By Myrna M. Velasco

(Part ONE)

 Heeding Brazil’s experience?

The country’s ethanol mandate should now be cruising at full speed, but implementation has slowed down as policy drivers seem heading in the wrong direction. Caution, because the way ahead could be a cliff.

The plan was borne out of the lavish twin goals of reducing the country’s fossil fuel dependence and at shoring up cash-for-farming opportunities; yet, these hopes along with the policy are now teetering at the brink of -- failure.

The Philippines is indisputably a ‘brave soul’ when it comes to its biofuels policy. It has rightful claim to being the only country in the Asian region, if not the world, to have cast blanket mandate on the sale of biofuels-blended diesel and gasoline products at its pumps.

Diesel products sold in the country currently have a 2% coco methyl ester (CME biodiesel) blend. Would there be enough supply sources for the biodiesel program? Check. And biodiesel producers assured the government and the public that they can supply the market even if the mix goes higher to 3% or 5% in the near term.

Now, here is the problematic twist. By February 2011, oil companies are mandated to comply with the full rollout of E10 (or the gasoline with 10-percent ethanol blend). By then, the policy direction is for all pumps to already carry gasoline products with 10% ethanol blend, as compared to the current mandate of 5% by volume blend. Scant local supply though remains a big hurdle for this phase of the policy’s implementation.

It appears that the country’s trump card unto ethanol pathway has been missed –policy framers failed to back up the plans with hard facts within the investment domain.

While it’s not yet too late in the game, glimpses into how the future of the country’s ethanol policy might shape remain blurred. The dilemmas are enormous - they range from lack of feedstock availability and infrastructure for ethanol production and exacerbated by the aversion of motorists to take the fuel switch due to lack of guidelines and information.

And as environmental demagoguery might have initially worked its way, the policymakers and industry players’ true mettle in resolving formidable stumbling blocks in the ethanol policy implementation have yet to stand the test of time.

Brazil’s way: voluntary patronage for end-consumers

When policymakers crafted the Philippines biofuels program, they profoundly built up Brazil’s experience as the ‘model-being-followed’.

A recent travel to Rio de Janeiro afforded me the chance to take a first-hand scrutiny of Brazil’s biofuels market .To anyone given a prior picture of what its market should have been, I was simply stunned to discover that Brazil’s model market on ethanol does not really have a blanket end-use mandate (meaning on the customer side), despite its 30-year old experience on ethanol production.

In the hierarchy of choices for the Brazilian transport sector, biofuels remain low in the value chain as compared to conventional gasoline and natural gas. To be clear, the mandate is for oil companies to sell ethanol-blended gasoline (the current prescribed blend is 25% although there is flexibility for up to 100% ethanol), but Brazilian motorists are still given that leverage to patronize it – only on a voluntary basis.

According to the Brazilian National Agency of Petroleum, Natural Gas and Biofuels (ANP), their motorists “have the freedom to choose depending in the free market prices of each fuel.”

In offering array of choices to its citizens, the Brazilian government kept in mind certain considerations, such as: the lower energy content of ethanol gives vehicles fewer miles per gallon; and that ethanol prices may also fluctuate heavily, depending on the feedstock yields and the seasonal fluctuation in sugarcane harvests.

On the whole, reports from the Brazilian Ministry of Energy and Mines note that the oil consumption of its transport sector “still far outweighs ethanol consumption.” Their motorists are also well-informed, such that they are strongly advised “to use more alcohol only in their mix if ethanol prices are 30% lower or more than gasoline.”

Apart from its domestic needs, Brazil also integrated in its ethanol development plan the demand of export markets to effect sense of balance on revenue stream expectations. Chalking up to 50% of global demand, it is currently the world’s largest ethanol exporter to major markets as the United States, Netherlands, Nigeria, Sweden, Japan, India, South Korea, and the Caribbean basin countries such as Jamaica, El Salvador, Trinidad and Tobago, and Costa Rica.

As of 2008, Brazil already has 378 ethanol plants – 126 of which have been dedicated purely to ethanol production, while the other 252 are engaged both in ethanol and sugar manufacturing. The core of this country’s ethanol production is at its central and southeast regions, chiefly in São Paulo state.

