FEATURE: The Philippines ethanol industry hits pricing bump

Philippine ethanol producers and oil companies are struggling to arrive at a mutually agreeable pricing mechanism for the alternative fuel in what could become yet another impediment to a smooth implementation of Manila's biofuels policy.

The Philippines' 2007 Biofuels Act prescribes that ethanol has to account
for at least 5% of total annual gasoline sales from February 2009 and 10% from
2011.

In the first year of the mandate, ethanol accounted for just 2% of annual
gasoline sales of 3.5 billion liters, according to one industry source.

Several factors ranging from low domestic ethanol production, lack of
funding for the ethanol industry, and poor public awareness of ethanol-blended
gasoline accounted for this dismal performance.

Lack of agreement over an ethanol pricing index appears to be the latest
hurdle.

The three main oil companies in the Philippines -- Petron, Shell and
Chevron, smaller independent retailers, ethanol producers and the Department
of Energy are currently negotiating on an appropriate ethanol pricing index,
Rosemary Gumerra, price mechanism planner for the National Biofuels Board,
told Platts this week.

The Ethanol Producers Association of the Philippines has proposed an
index that reflects the domestic cost of production while oil companies want
an index based on the cost of imported ethanol.

Local ethanol manufacturers see the price of imported ethanol as too low
to use in establishing an ethanol pricing index, Gumerra said.

They have instead proposed a formula that will take into account
feedstock costs, operating costs and a margin. They have suggested using the
price of molasses, as monitored by the Philippines' Sugar Regulatory
Authority, to arrive at the feedstock cost.

A change in government has further delayed a resolution. "Now, everyone
is waiting for the new secretary of the Department of Energy to take charge
and decide on the matter," another industry source said.

ADEQUATE SUPPLY REMAINS A MAJOR CONCERN

Meanwhile, lack of local supply of ethanol is still a major concern,
especially as the period during which companies are allowed to import draws to
a close.

The Philippines imported 184 million liters of ethanol in 2009 and the
National Biofuels Board has given approval for 150 million liters to be
imported in 2010.

But according to the biofuels law, imports are only allowed for four
years from the date of implementation of the law, Gumerra said. So, starting
February 2011, companies will not be allowed to import ethanol and there might
not be enough domestic production to meet the 10% mandate, she added.

If there is not enough ethanol supply by 2011, the mandate could remain
at 5%, Gumerra said.

The NBB is empowered to take a call on whether the country should move to
a 10% mandate or remain at 5%, she said.

"If the 10% blending requirement cannot be sourced locally, and companies
are not allowed to import, how will they comply [with the mandate]?" she said.
"This is one of the major issues the NBB has to tackle at its next board
meeting," she added.

Oil companies, on the other hand, need a final decision on the blending
ratio soon since they will accordingly invest in additional infrastructure
such as storage and blending facilities and other logistics, she said.

At a 5% blending ratio, the Philippines' ethanol demand stands at around
182.5 million liters. This will double to 365 million liters should the
country move to a 10% mandate next year.

There are currently only two ethanol plants in the Philippines with a
combined capacity of 40 million liters/year. These are Leyte Agri's 10 million
liters/year and San Carlos Bioenergy's 30 million liters/year plants.

Three new ethanol plants, with a combined capacity of 128 million
liters/year, are due to begin operation between now and early 2011. These
include: Roxhol Bioenergy's 37 million liters/year plant, Cavite Biofuels 37
million liters/year plant, and Green Futures Innovations 54 million
liters/year plant.

Even if these three plants come on stream, the country will still be
short of 200 million liters/year of ethanol to meet the 10% mandate.

The industry was dealt another blow last week when Alto Power called off
its planned investment to put up a 40 million liters/year ethanol production
facility at Cagayan de Oro on the southern island of Mindanao.

Alto Power cited lack of government support for the domestic ethanol
industry as its reason for calling off its investments, according to the
Ethanol Producers Association of the Philippines.

EPAP has called on the incoming presidential administration, which will
take office this month, to support the spirit of the biofuels act.

source: platts