Biodiesel – To be (B20) or not to be (B25), that is the question.

Biodiesel – To be (B20) or not to be (B25), that is the question.  (Vol 92)

Introduction.

The Jakarta Post (JP) and Tribune News reported on 21 March 2018 that the Energy and Resources Ministry (ESDM) director general Rida Mulyana said the government had opened talks with mining companies and equipment providers on the conversion to biodiesel. Mr Mulyana is reported to have said that the mining sector was expected to adsorb 90% of about 400,000 litres of additional biodiesel use (currently 3.5 million kilolitres), while the remaining 10% would be used in locomotives operated by the national train company (Pt. KAI). Locomotives would use B5, the heavy equipment of the mining sector will use B10, or 10% biodiesel. In other news items it is hoped that the mining industry will consume up to 1 million kilolitres per year of biodiesel. The Jakarta Post (23 May 2018) indicated the government is planning to bring in regulations early next year (2019) to change the commitment (including miners) to biofuels mixture from 20% (B20) to 25% (B25), provided engine manufactures can cope with the new fuel mix. Another JP article (28 May) indicated that the 2018 budget planning is for 3.22 million KL of biodiesel that would provide 3 million KL for the Public Services Obligation (PSO) sector, 20,000 KL for the state-owned railway operator (Pt.KAI) and the remaining 200,000 KL for non-PSO players (presumably including the mining sector).

The popular reasoning for the governments support of the biodiesel industry is that 1) it lowers the need to import fuel and 2) supports the Crude Palm Oil (CPO) industry. The Government has introduced a levy on CPO exports to subsidize the distribution of biodiesel. The Indonesia Biodiesel Association (APROBI) web site indicates its 23 members have a biodiesel installed capacity of 11.9 million Kl/year, and 1 company produces bioethanol with a capacity of 10,000 Kl/year.

The mining industry have concerns on biodiesel supply, reliability of product, storage, impact on machinery and SOP of mining operations. The contribution to national development and environmental benefits thought the use of biodiesel are not well understood or recorded. This article may prompt various miner’s association and others to further review the impact of biofuel on the mining industry.

ESDM Regulation

The Energy and Mineral Resources Ministry (ESDM) kicked of the biofuel industry with Ministerial Regulation 32 of 2008 on the Provision, Use and Procedures for Biofuels and other fuels. The stated purpose of biofuel is to increase the use of other fuels and so to promote national energy security. The use of such biofuels is to be mandatory and is to be phased into all areas of fuel use. Fiscal and non-fiscal incentives may be applied to producers and users of biofuels. Much of the regulation sets the outline for the development of the commercial biofuel business. The standard of biofuel will be set under the Indonesian National Standard (SNI) that shall incorporate consideration of technology developments, producer capabilities, consumer needs, occupational safety and health as well as management of the environment. The retail price is to be set by the price of raw feed, distribution factors and an economically viable margin. Commercial businesses are to produce sufficient biofuel to meet the national requirements and may export / import biofuel. Biofuel businesses are to report to the Director General three times a year. This regulation 32/2008 sets out tables for levels of biofuels to be applied to different segments of fuel users. These biofuel levels were updated by regulation 12/2015.  Industry and Commercial users are to consume 15% biodiesel from April 2015, 20% biodiesel from January 2016, and 30% biodiesel from January 2020 onwards. ESDM ministerial regulation 2026 of May 2017 revised the biodiesel market index price from 125 USD/MT to 100 USD/MT. The associated biodiesel market index price is (Average CPO reference price + 100 USD/MT) X 870 kg/m3 + delivery cost.

It would appear the legislation is based upon ambitious targets. Some informal industry commentators indicate there is little enforcement of the targets, and exemptions from the target are allowed.

Historical Perspective.

