VZCZCXRO3679
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #0854/01 0821009
ZNR UUUUU ZZH
R 231009Z MAR 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 4007
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHDC
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 0425
RUEHBY/AMEMBASSY CANBERRA 0576
RUEHBJ/AMEMBASSY BEIJING 4008

UNCLAS SECTION 01 OF 04 JAKARTA 000854 
 
SIPDIS 
 
DEPT FOR EAP/MTS, EB/IFD/OIA, and E Special Advisor Manuel 
DEPT PASS OPIC, EXIM, TDA 
DOE FOR TOM CUTLER/PI-32 AND C. GILLESPIE/PI-42 
COMMERCE FOR 4430-BERLINGUETTE 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ENRG ECON EINV SENV PGOV ID
SUBJECT: ENGAGING INDONESIA ON BIOFUELS POLICY 
 
REF: 06 JAKARTA 9864 (Billions for Biofuels) 
 
¶1. (U) This is an action request; see para 17. 
 
¶2. (SBU) Summary.  The Government of Indonesia (GOI) is continuing 
its ambitious 5 year, multi-billion dollar investment plan to boost 
biofuel production to 200,000 barrels per day by 2010.  At a 
high-profile media event on January 9 the GOI signed 58 initial 
agreements reportedly worth $12 billion with foreign and domestic 
biofuels investors.  Chinese, Japanese, and Malaysian firms are the 
most active in announcing deals.  The huge price tags attached to 
the public announcements mask the tentative status of many of the 
deals, however.  Despite the land grab quality of some of these 
projects, the GOI has announced modest and sensible biofuel policies 
to date, including a $108 million fund to create incentives for 
biofuels investments and $1.08 billion to improve agricultural and 
rural infrastructure.  Although Indonesia has a history of dramatic 
policy programs, many of which never come to fruition, the GOI's 
biofuel initiative appears to be here to stay.  The U.S. Trade 
Development Agency has agreed to fund a 10-person GOI biofuels 
delegation to visit the United States in the near future, and we are 
currently coordinating trip details with the GOI.  On March 23 the 
national biofuels team chief expressed enthusiasm for the TDA trip 
and said he hoped to combine the U.S. trip with a previously 
accepted invitation to travel to Brazil in May.  The GOI is eager to 
learn from the U.S. experience, and we recommend Washington agencies 
meet with the GOI biofuels delegation in Washington for policy 
discussions, possibly under the auspices of our Bilateral Energy 
Dialogue.  This report uses an exchange rate of Rp 9200.  End 
summary 
 
Billion Dollar Bandwagon; Deals Still Tentative 
--------------------------------------------- -- 
 
¶3. (U) On January 9, dozens of foreign and domestic companies signed 
agreements with the GOI to develop 58 biofuel projects.  The GOI 
said the agreements totaled more than $12 billion and will be key in 
supporting the GOI's plan to boost biofuel production to 200,000 
barrels per day by 2010, reducing fossil fuel use by 10 percent. 
AlHilal Hamdi, chairman of the National Biofuels Development Team, 
told reporters that the projects under development will include 
biofuel crop plantations and processing plants.  He said Indonesia 
plans to use crude palm oil (CPO), jatropha curcas, cassava, and 
sugar cane as feedstock.  Local analysts tell us these projects have 
large price tags but are very far away from being done deals. 
 
¶4. (U) Hamdi said that the GOI will make available 6.5 million 
hectares of land for biofuel crop development: three million 
hectares for oil palm, 1.5 million hecatres for jatropha curcas, 
500,000 hectares for sugarcane, and 1.5 million hectares for 
cassava.  He added that the GOI estimated that investment per 
hectare will be as follows: Rp 30 million ($3260) for oil palm, Rp 
15 million ($1630) for sugarcane, Rp 3 million ($326) for jatropha 
curcas and Rp 3.5 million ($380) for cassava.  He noted that the GOI 
has ambitious rural employment objectives for the plan, as well, and 
had projected it will give jobs to three million Indonesians.  The 
GOI said it is seeking to develop 11 biofuel processing plants to 
produce 187 million liters in 2008 and 1.3 billion liters by 2010, 
equivalent to the country's total fuel consumption of 41 million 
kiloliters in 2005. Its goal is to cut fossil fuel use in the 
transportation sector by 10 percent and by 50 percent in the 
electricity sector. 
 
Chinese Looking For New Growth and Tech Transfer 
--------------------------------------------- --- 
 
¶5. (U) China National Offshore Oil Corp (CNOOC), China's dominant 
offshore oil and gas producer, made the biggest splash of the day 
with its signing of a memorandum of understanding with companies 
controlled by the Indonesian conglomerate the Sinar Mas Group to 
invest $5.5 billion in biofuels.  CNOOC may team up with Sinar Mas 
Agro Resources and Technology to develop biodiesel from crude palm 
oil and bioethanol from sugar cane or cassava in Papua and 
Kalimantan.  According to a Sinar Mas press release, the three 
companies will develop the project in three phases and over eight 
years.  Papua and Kalimantan regional governments have reserved 
approximately one million hectares of land (2.4 million acres) for 
the consortia.  If the project comes to fruition, in terms of 
investment value it would roughly equal BP's $5 billion Tangguh LNG 
 
JAKARTA 00000854  002 OF 004 
 
 
project in Papua and supercede China's biggest overseas oil 
acquisition, the $4.2 billion PetroKazakhstan acquisition in 2006. 
 
