A growing fuel source: The cultivation of palm oil and sugarcane drives the development of a nascent biofuels industry

In recent years rising oil prices and global warming have driven the development of alternative fuel sources as nations look to secure their energy futures while reducing carbon footprints. While Colombia is a serial user of “clean”, renewable energy through its reliance on hydroelectricity, it is also a growing producer of biofuels such as ethanol and biodiesel, thanks in large part to a strong political desire to support and prioritise the industry.

Legislation passed in 2001 mandated the use of biofuel mixes – ethanol in gasoline and biodiesel in diesel – and created domestic demand for the alternative energy source. Creating a domestic market for biofuels was vital as export potential for the crop is relatively limited given the massive production of biofuels in countries such as Brazil and the US.

POLITICAL WILL: While securing its energy future and reducing the emission of greenhouse gases were the driving factors behind the government’s desire to promote the development of biofuels, so too were the supply sources of its feedstock. Palm oil and sugarcane are the primary sources of feedstock for ethanol and biodiesel in the country and, as such, any support for a domestic biofuels industry is also support for the agricultural industry.

Nurturing the growth and development of the agricultural industry helps solve numerous critical problems that the national government faces. Beyond the economic development it provides in rural areas it offers necessary alternatives to rural farmers lured by the profitability of coca, the plant used in the manufacturing of cocaine. This is primarily true of sugarcane, which grows in similar environments and offers a safe and sufficient, if not quite as lucrative, alternative as a cash crop. Generally speaking, rural economic and social development also reduces the effectiveness of insurgent groups, which operate and recruit primarily in the countryside.

Yet another factor that prompted the establishment and growth of biofuels has been the steadily declining reserves of the nation’s crude oil. At 2012 production levels, when compared to proven reserves, it is expected that the country’s entire stock will be depleted in less than seven years.

Biofuels are, due to their organic nature, a reliable renewable energy source (even though some dispute their sustainability given the often edible feedstock and hunger situation in some areas). Furthermore, the biofuels are used in conjunction with other alternative fuel and energy sources to reduce domestic demand of finite resources, such as crude oil.

LEGISLATION: Law 693 of 2001 established the guidelines for the development of ethanol through the creation of mandatory ethanol-gasoline mixes in the domestic market, tax incentives for consumers and a mechanism for price controls. Both price and mandatory biofuel mixes are calculated and set forth by the Ministry of Mining and Energy (Ministerio de Minas y Energía, MME) each month, while consumer tax breaks are equal to 16% of sales tax and 14% on other taxes. It was a full three years before Congress would pass legislation on biodiesel, articulated in Law 939 of 2004. Under Law 939, the price of mandated biodiesel-diesel blends are likewise established on a monthly basis by the MME. Consumer tax breaks are 16% of sales tax and 14% of other taxes.

Law 693 and regulating legislation that followed went into effect in 2005 by requiring large cities of more than 500,000 to offer gasoline-ethanol blends of 10% (+/-0.5%), otherwise known as E10. However, regulations were eased to provide sufficient time for the market and the producers to meet the mandates and, as such, only E8 is currently widely available. Similarly, initial regulations mandated biodiesel blends of 5% (B5) in 2008, 10% (B10) in 2010 and 20% (B20) in 2020; though the obligations have been eased slightly as well and currently both B8 and B10 blends are used throughout the country.

Incentives for manufacturers of biofuels also exist in the form of reduced corporate income taxes of 15% in lieu of the standard 34%, thanks to the existence of specialised agro-industrial free zones. Investments of more than $18m or that generate at least 500 jobs also receive the added benefit of importing equipment duty-free while various other tax breaks exist on the purchase of feedstock.

ETHANOL: Since the implementation of mandatory ethanol-gasoline blends in 2005, ethanol production has increased from an annual 24m litres to an estimated 357m litres in 2012, according to statistics from the Federation of Biocombustibles.

