Constant revisions in 
government policies lead to confusion within the industry.  His 
remarks were widely applauded by the mostly industrial crowd. 
 
¶7.  South African Biodiesel Managing Director Franz Hugo emphasized 
the need for industry and government involvement in the entire fuel 
chain.  According to Hugo, biofuels could be a key multiplier for 
rural development if the fundamentals were right.  Subsistence 
farmers need cash and could be involved in commercial aspects of 
biofuels, but they will need a steady sustainable market for their 
products.  Hugo noted that the government must be involved in 
quality assurance.  Backyard production of poor quality fuel will 
only cause consumers to lose faith in the product.  He emphatically 
stated that all African Countries must have the same standards at 
the regional level.  Ministers need to coordinate with each other to 
develop comparable fuel incentives, tax breaks, and quality 
standards. 
 
¶8.  SADC Senior Program Manager for Crop Development Simon Mwale 
agreed that Southern Africa must act regionally.  SADC commissioned 
a study on biofuels which was completed at the end of 2005.  The 
study raised key questions which SADC is trying to answer.  These 
questions include what institutional framework should be used, what 
 
PRETORIA 00005042  002.2 OF 004 
 
 
standards to use and which technical measures to adopt.  SADC is 
working with the South Africa Biofuels Association to develop 
regional standards and to find R&D solutions to regional obstacles 
to the industry.  The primary goal of the study is to break down 
regional barriers. 
 
¶9.  When questioned further by the audience about SADC's timetable, 
Mwale commented that he could not be specific.  If the first biofuel 
meeting can be held in the first quarter of 2007, then the policy 
framework might be ready for country consideration by the end of 
¶2007.  The countries would then amend or adopt the framework and 
return it for SADC consideration.  Mwale concluded that adoption of 
a regional framework would probably not occur for at least three to 
four years.  AFDB Renewable Energy Expert Youseel Araoui admitted 
that the AFDB had no biofuel projects and had put no resources into 
the area yet.  Their focus has been on wind and hydropower. 
 
---------------------------------- 
WHY CARBON CREDITS ARE NOT WORKING 
---------------------------------- 
 
¶10.  The Clean Development Mechanism (CDM) is a flexible mechanism 
from the Kyoto Protocol.  This mechanism was designed to make it 
easier for industrial nations to meet greenhouse gas emission 
reductions and to assist developing countries with sustainable 
development.  The CDM is a market-based instrument.  To qualify for 
CDM credits, projects must meet certain criteria, one of which is 
the additionality test.  This test requires that projects are given 
credits only if they would not have been implemented under a 
business-as-usual scenario.  In other words, the project must add 
something additional. 
 
¶11.  EcoSecurities South African Country Director Henk Sa zeroed in 
on one key problem for CDM, especially in South Africa.  He noted 
that South Africa does not have a one-stop shop for CDM, although 
the country is working on it.  Only one percent of all CDM is even 
located within Africa and over fifty percent of that one percent is 
within South Africa.  Sappi (an international South Africa-based 
forestry product company) CDM Project Leader Grant Little expanded 
on this theme.  South Africa does have a designated national 
authority (DNA) sited within the Department of Mines and Energy 
(DME).  The process to achieve CDM certification is similar to that 
used for environmental impact assessments.  Many South Africa 
companies are exploring CDM projects, but little has been 
formalized.  According to Little, the numbers tell the story.  India 
has 450 projects; China has 177; Brazil has 190.  There are only 
four registered projects for South Africa.  Little asked: is CDM 
working in South Africa?  He answered himself with a resounding 
"No." 
 
¶12.  Little explained that there are positive aspects to doing 
business in Africa that should make CDM feasible.  These factors 
include availability of financing, political and economic stability, 
advanced technology and a government that is pushing renewable 
energy.  According to Little, negative influences outweigh these 
positive aspects.  South Africa and the UN both have seemingly 
endless red tape.  Transaction costs are high.  Many African 
companies are worried about what will happen after 2012, especially 
if large projects are involved.  Additionality seems to be a 
particular hurdle that South Africa cannot surmount.  Finally, South 
Africa has extremely low energy costs so there is no push for CDM. 
 
 
¶13.  Little offered no "off-the-shelf" solutions because different 
communities require different solutions.  He noted that many of 
these obstacles can be overcome.  Every country has to deal with the 
UN's red tape; every country has concerns about 2012.  Little 
emphasized that South Africa's manufacturing infrastructure is a 
huge enabler for the development of the industry, but the energy and 
government infrastructures are bigger brakes.  Many South African 
projects face what Little called the "Catch 22 of CDM" - to get bank 
financing the project must be viable but to get the carbon credit, 
the project must prove it needs the credit to become viable. 
 
-------------------------------------------DE VELOPING AN LARGE-SCALE 
AFRICAN PRODUCER MARKET 
------------------------------------------- 
 
¶14.  Engen Petroleum Refinery Strategic Planner Ian Baxter discussed 
the role of refineries in building a market for biofuels in Africa. 
He noted that a five percent ethanol mixture is currently permitted 
in South Africa where standards are already aligned with the EU. 
Baxter then refuted earlier comments that biofuels could replace 
 
PRETORIA 00005042  003.2 OF 004 
 
 
petroleum in South Africa.  He noted that petroleum is a finished 
product that is easy to replace with imported product if a shortage 
arises.  There are no additional changes needed to add more 
petroleum.  Biofuels require extensive logistical changes by 
refineries, especially in transportation planning.  Refineries 
require completely separate logistics systems to transport biofuel. 
(Comment.  Petroleum in South Africa is transported primarily by 
pipeline until the last few kilometers to the pump when tankers are 
employed.  Biofuels require transport by road from the refinery to 
the pump.  End Comment.) 
 