By land allocation, sugarcane plantation cornered 2.8% of Brazil’s arable land of 276 million hectares (already shared with sugar production; hence, ethanol’s requirement is only placed at approximately 1.5%), just a paltry portion, if compared to the 72% earmarked for pasture and 16.9% for grain crops.

Solutions across chains

This South American empire is a clear winner in the ‘ethanol race’ because it steadfastly worked on addressing all concerns in the entire chain of the policy’s implementation – it incentivized farmers to ensure feedstock availability; it pursued research and development (R&D) initiatives not only to develop sugarcane varieties that will give best yields, but also to discover which yields are adaptable to its sub-tropical climate and semi-arid regions.  The government also established the policy framework to spur car companies to manufacture flex fuel vehicles (FFVs) and made the investment climate, tax regimes and fiscal and non-fiscal perks for biofuel projects viable for capital outlays on such infrastructure as production facilities, pipelines, and logistics on the distribution front.

Suffice it to say that all the key elements that defined the success of Brazil’s Pro Alcool Program are still manifestly lacking in the policy track being pursued by the Philippines.

Being ahead in the race and having navigated its way well, Brazil’s program can also conveniently claim that it already overran ‘food-versus-fuel predicaments’, even if it still relies heavily on first-generation feedstock.

On the R& D sphere, for instance, Brazil’s biotechnology research and genetic improvements on its sugar cane cultivation have led to the discovery (gene identification) and development of varieties (more than 500 of them) that have stronger resistance to pests and diseases and those with capacity to adapt to different environments, effectively resulting into expansion of its sugarcane cultivation areas. To date, it is widely perceived that Brazil’s sugar cane-based ethanol industry is more efficient than the United States, which placed its bet on corn as feedstock for ethanol production. Figures have shown that Brazilian distillers can produce 727 to 870 gallons per acre (at a cost of 22 US cents per liter) as compared to US corn’s 321 to 424 gallons per acre at 30 US cents per liter.

Onward, this country is developing transgenic varieties and experimenting on functional genome – on the goal of producing more ethanol gallons per hectare of sugar cane yield.

From its success on the ethanol front, Brazil is now expanding its alternative fuels policy into biodiesel by pursuing wider experiments on jatropha as a feedstock, on top of the main oleaginous plants, like castor and sunflower seeds, which are the prevailing sources of its biodiesel supply.

State-run Petróleo Brasileiro S.A. (Petrobras) is also increasing its own investments on biofuel facilities – both for ethanol and biodiesel as it programmed rolling investment of $2.8 billion over five years (2009-2013). The ethanol program’s success formula is similarly being applied on its biodiesel venture, including the “Social Fuel Seal” jump-off point which will incentivize farmers to plunge into the venture.

The Brazilian Federal Government’s National Program for Biodiesel Production and Use mandates that 30% of oleaginous plant supply shall come from family-owned farms. “The conditions imposed to secure and maintain the Social Fuel Seal include not only procuring the grains from family farmers, but also providing agricultural technical assistance to them,” Petróbras explained.

The company said it already hired 49,478 family farmers in northeastern Brazil and in the state of Minas Gerais for its biodisel plantation undertaking. As the program is still at its kick-off point, the oil firm noted that there are dilemmas still needing to be addressed, such as low productivity, large incidence of pests and diseases and the lack of uniformity in jatropha cultivation and maturity.

Energy negative

Going back to the premise of abating climate change risks, doubts have actually been sounded off as to the practicality of biofuels in clearing out toxic fumes or smog triggered by fossil fuels in the transport sector.

That’s even setting aside flipside argument that biofuels had been lined up then as alternative to arrest the impact of the much-anticipated ‘peak oil’ scenario which was expected to pull up prices to as high as $200 per barrel.

It was until global oil prices plummeted in the first half of 2009 and cut a swathe through alternative fuel policies of many countries that at some points, biofuels have been momentarily forgotten or repulsively decimated in energy policy discussions. Experts have opined that when global oil prices whittled down, it subsequently canceled out initiatives of some countries on biofuels, that a number of projects (for biofuels facilities) have been rolled back or shelved.

