UPDATE 1-Indonesia considering mandatory use of biofuel

Wed May 21, 2008 8:35am BST

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By Fitri Wulandari and Niluksi Koswanage

JAKARTA May 21 (Reuters) - Indonesia, the world's biggest palm oil producer, is considering bringing in a mandatory policy for the use of palm-based biodiesel in the domestic market this year, government officials said on Wednesday.

The resource-rich tropical nation has been pushing for the use of biofuels de from palm oil to cut the use of costly petroleum products and ensure the fledging biodiesel industry survives rising prices of the commodity.

"The government is studying a mandatory policy for palm biodiesel mix, for example starting with a 3 percent mix," Franky O. Widjaja, chairman of the Indonesian Palm Oil Board, told reporters on the sidelines of a palm oil industry conference.

State oil firm Pertamina has been selling biodiesel since 2006 but rising palm oil prices and the lack of a mandatory policy, as well as incentives, has prompted the firm to cut the blend in its diesel fuel from an initial 5 percent to 2.5 percent and then 1 percent.

Evita Legowo, secretary at the National Biofuel Development Team, confirmed the plan and told Reuters the policy could be introduced this year.

"We haven't decided how much the biodiesel blend will be. Without a mandatory policy, producers are worried that their products are not being used," Legowo said.

The combined capacity for biofuel using palm oil as a feed stock in Indonesia is 1.7 million tonnes per year and the country exported an estimated 300,000 tonnes in 2007, according to data from the Indonesian Biofuel Producers' Association.

But a lack of domestic demand amid rising palm oil prices has meant that five out of the nine firms in the Indonesian palm-oil based biofuel sector have been using less than 10 percent of capacity or have stopped operations, the association said recently.

Palm oil futures have tumbled around 20 percent from a record high of 4,486 ringgit a tonne hit in March. But prices are still nearly 17 percent higher than at the start of the year.

"In other countries, biofuel industries have government policy. Without the policy, it will be difficult for the industry to develop," Widjaja said. Indonesia is expected to produce 18.6 million tonnes of palm oil this year, rising from 17.18 million tonnes in 2007.

The grain and oilseed-based biofuel sector has come under attack from green groups for accelerating the destruction of forests, while some analysts blame it for contributing to soaring world food prices by diverting crops that could be used for food.

Biofuel industry officials have denied this. (Editing by Ed Davies)