¶6. (U) CNOOC officials told reporters that the project, if it goes 
forward, would open up a potential new growth avenue and give 
valuable experience to transfer back to China.  Also during the 
event, the partners reportedly signed financing deals with 
state-owned banks Bank Mandiri and BNI, though they refused to 
release any details on financing arrangements.  In fact, the 
partners disclosed few details of the deal at all and were careful 
not to call them contracts, stressing they were merely "like 
memoranda of understanding".  The partners gave no project 
milestones nor did they say how the investment will be apportioned. 
CNOOC spokesmen emphasized that they will conduct feasibility 
studies at each stage of the venture before deciding whether to 
proceed to the next stage.  Local industry analysts say that success 
in this project would help Sinar Mas Group begin to repair its 
reputation, which has been sullied by the massive bond default of 
its Asia Pulp and Paper unit. 
 
GOI Biofuels Policies Sensible to Date 
-------------------------------------- 
 
¶7. (U) In addition to the spate of biofuels projects described above 
and below, the GOI has also announced a trio of modest policy 
initiatives designed to promote biofuels development.  On December 
20, 2006 Finance Minister Sri Mulyani Indrawati signed memoranda of 
understanding (MOUs) with state-owned Bank Mandiri, Bank Rakyat 
Indonesia, Bank Bukopin, and two regional banks, to provide up to Rp 
25.6 trillion ($2.8 billion) to finance the development of biofuel 
feedstock crops and infrastructure. The banks will disburse the 
loans in stages over the next few years according to plantations' 
needs. Under the terms of the MOU, interest rates on loans to 
plantations will be capped at 10%, with the GOI subsidizing any 
further interest charges.  The GOI pledged in its Fiscal Year 2007 
budget to provide interest-rate subsidies of up to Rp 1 trillion 
($108 million) to support the program.  The remainder of the money 
will go to rural areas to build biofuels processing plants and 
roads.  In January the GOI issued a regulation granting tax 
incentives for Indonesian domestic investments in certain business 
sectors, including biofuels. The new regulation provides: 
 
-- Accelerated depreciation of fixed assets at twice the rate under 
normal circumstances; 
 
-- Tax loss carry-forward up to 10 years (instead of 5); 
 
-- Investment tax credit reduction of net income by 30% of capital 
(land, buildings, equipment) invested to be pro-rated over six 
years, at 5% per year. 
 
 
Malaysians May Pony Up $4 Billion 
--------------------------------- 
 
¶8. (U) Malaysia's Genting, one of the country's leading 
corporations, also inked a plan to invest as much as $3 billion for 
biofuels plants in Papua, according to local press.  A Genting 
spokesman said they will invest via their Singapore-based Genting 
Biofuels Asia.  Meanwhile, compatriot MultiVest Corp. announced a 
partnership with several Indonesian parties to build a $1 billion 
biofuel production center in West Kalimantan, where the company 
already has 100,000 hectares of plantation land. 
 
¶9. (U) Malaysia and Indonesia, which are the world's top palm oil 
producers, decided last year to allocate nearly 40 per cent of their 
crude palm oil output for biodiesel production. The move helped 
drive palm oil prices to $560 per ton in January from around $340 in 
January 2006, a 65% jump.  The GOI has estimated the biodiesel 
industry will use 600,000 tons of crude palm oil this year.  A 
leading trade publication editor forecast this month that Indonesia 
will produce 17.1 million tons of palm oil in 2007, surpassing 
Malaysia as the biggest supplier for the first time. Malaysia is 
targeting output of 16.5 million tons this year. 
 
Local Companies Also Sign Deals 
------------------------------- 
 
¶10. (U) Indonesian firms also announced new partnership agreements 
 
JAKARTA 00000854  003 OF 004 
 
 
at the conference.  PT Medco Etanol Indonesia, a subsidiary of 
national energy firm PT Medco Energi International, signed an 
agreement with state plantation firm PTPN VIII to develop 
cassava-based bioethanol projects in Garut and Cianjur, West Java. 
Coal mining firm PT Berau Coal signed agreements with Berau regency 
administration and the Ministry of Agriculture's Center of 
Plantation Research and Development to develop jatropha curcas 
projects.  To develop jatropha curcas as a source of biofuel, 
Sinarmas will cooperate with the Bogor Institute of Agriculture and 
the Agriculture Ministry to establish a 500 hectares research center 
in Deltamas, Kerawang, West Java.  Separately, State electricity 
company PLN signed an MOU during February with the International 
Finance Corporation for a feasibility study on the development of 
biofuel-based power plants. 
 