Platts global director for market reporting Jorge Montepeque previously intimated that biofuels could not have been a solution to either climate change risks or price reduction because the overall impact is that they typically consume more energy for every gallon of biofuel produced. “I think biofuels in most markets consume more energy than they produce. So it tends to be energy negative,” he said.

He further noted that “most efforts in biofuels actually lead to higher energy prices, because if you produce a gallon of gasoline, you use more than one gallon of diesel to make that gasoline.”

Going on four years and with the turn of tides seem turning the other way, the Philippine scene ignites a growing chorus for government to start reviewing or re-casting its biofuels policy, especially with the apparent flux in ethanol investment flows. (To be continued)

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Finding ethanol mandate’s way out from ‘rough patches’

By Myrna M. Velasco

(Part TWO)

This is a stark reality in the Philippine transport sector: majority of in-use gasoline vehicles (including carbureted and some high end cars as well as most 2T and 4T motorcycles) are not ready to use ethanol-blended gasoline.

It is a basic yet protracted predicament that government and industry stakeholders must address relative to the scheduled E10 rollout next year.

And if the oil companies would prefer selling gasoline with higher ethanol blends (i.e., E20 or the gasoline with 20% ethanol blend) as a strategy to comply with the prescribed 10% gross sales by volume, the burden will be tossed on the car companies to bring to market flex fuel vehicles (FFVs) suitable for higher ethanol mixture. Yet even that is confronted with chicken-and-egg dilemma since some car markers prefer to wait for developments on the investment and policy implementation fronts before pumping in capital into manufacturing ethanol-fed vehicles.

From the end-user side, complaints have reportedly been lodged by multicab drivers to the Department of Energy (DOE) about “unexplained noises from their vehicle engines” and for the instances that their engines “die instead of remaining idle” during short stops in traffic.

Additionally, there are concerns as to ethanol’s adverse effect on car performance, such as “hard starting, poor fuel economy, rough running and poor acceleration”. The consequent ‘knockout’ impacts are only expected worsening once the full-fledged E10 rollout comes to fore around February next year.

The DOE emphasized that ‘housekeeping guidelines’ and protocols must be established “to inform and assist motorists in coping with negative effects that E10 gasoline may have on non-compliant vehicles.” The department’s oil industry management bureau is reportedly crafting the guidelines addressing these concerns.

Problem on the supply side

Rarely a pessimist, but this time DOE assistant secretary Mario Marasigan is admitting that there would certainly be a shortage in domestic ethanol supply at the strike of E10 mandate next year. “On bioethanol, production capacity will increase in 2010 with at least one plant to be completed but total [capacity] will not be sufficient to meet requirement,” he said. The expected addition to the existing production of the San Carlos Bioenergy and Leyte Agri plants would be the 30 million liters production of Roxol Bioenergy, which is due to come on line this year.

Resolving ethanol production shut-ins would matter a great deal if the government wants to give the biofuels mandate a viable follow-through. Otherwise, the policy’s future will be perpetually threatened if not bound for an unwanted collapse altogether.

The Ethanol Producers Association of the Philippines (EPAP) is sure on prognosis that investors are willing to fork out capital for ethanol investments. But they are batting for a reasonable tariff protection, a 20% duty rate for imports, to make them competitive or be on equal footing with overseas ethanol suppliers.

Investors argued the tariff schedule being sought is well aligned with the most favored nation (MFN) rates set forth under trade bloc agreements that the country has been a party to and also with the Asean Harmonized Tariff Nomenclature (AHTN) under the Tariff and Customs Code. The proposed duty rate, it was noted, will put the domestic ethanol industry at par with the tariff regimes being enjoyed by other ethanol producing countries -- particularly Brazil, India, the United States, Japan and neighboring Thailand and Indonesia.

“At 20% tariff on importation, locally produced bioethanol can compete with imported [ethanol] and be commercially viable,” EPAP executive director Tetchi Cruz-Capellan said. The current duty rate on ethanol imports is 1.0% as prescribed under Executive Order 449.  Hence, it is a more attractive proposition for the oil companies to import their ethanol supply.