¶15.  SASOL Alternate Energy Group manager Brian Tait agreed that 
there was little likelihood of profit with biofuels.  SASOL has 
concluded that until crude reaches a minimum of USD 89 per barrel, 
there will be no profit in this market.  Tait noted that even at 
this price, SASOL would need high tax incentives to make the market 
work. 
 
----------------------------------------- 
SMALL-SCALE PRODUCERS ARE A VIABLE OPTION 
----------------------------------------- 
 
¶16.  Growing Fuels Managing Director Willie van der Westhuizen felt 
there was a niche for small-scale biofuel producers, especially in 
Africa.  His company has been piloting a small-scale biodiesel plant 
near Stellenbosh in the Western Cape province of South Africa, in 
partnership with Spier and AGAMA Energy.  Licensing is still in 
process and they hope to begin production in 2007.  They market to 
local trucking fleets, a niche market. The goal of the project is to 
produce a replicable project for the rural areas.  He envisions 
small-scale producers (under 1000 tons per year) producing 
exclusively for local farmers and truckers. 
 
¶17.  Van der Westhuizen sees small-scale production not as 
replacement fuel production, but as a development strategy.  Small 
plants can stimulate the local economy.  Large obstacles remain 
including the cost for quality control.   At this time, the cost of 
testing a batch of biofuel is equal to the cost of producing that 
fuel.  His company is considering new testing equipment from 
Germany, or asking the government for subsidies for small producers. 
 Stabilizing the fuel stock supply chain is critical for small-scale 
success.  Van der Westhuizen says, "there is no value in starting if 
the agricultural sector is not involved in development of the 
industry." 
 
¶18.  African Alternative Energy CEO Thomas Munn provided information 
on micro-scale production.  His firm operates a pilot farm near the 
Lesotho border.  The goal is to develop a completely self-sufficient 
farm.  Munn's farm investigated using jatropha as a fuel source, but 
it had too large harvest costs and required too much manual labor. 
The farm managers have developed farming, irrigating, welding and 
rock crushing vehicles that operate on biofuel.  Munn says he wants 
"fuel used where it is made and made where it is needed."  He 
envisions new fuel companies every 50 kilometers along the roads, 
with all control over production and fuel stock harvesting vested in 
the local communities. 
 
¶19.  Three micro pilots are in production.  A feedstock company 
outside of Pinetown, near Durban, produces 450 liters per eight 
hours of operator time.  An organic farm near Ficksburg operates an 
entire range of farming equipment on biofuel made primarily from 
sunflower oil.  The extra revenue was used to pay for the 
installation of the biofuel machinery.  A soybean pressing plant in 
the Free State province is currently pressing 75,000 liters of 
soybean fuel per year.  The crops are planted in rotation with maize 
and farming costs are reduced by using biofuel generated from those 
plants.  Munn concluded that the technology and the will are 
available in South Africa, but the legislation is missing. 
 
--------------------------- 
CAN BIOFUELS BE PROFITABLE? 
--------------------------- 
 
¶20.  Barclay's Agribusiness Specialist Fazel Moosa explained that 
the South African sugar industry is protected and that sugar prices 
are established by the government.  The state-owned power company 
ESKOM will not pay the government-established prices for fuel 
stocks.  Moosa said the banks were concerned about potential 
surpluses and unusable byproducts.  Barclay's market analysis showed 
that even when crude oil is at USD 60 per barrel, the biodiesel 
industry would operate at a loss unless the government provides 
support. 
 
 
PRETORIA 00005042  004.2 OF 004 
 
 
¶21.  According to Moosa, the University of Pretoria, in conjunction 
with the University of Missouri, modeled the biofuel industry in 
South Africa.  The results showed that a large-scale industry would 
need 45 percent import tariffs and rebates on fuel to become 
profitable. It might be possible to create a viable industry using a 
"massification" scheme of linking small scale farmers to ensure a 
steady supply chain. 
 
¶22.  AGAMA Energy Managing Director Glynn Morris concurred, noting 
that rural electrification is a key goal for biofuels.  His company 
has one project operating in Lesotho, another at a rural school in 
the KwaZulu Natal province of South Africa.  Each uses a small 
household (or school-sized) digester to generate biomass energy. 
 
----------------------------- 
US TAKES OPPORTUNITY TO SPEAK 
----------------------------- 
 
¶23.  When a Finnish speaker failed to appear, Organic Fuels' Josh 
Steward took his place in the conference agenda.  Organic Fuels of 
the U.S. has production locations throughout the U.S. in the 
Midwest, South and central California.  The trend is for larger 
facilities because of economies of scale.  He described two 
projects, including one in Denton, Texas, where landfill gas is used 
to generate enough fuel to take Denton's public buildings off the 
electric grid.  Steward also seized the opportunity to speak on 
ethanol standards, urging the African audience not to simply adopt 
European standards at the exclusion of U.S. and other standards. 
 
¶24.  COMMENT.  The conference generated excitement and provided 
biofuel experts across the continent and across specialties an 
opportunity to exchange views.  The audience appeared frustrated by 
the lack of regional cooperation among African governments and 
grasped the necessity for regionally harmonized incentives if this 
industry is to prosper.    END COMMENT 
 
Bost