A 2006 research paper (Wirawan and others) on the prospects of biodiesel development in Indonesia indicates Indonesian research into biofuels started in a more significant manner around 2000 by LEMIGAS, the Department of Agriculture, ITB and BPPT, which lead to the inclusion of biodiesel in the National Energy Policy of 2006. This targeted biofuels to contribute at least 5% of the total national energy consumption by 2025. This targets the production of 1.5 million kilolitres by 2010 and to increase to 6.4 million kilolitres by 2025. The price of raw feed (CPO) is a major factor for the economic model.

A 2008 research paper (Dillon and others) looked at the Indonesian government support for biodiesel. As of June 2008, the government estimated some 1,040 people were employed in the biofuel production industry. The “Losari Concept” would see a hundred new biodiesel plants employing 3,000 people, to replace 10% of Indonesia’s fossil fuel needs. About 4% of plantation area would be needed for biodiesel, placing further pressure on deforestation and biodiversity.  Crude Palm Oil (CPO) is the main raw feed, but studies also looked at sugar cane, cassava and jatropha. Palm oil is also important for Indonesians cooking oil and a major source of calories, so increase in price pressure from biodiesel is of concern. Biodiesel refineries need to be monitored for pollution of air, water and waste disposal. The rise in feedstock prices in 2007 & 2008 lead to the governments abandonment of early targets for the biofuel industry and allowed Pertamina to drop the biofuel content. The viability of the biofuel policy is contingent upon the variable feedstock price, weather and price of petroleum.

A 2015 Indonesian thesis (Halim) looks at the cost benefit of biodiesel and general implementation of the Indonesian biodiesel policy. The overall conclusion is that the Government and Palm Oil Producers are nett winners, while the public are nett losers. This study does not adequately quantify other costs to society. The study also calls for greater transparency of government data related to the biodiesel industry.

Biodiesel Production.

A 2017 report (Wright and others) on Indonesian 2016 annual biofuels status, states the ESDM 2016 reports biodiesel production reached 3.6 billion litres (consumption 3.0 bill litres) and expects 2017 production to decline to 2.9 billion litres (consumption 2.8 bill litres), then is expected to increas to 3.3 billion litres in 2018. Indonesia exports 200 – 500 million ton of biodiesel annually. Since the presidential decree 61/2015, Indonesia has a levy on CPO and biodiesel exports to offset the price differential between biodiesel and fossil fuels for the Indonesian consumer. For example, in June 2017 the Indonesian biofuel market index price was 8,230 IDR/Lt while the Indonesian diesel price (PSO) was 5,150 IDR/Lt that was funded by a CPO export levy of 50 USD/MT and PME export levy of 20 USD/MT. [MOF regulation 136 & 133 of 2015]. Biodiesel tends to be produced in relatively small plants, up to 100,000 ton per year, with different technologies. Pertamina and AKR are the main biodiesel distributors. Indonesian diesel consumption is around 33 billion litres for 2017 and is projected to rise to 41 billion litres in 2019 and continue to gradually rise each year thereafter. Indonesia’s biodiesel is largely consumed by the on-road transportation sector (B20), with minor amounts for diesel powered electricity.

A 2016 white paper (Kharina and others) on Indonesia’s biofuels policy was produced by the International Council on Clean Transportation. Indonesia’s consumption of transport fuel is projected to continue to increase, that challenges Indonesia’s global environmental emission targets, and reflects negatively on Indonesia’s increased imports of petroleum fuels. Fortunately, Indonesia is the world’s largest producer of palm oil and so has access to biodiesel raw feed. There are many ministries involved with the Biofuels industry, including Ministry of Forestry and Environment, Ministry of Agrarian and Spatial Affairs, Ministry of Energy and Mineral Resources, Ministry of Finance and the Indonesian Oil Palm Estate Fund that collects the export levy. The paper outlines the history and general nature of the biodiesel industry. The 2014 data shows realization of production targets for Pertamina (subsidized fuel) was 73% realized, Pertamina (non-subsidized) was 9% realized and other fuels 35% and PLN 25% from realized from target. In 2016 the projected CPO export levy of about Rp 16 trillion ($1.2 bill) would only allow subsidization of about 2.5 billion litres of biodiesel production. This would allow blending on average of about 15%, being less than the government’s target of 20%.