¶11. (U) A spokesman for Singapore's Wilmar Energy subsidiary, PT 
Bukit Kapur Reksa (BKR), told reporters at the January signing 
conference that it is set to start operations in May 2007 for its 
biodiesel plant (see ref A).  The facility, located in Dumai in Riau 
province, will have a capacity of one million liters of crude palm 
oil (CPO) per year. 
 
JBIC Offers "Unlimited" Biofuels Loans 
-------------------------------------- 
 
¶12. (U) The Japan Bank for International Cooperation (JBIC) said in 
February it is ready to fund GOI or private sector biofuel projects. 
 "The Japanese Prime Minister has instructed JBIC to extend loans 
for the development of bio-fuel. The amount of loans that JBIC will 
provide is unlimited," said JBIC's Toyoaki Fujita in Jakarta on 
February 6 at a biofuels conference.  Fujita said JBIC would offer 
fixed-rate terms that undercut commercial rates currently on offer 
in Indonesia. 
 
¶13. (U) Japan's Kanematsu Corp. is reportedly considering building a 
biofuel plant using cassava as a feedstock, according to Industry 
Minister Fahmi Idris who spoke to reporters on January 19.  He said 
Kanematsu was studying building a 100,000 liters per day-capacity 
bioethanol plant.  Idris added that the company was also looking for 
50,000 hectares (123,600 acres) of land to plant cassava for 
feedstock.  Kanematsu has already broken ground on a 200,000 liter 
per day cassava-based bioethanol plant in Thailand, according to the 
company's website. 
 
¶14. (U) Biofuels chief Hamdi told a local news agency on February 28 
that Britain's BP planned to invest about $50 million in a jatropha 
oil project with an annual capacity of 350,000 tons from 100,000 
hectares of jatropha plantations.  Hamdi claimed, also according to 
press reports, that Sweden Bioenergy planned a similar sized 
investment, also using jatropha.  BP confirmed to press that it does 
have a similar-sized jatropha oil-based biofuel investment in India, 
but denied they have agreed to an Indonesian deal.  BP said it still 
studying investment opportunities all over the world. 
 
TDA Funds Biofuels Delegation to U.S. 
-------------------------------------- 
 
¶15. (SBU) The U.S. Trade Development Agency has offered to fund 
approximately ten Indonesian delegates to visit the United States 
within the next six months.  We are currently working with biofuels 
Chief Hamdi to determine the GOI's terms of reference for the visit. 
 On March 23 Hamdi told us that he was enthused by the idea of 
visiting the U.S. and hoped that he could combine our trip with a 
previously accepted invitation to travel to Brazil in May.  The TDA 
has notionally scheduled visits to Minnesota, the only state that 
requires biodiesel use, to meet with biofuels producers and 
regulators and to Colorado to visit the DOE's National Renewable 
Energy Laboratory.  We have invited Hamdi to lead the delegation and 
have tentatively penned in representatives from the Directorate 
General of Oil and Gas, Pertamina's downstream operations, the 
Indonesian Palm Oil Commission, as well local companies that will be 
building biofuels processing plants. 
 
¶16. (U) USAID is also funding a biofuels pilot project in Flores. 
As part of its Agribusiness and Marketing Support Activity project 
(AMARTA) USAID is developing a 50 - 70 hectare pilot project to 
cultivate and process crude jatropha oil to partially meet the 
energy needs of remote fishing villages.  USAID will offer grants to 
the villages as part of the three year project to fund purchase of 
 
JAKARTA 00000854  004 OF 004 
 
 
plant materials, planting and maintenance, harvesting and 
post-harvesting equipment, and processing of crude jatropha oil. 
USAID is also paying for training, education, and demonstrations on 
uses of jatropha oil as a kerosene substitute, as well as developing 
a soap making cottage industry with the extracted glycerin 
byproduct. 
 
¶17. (SBU) ACTION REQUEST:  The GOI's biofuel development program is 
the Yudhoyono Administration's most prominent economic policy 
initiative at the current time, and Indonesia has the potential to 
be a very large player on world biofuels markets.  The GOI does face 
large hurdles in meeting its program goals, but the GOI is eager to 
learn from the U.S. experience with biofuels.  TDA has allotted 
several days for delegates to stop in Washington for policy 
discussions with USG agencies.  We accordingly recommend that 
Washington agencies agree to receive the delegation for discussions 
on biofuels policy and possible avenues of further bilateral 
collaboration, possibly under the rubric of our Bilateral Energy 
dialogue.  The GOI would be very interested in hearing USG views on 
biofuels policy implementation, including fiscally and 
environmentally sound biofuels subsidy and regulatory policies, 
promoting biofuels research and development, and policies that 
balance food-versus-fuel trade offs in an economically sustainable 
manner. 
 
HEFFERN