### Required Report

- public distributio n

Date: 6/1/200 9



### GAIN Report Number: AS902 3



# Australi a

BIOFUELS ANNUA L

BIOFUELS ANNUAL 200 9

Approved By:

Grant Pettrie, Agricultural Counselo r

Prepared By:

Mike Darby, Agricultural Specialist

Report Highlights:

Biofuel production capacity is forecast to reach 365 ML in 2009/10, surpassing the Federal

Government target of 350 ML. Improved feedstock supplies and lower costs are likely to offset

lower retail fuel prices. However, a shortage of credit due to the fi nancial crisis and the lack of

new policies at the Federal government level are inhibiting further developments according to

industry sources.



### Post:

Canberr a Commodities:

selec t



### Executive Summary:1. Domestic Policy Environment

Energy Overview :

Australia’s energy production continues to exceed its energy consumption making Australia a

significant net energy exporter. For example, according to the Australian Bureau of Resource

Economics (ABARE), Australian resources of uraniu m account for 38 percent of the world’s

uranium resources and Australia’s brown coal resources represent around 24 percent of the

world’s brown coal resources.

In terms of energy sustainability, at current levels of production, Australia’s reserves of br own

coal, black coal and conventional gas are expected to last 500 years, 100 years and 60 years

respectively.

Despite the energy surplus, Australia is a net importer of liquid hydrocarbons (including crude

oil, liquid petroleum gas (LPG) and other refin ed and semi

- refined petroleum products).

Australian reserves of crude oil and condensate represent only a small proportion of total world

reserves.

In 2009, Australia is forecast by ABARE to produce 27,906 ML (million liters) of crude oil and

condensate

, export about 17,188 ML and import 30,214 ML. Long term projections have

production peaking at 29,011 ML in 2012, exports peaking at 17,987 ML in 2011 and imports

peaking at 32,896 in 2012.

Production of biofuels in Australia received much media attent ion in 2007 and 2008. The

primary driver in biofuel interest is energy prices. As energy prices have increased, so too has

pressure on governments to find alternate energy sources. More recently however, interest in

biofuels has subsided in line with re duced fuel prices.

A secondary driver for biofuels policy has been the debate over climate change. The

occurrence of a severe and prolonged drought, the worst in over 100 years, has bought the

climate change debate center stage. This, combined with a change of government at the

federal level, is likely to see continued pressure to provide environmentally friendly policy

decisions.

Despite the media attention and the prominence of the climate change debate, the current

Government of Australia (GOA) h as yet to send a clear signal regarding biofuel policy. At

present, the industry continues to operate under the arrangements made by the previous

government.At a regional level within Australia, many ventures into biofuel production, using locally

prod uced grain, have been proposed. However, extreme grain supply shortages together with

a shortage of venture capital, due to the global financial crisis, have seen many domestic

biofuel ventures either shelved or abandoned.

Despite the attention placed on biofuel production, the industry remains in its infancy. One

report put biofuel production at about 0.5 percent of petrol (gasoline) consumption and about

1.0 percent of diesel consumption, although industry sources suggest these figures are too

high.

a. Policies Supporting the Production and/or Use of Biofuels

The GOA has a broad range of policy instruments that affect the production of biofuels. These

instruments include a production target, fuel taxes (excise), fuel quality standards, grants and

labeling as reported in GAIN Report AS 7032.

In 2007, Austra lia elected a new Federal government. The new Labor government has not yet

made any substantive policy changes in regards to biofuel. In a recent speech made to sugar

cane producers the Minister for Agriculture stated that “how we deal with those policie s is

something that is still being worked through”.

The GOA is due to release an “energy white paper” at the end of 2009 and as part of this

process has released a “strategic directions paper”. This paper makes no mention of biofuel,

however consultat ion with biofuel industry stakeholders revealed an intent to make

submissions to this process. Industry sources believe that any new biofuel policy

announcement will likely be made following the release of the white paper.

Both ethanol and biodiesel are currently free from excise taxes, currently applied to diesel and

petrol. This exemption is made in the form of “production grants” which effectively provide a

subsidy at the same rate per liter of fuel as the excise that wo uld be levied

– A$0.381 per

liter. This scheme is due to commence scaling down in 2011/12 when the effective assistance

rate will fall to A$0.234 and will continue to fall through 2015/16.

Biofuels Excise Rates for Australia

Fuel Type Ethanol Biodiesel

Excise

Applied Effective

Relief Excise

Applied Effective

Relief

2005/06 0 38.1 0 38.1

2006/07 0 38.1 0 38.1

2007/08 0 38.1 0 38.1

2008/09 0 38.1 0 38.1

2009/10 0 38.1 0 38.12010/11 0 38.1 0 38.1

2011/12 2.5 23.4 3.8 32.1

2012/13 5.0 20.9 7.6 28.3

2013/14 7.5 18.4 11.4 24.5

2014/15 10.0 15.9 15.3 20.6

2015/16 12.5 13.4 19.1 16.8

Source: ABARE

At a state level, New South Wales increased its volumetric mandatory inclusion policy for

ethanol to legislation. Under this legislation, by 2011, the inclusion level of ethanol in petrol

will be ten percent. Industry sources believe that this will equat e to roughly 120 ML of ethanol

per year. This follows the volumetric mandated level of two percent implemented in 2007.

