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December 17, 2001

Australia takes plunge with ethanol

By Michael Byrnes

SYDNEY, Dec 17 (Reuters) - Ethanol, the environment-friendly fuel setting energy trends in Latin America, Europe and the United States, is making inroads in Asia as countries search for ways to use surplus farm output and cut fuel bills.

Australia, China, Thailand and India have all begun to take steps to produce ethanol fuel from farm products or to blend it with gasoline. Japan has signed a major import contract for the fuel, while Taiwan is considering jumping on the bandwagon.

"Ethanol is top of the pops. Everyone is talking about ethanol. People are seeing it as the international commodity of tomorrow," Ian Ballantyne, general manager of Australia's main cane farmers group, CANEGROWERS, said.

Distilled from renewable crops such as sugarcane, corn or grains, ethanol as fuel reduces greenhouse gas emissions. It is also a clean replacement for oxygenating additive MTBE (methyl tertiary butyl ether), which seeks out and pollutes groundwater.

And it could be a bonanza for sugarcane growers in Australia, Thailand and India, who are reeling from a world sugar price collapse but who could grow cane for ethanol plants.

World sugar leader Brazil has been making ethanol fuel since the mid-1970s, currently producing 13 billion litres a year.

But ethanol's day is dawning globally now, with the European Commission about to require an initial two percent blend of ethanol in fuel by 2005, rising to 5.75 percent in 2010 and 20 percent in 2020.

Ethanol producers in the United States are also preparing production lines as California moves to phase out MTBE.

In Australia, BP (BP.L) is modifying a refinery to produce a 10 percent ethanol-petrol blend from the first quarter of 2002.

GOVERNMENT PULLS STRINGS

Australia's government is promoting ethanol by exempting it from fuel excise tax and, in the heat of last month's election campaign, it promised to subsidise new plants. But Ballantyne was unsure about the level of support from the big oil companies.

"I'm a little dubious about placing this in the hands of the international petroleum magnates," Ballantyne said.

Ewan Macpherson, manager government and public policy at the Australian Petroleum Institute, told Reuters that petrol companies supported the introduction of ethanol "in general" as long as there was no compromise on fuel standards.

Ballantyne says the government should pass laws to encourage blending of ethanol with gasoline.

"The government wants to avoid mandating and regulating," a federal official told Reuters. Oil giants are seen being brought into line with policy via the subtle coercion of a 2006 review.

"It's a pre-warning, saying 'we're not going to hit you over the head right now, but if you don't do what we want voluntarily, then perhaps in five or six years time we'll mandate'," he said.

Ethanol delivered the octane-enhancing qualities that oil companies wanted and "clean fuel" marketing opportunities would produce further benefits for oil companies, the official said.

The subsidy of 16 cents a litre for new or expanded biofuel capacity, or 16 percent on new plants, would attract players. There could be new production by the end of 2002, he said.

FIRST MOVES UNDERWAY

After a five-month feasibility study and backed by an A$8.8 million grant from a federal Greenhouse Gas Abatement Programme, BP will tender for the long-term supply of Australian-produced ethanol to blend with petrol at its 85,000 barrels a day Bulwer Island refinery near Brisbane, the company's spokesman said.

Production of the blend will be driven by demand, but BP expected to use eight million litres of ethanol over the next two years, with production ramped up from there, he told Reuters.

"Half a thimble full," Ballantyne said.

But officials, who see the subsidy scheme operating by mid-2002, have been receiving inquiries even from abattoirs which want to use tallow from offcuts and waste to make biodiesel fuel.

Ballantyne has said that five percent of Queensland's normal sugarcane crop of more than 35 million tonnes could be used to produce the fuel, creating a large increase in cane grown.

The federal government is aiming for national ethanol production of 350 million litres a year by 2010, up from the existing 110 million litres output by Australia's two main producers, CSR Ltd (CSR.AX) and Manildra.

All present production is used in industrial applications or exported to Asia, mainly as drinking alcohol.

After exempting ethanol from a A$0.3812 fuel excise tax, the government sees around five new distilleries of 50 million litres a year being built with a subsidy of around A$10 million each.

If Asia swings to ethanol fuel, the sky is the limit.

"Australia could... produce a hell of a lot more," an official said. "There's a lot of feedstock (and) some huge markets."  

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