The proposed tariff shield already went through deliberations and public hearings at the Tariff Commission and has been recommended for President Arroyo’s approval. Section 11.F of Republic Act 9367 or the Biofuels Law explicitly directs the Tariff Commission to “create and classify a tariff line for biofuels and biofuel-blends in consideration of the WTO (World Trade Organization) and AFTA (Asean Free Trade Area) agreements.”

Once underpinned by an attractive duty rate, Capellan opined that even distillers in the so-called “sin industry (liquor)” might opt to shift to ethanol production. That will then help resolve supply problems prior to the critical 2011 implementation timeframe.

Without increasing ethanol tariff rates, Capellan stressed that “the arithmetic of ethanol in the Philippines is discouraging,” consequently undermining investment flows. No doubt that the country’s production volume has been swiftly surpassed by Thailand’s, which is expected to register hefty growth volumes of 187% to 1.172 billion liters next year, as compared to the country’s 60% growth to reach a volume of just 80 million liters by 2011.

Since energy independence was the other argument peddled in the country’s biofuels policy, Capellan reminded policymakers that “we cannot attain energy security by replacing Middle East oil imports with Brazilian ethanol imports.”

She added if the country would heed the lessons of Brazil’s ethanol program, then it has to be prudently assessed from the viewpoint that its policy path treaded much on optimizing domestic production by incentivizing feedstock farmers and drumming up incentive support for investment growths on infrastructure.

“The key to energy independence is harnessing our renewable resource and create a strong ethanol industry in the Philippines,” the ethanol producers’ group has noted further.

From test tube to gallons

With an acceptable duty rate, Bronzeoak Director Don Mario Dia indicated that it is easier for investors to plan for ethanol producing facilities. The country’s first ethanol plant, San Carlos Bioenergy, is expected joining the expansion bandwagon once the tax regime for the industry improves.

Eastern Renewable Fuels Corporation president Fernando L. Martinez shared the prognosis, noting that while his company casts this year as a “decision point” for its planned infrastructure investments on ethanol, they are still frantically looking for signs that their proposed venture will turn out to be viable.

The oil executive sees a lot of potential on cassava as alternative feedstock, noting that their initial experiments manifest encouraging yields. But Martinez said the more fundamental problems such as land allocation for plantation or aggregating for corporate farming must first be addressed.

Referencing once more on Brazil’s experience, it is essentially notable that this model-country’s R&D initiatives focused much on discovering sugarcane DNAs that has not confined experiments at the test tubes but has proven efficiency on commercial-scale gallons of production.

As the Philippine ethanol industry is still struggling at identifying arable lands for plantation, its concern has not even reached that point yet. Nevertheless, it is worth examining this early how else can the country be able to move forward in sustaining supply – or if it can whet industry players’ appetite to eventually expand ventures into second or third and fourth generation feedstock (such as cellulosic ethanol or algae (oilgae) for biodiesel) to keep the industry away from competing with the food chain.

The light dims at the end of the tunnel

For the oil companies, much of the concern is on the “poor public reception” of ethanol fuel, since motorists are still risk-averse when it comes to patronizing E10. As a result, the sale of E10 at the pumps was reported to be withering. And given ethanol’s dismal sales performance, it adds cost to the oil companies.

“The concern is not about the public not knowing that E10 is available but on the suitability of the fuel to their vehicles, whether old or new,” it was noted.

The fallacy of hush-hush legislation has also been manifesting through other tolls: underwriting of ethanol supply contracts is emerging as a difficult proposition for oil companies, mainly due to flip-flopping on the policy’s implementation; while banks are reluctant to lend to projects which cannot guarantee them predictable and stable revenue streams.

The widely-perceived inconsequential impacts of ethanol use are now being tagged as the “misgivings” of the Biofuels Law’s implementation.  What has been worrying the oil companies most is that, since they are in the front-line of business, they will automatically be first in the line of defense on complaints from end-user motorists.

At present, the prospects are dim and the challenges for policymakers are mounting to have that cycle reversed – but better to do it sooner than later. ###