The May 2018 Jakarta Post news item reports from the Biofuel Producers Association (APROBI) indicates the 2018 Indonesian biodiesel production capacity is currently at 11 million kilolitres.

Biodiesel impact on machinery.

A 2015 report (Hect) published the results of a biodiesel trial on the mechanical maintenance and operational impact on public busses in Santa Clara Valley, USA. They tested the impact of various 5% and 20% biodiesel on their diesel-electric powered public busses over some 6 years that minimizes statistical variability that is present with shorter studies. The biodiesel resulted in increased maintenance wear on certain fuel system components (fuel gauge, fuel pump, injectors). Engine failure was more prevalent in older designed diesel motors, but newer designed motors had little difference with biodiesel fuels. The largest impact was on increased operation and maintenance to keep the fuel from separating in the fuel storage tanks. A key factor is tighter contractual biofuel supply specifications and to encouraged more testing of delivered fuels. Biodiesel is more susceptible to water contamination compared to petroleum diesel, and microbiological growth can become an issue. Some laboratory studies indicate B20 may reduce power, torque and fuel economy by 2%, and increase fuel consumption by about 3%.

A 2018 report (Searle and others) looked at the compatibility of mid-level biodiesel blends in vehicles in Indonesia. They found that palm biodiesel increases pollutants of NOx and PM in low sulphur-biodiesel (<50ppm), compared to fossil diesel but can decrease emissions with high sulphur biodiesel, as is typically used in Indonesia. This Indonesian study confirmed that biodiesel causes greater corrosion in several types of metal used in vehicles, though some biodiesel can slightly improve lubricity which may reduce some moving part wear. Biodiesel degrades some types of elastomers and leads to greater deposit formation and plugging of some vehicle components compared to fossil diesel. The overall impact on the fuel/engine and vehicle systems is that more replacements of fuel filters, fuel injector nozzles and seals, and other components are required with using biodiesel. “Indonesia’s goals to blend 20%-30% palm biodiesel in its diesel supply will result in increased vehicle maintenance costs”.

Some Crude Palm Oil Production Issues.

Various Web news articles indicate a number of operational issues with the Indonesian biodiesel industry.

• The subsidy funds are derived from a levy on CPO exports, which depends on export volumes that is influenced by weather, policies in Europe and US and global competition in the CPO and other bio-sources of biodiesel feed. Lower fund collection is translated into lower biodiesel procurement quotas, and thus lower biodiesel availability.
• There is various global pressure to keep CPO prices low, and that lowers the margin of CPO producers. If the price is too low some palm oil producers simply don’t pick and produce. The government has changed the levy formula in response to changes in the CPO export price, but there are limitations for the CPO industry to bear this levy.
• Regulations for non-subsidized blending are more stringent than for subsidized petroleum. This creates an additional safety risk where Pertamina’s biodiesel suppliers are not willing to back safety guarantees asked for by Pertamina.
• There are not enough raw biodiesel storage facilities to receive biodiesel for Pertamina to mix and distribute the final product, thus barge floating storage is often used resulting in demurrage bills for the producers of raw biodiesel.
• The biodiesel production does not yet significantly offset fuel imports to Indonesia. The Jakarta Post news item (23 may 2018) suggests an increase of 5% biodiesel may save US$ 1 billion in oil imports each year, though parts of this story seem confusing. The Government should be congratulated for keeping the biodiesel mandate going through the recent prolonged low oil price period.

Miner’s Outlook.