As of 2012 there were 131,573 ha dedicated to producing sugarcane for ethanol production, while production employed 7429 people directly and 14,858 indirectly. A further 89,148 people rely on ethanol production for their livelihood. There are five ethanol plants in operation responsible for the country’s entire production with the vast majority located near sugar plantations in the neighbouring regions of Valle del Cauca and Cauca, in the western part of the country. According to the Federation of Biocombustibles, total daily production capacity is 1.28m litres of ethanol per day, 1.15m (90.2%) of which is located in Valle del Cauca and Cauca.

Additionally, new production plants are already being constructed that will nearly double capacity by adding a further 1.26m litres per day in the coming years. State-owned Ecopetrol is investing in what will become the largest ethanol plant in the country when its 480,000-litre-per-day facility in Puerto Lopez comes on line. The facility, which is being established by Ecopetrol’s subsidiary Bioenergy, will require an additional 14,400 ha of sugarcane feedstock and a total investment of $240m. Riopaila Castilla, Colombia’s largest producer of sugarcane, is also investing $100m in a processing plant in Valle del Cauca that will produce an additional 400,000 litres of ethanol per day when it becomes fully operational in 2013. Furthermore, a $350m investment by Israeli conglomerate Merhav, through its local subsidiary Agrifuels, will see 376,000 litres per day produced in the department of Magdalena. The plant is likewise expected to come on-line in 2013.

BIODIESEL: Since the implementation of mandatory biodiesel blends in 2008, production increased at astounding rates in the first two years from 23m tonnes per year in 2008 to 338m tonnes in 2010. Since then production has decelerated slightly, increasing to 443m tonnes in 2011 and an estimated 480m tonnes in 2012, according to the Federation of Biocombustibles. Biodiesel is produced from palm oil and given the broader geographic production of the crop, its production facilities are not as heavily concentrated in one area as is the case with ethanol. Biodiesel plants can be found in five departments scattered in many northern and central areas. Moreover, biodiesel has had a much larger impact compared to ethanol in terms of employment generation, having created 21,000 jobs directly and 42,000 indirectly, sustaining a total of 252,000 people, according to the Federation of Biocombustibles.

Ecopetrol, this time through another subsidiary, Ecodiesel, is also heavily involved in the production of biodiesel and with three other plants, is responsible for roughly one-fifth of total annual capacity. According to the National Biofuel programme, published by the National Office of Science, Technology and Innovation Development, there were 10 biodiesel plants in 2012 with a total combined capacity of 595,200 tonnes per day, with the four large facilities responsible for 115,000 tonnes per day each, or 77% of total capacity.

QUALITY CONTROL: Biofuels are generally scored on a quality basis by their ability to reduce greenhouse gases – in particular carbon dioxide emissions – and by these standards Colombia produces some of the highest quality ethanol and biodiesel on the planet. A study conducted by the Swiss Federal Institute Laboratories for Materials Science and Technology found that Colombia’s sugarcane ethanol production reduces greenhouse gases by an average of 74% compared to 65% for Brazil’s sugarcane ethanol, 53% for Europe’s beetroot ethanol and 10% for the US’s corn-based ethanol. The same study also found that Colombian palm oil biodiesel reduced carbon dioxide emissions by some 83%, compared to only a 44% reduction for soy-based biodiesel in the US, 35% for Malaysia’s palm oil biodiesel and 19% for Brazil’s soy biodiesel.

The initial growth of the biofuels industry is expected to naturally taper off as time goes on in terms of percentage increases as the law of big numbers kicks in. However, given the country’s extremely low reserve-to-production ratio in crude oil and the government’s ongoing efforts to ensure that six out of every 10 vehicles sold are equipped with flex fuel technological capacity, the numerical increases in biofuels are likely to continue as the industry attracts more and more investment and the government slowly increases the mandated percentages of biofuel blends available in the commercial marketplace.

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The Report: Colombia 2013

Energy & Utilities chapter from The Report: Colombia 2013

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