• Biodiesel is not readily available to all mine sites, including some of those supplied by Pertamina.
• Biodiesel can be slightly more expensive than regular petroleum diesel.
• There is concern that the biofuel ratio and quality is not stable nor assured.
• The issue of biofuel separation and adsorption of water mandates the fitting of additional specialized filters and parts at all stages of the on-site fuel cycle, from receiving supplier shipments to the fuel injectors within the motors.
• Specialized Standing Operating Procedures (SOP) needs to introduced and strictly monitored for the use of biofuels. This includes specialized quality sampling of delivered supplies. Operations need to keep track of equipment that has been idle for more than a day or two which will need its fuel tank recirculated / mixed (fuel kidney machine) before starting the engine.
• Biofuel delivered by barges over long distance to remote mines is subject to fuel separation.
• Biodiesel is not good for older diesel machines, but many of the newer machines have improved design and less corrosive parts that can better handle the biodiesel.
• Biodiesel can have a negative impact on machine performance. There is concern over the policy to mandate the use of B5/ B10/ B15/ B20/ B25 or B30 when buying a multi-million-dollar mining machine that will need to have known performance and maintenance factors over 5+ years.
• Biodiesel has less energy per unit of fuel, meaning more fuel needs to be consumed for the same energy output. In terms of mining excavators this could also impact on the number of cycles to load trucks, or crushing plants efficiency could be downgraded.
• Biofuel can corrode various engine seals, leading to more frequent oil changes. In some extreme cases such leakages can lead to catastrophic engine failure, or engine fires. This may have knock-on effects for insurance of mining equipment.

Pressure on biodiesel.

In 2017 the Indonesian palm oil sector exports earned some US$ 22.97 billion, and directly employed some 17.5 million workers and indirectly supports another 12 million Indonesians. In 2016 the percentage of small palm oil plantation owners was about 41% and is targeted to reach 60% by 20310. The Government sees the palm oil sector as important for poverty alleviation throughout Indonesia. One of the export products is that of biodiesel, is now under immense pressure from the various export destinations. Europe and the USA have placed import barriers to support their own domestic biodiesel production and further claim the Indonesian palm oil plantations are negatively impacting the natural forests of Indonesia. The levy derived from the export of CPO is used to subsidise the biodiesel distribution. With less exports there is less subsidies available, and thus less biodiesel is distributed throughout Indonesia.

Most of the biodiesel goes to the public transport sector. The global trend is towards electric cars, wherein the diesel car market is expected to decline. This may be followed by electric busses and trucks. The governments 2020 targets of B30 may be short lived with this electric vehicle development trend. The initial mining fleet installed at the PT. Bukit Asam coal mine in the 1980’s was that of a mine mouth coal power plant and electric bucket wheel excavator, conveyors and overburden spreaders. More recently some coal mines are looking to develop small coal fired power plants to run electric excavators etc. This technology trend away from biodiesel will be enhanced should biodiesel become a less cost competitive fuel.

Recommendations.

Indonesian is looking to adopt the cleaner diesel fuel in line with the Euro 4 standards starting in 2021. The mining industry would be uncomfortable with introducing a new fuel grade and changing the biodiesel mix from B20 to B25 in 2019, then changing the biodiesel mix to B30 in 2020, then changing the fossil diesel standard in 2021. It would be more desirable for fuel producers and users that the regulators review and better coordinate the future fuel policy.

The trend towards less CPO export levy collections and consequently less biodiesel, combined with trend towards lower domestic fossil fuel lifting may place greater pressure on the government to look for an alternative source of funding to support the growth of the biodiesel industry. Recently non-mining sectors have sought to resolve their difficulties by simply placing greater burdens on the coal and mineral industries. The biodiesel industry is looking to do the same, with bringing forward the biodiesel content to adsorb more biofuel. It is hoped that the looming biodiesel crisis will NOT look at increasing the price of biodiesel to the mining sector to off-set the reduced levy collections. The miners must maintain a certain level of profitability, repay debts and conduct many Public Service Obligations. Any increase in the fuel price shall be met with reactions to reduce other operational costs (reduce manpower?) and to reduce strip ratios (or lift mineral cut off grades) resulting in overall less reserves and shorter mine life. Any short-term biofuel cost increases may result in long term losses for Indonesia. It may be overall more beneficial for Indonesia to reduce the biofuel content for mining and to prioritise the biodiesel for Public Service Obligations.

It is clear that a broad study of the relationship of the biofuel supply with the mining sector is needed.