Under this mandate, “each supplier of wholesale fuel for sale in NSW will be required to

provide evidence on a quarterly basis from Se ptember that ethanol makes up at least 2 per

cent of the total volume of petrol they sell in NSW”.

The state of Queensland has committed to a mandate of volumetric inclusion of five percent by

2011. Victoria and Western Australia have a biofuel “target” of five percent by 2010. The

states of Tasmania, South Australia and the Northern Territory remain uncommitted.

b. Size of Total Motor Vehicles Petroleum Based Energy Market

According to ABARE, total consumption of petroleum products for 2009 is estimated at 58,119

ML (million liters) and is projected to increase steadily to 61,463 ML in 2014. Automotive

gasoline makes up about 55 percent of Australia’s transport fuel demand while diesel

represents about 45 percent. Liquid Petroleum Gas (LPG) is included in this petrol figure and

represents about 8.4 percent of “non diesel” transport fuels.

Source: ABARE d

ata

According to government reports, the demand for diesel has been growing at about three

percent faster than automotive gasoline which has been growing at a rate of about 1.2percent. Despite the growth in diesel fuel consumption, the overwhelming maj ority of new

cars sold in Australia are run on automotive gasoline.

c. Biofuels Production Capacities, Current/Planned

Post estimates biofuels production capacity for 2008/09 at 255 ML, representing about 180 ML

of ethanol and 75 ML of biodiesel. According to post’s calculations, this would put biofuel

production at about 0.4 percent of total liquid fuel consumption.

Po st anticipates continued increases in ethanol production capacity while biodiesel is likely to

remain unchanged in 2009/10, bringing total biofuel production to around 365 ML. If

achieved, this level will have exceeded the GOA target of 350 ML. Post advi ses that many

plants are currently operating below potential capacity making it difficult to forecast actual

production. Furthermore, some plants have closed.

Many proposed biofuel projects have either been shelved or abandoned and the recent global

fin ancial crisis appears to have only exacerbated this situation. Industry sources currently

report that the lack of strategic policy direction at the Federal level is also currently inhibiting

investment in the biofuel industry.

Current ethanol production facilities

(Million Liters

– ML)

Production facility/location Principle feedstocks

Manildra Group

– Nowra NSW Waste wheat starch

CSR Distilleries

– Sarina Qld Molasses

Dalby Biorefinery Grain

Source: ABARE, 2008

Current and Proposed Biodiesel production capacity

(Million Liters

– ML)

Biodiesel Capacity Principle Feedstock

Biodiesel Ind

– Rutherford NSW Tallow and used cooking oil

Biodiesel Producers Barnawatha

Smorgan Fuels

– Laverton Vic Tallow and used cooking oil

Eco

- tech Biodiesel

– Narangba Qld Tallow and used cooking oil

Source: Post Estimate

d. Feedstock Supply

Suitable feedstock supply for biofuel production, such as grain, reached historically low levels

during the prolonged and severe drought which began in 2002. Post forecasts have production

of winter cereals and sorghum returning to near average levels in 2009/10. Prices for these

commodities will also likely remain at levels closer to the long term average, down from therecord highs of 2007/08. Increased production of grains and reductions in grain prices will

likely benefit biofuel producers who rely o n grain and grain derivatives for feedstock.

Production of other agricultural commodities such as sugar and molasses remain at around

average levels; however competition and prices of these commodities have increased

significantly

– partly due to drought and partly due to increased demand. Supplies of by

products for biofuel such as tallow and other vegetable oils have reached record or near record

levels.

Post advises that feedstock supply, particularly in terms of winter cereal grain and sorghum, i s

forecast to return to levels more reflective of the long term average in 2009/10. Due to

severe and persistent drought conditions which began in 2002/03, grain inventories remain at

levels well below the historical average. Inventories are expected to improve in 2009/10

although they will not likely exceed the long term average.

Source: ABARE data

The reductio n in feedstock supply since 2002/03 and associated high feed grain prices has also

constrained the production of other commodities. The Australian cattle lot feeding sector has

also been greatly constrained by the lack of feed grain. Numbers of cattle on feed have

declined sharply as feed grain inventories have dwindled. Biofuel manufacturers who rely on

grain as feedstock experienced the same downward pressure.The Australian lot feeding sector has made repeated statements regarding their opposition to

the policy arrangements for producing bio fuel in Australia. The core of their opposition relates

to the perception that the “playing field just isn’t level”. Provision of capital grants, relief from

fuel excise taxes and government ethanol mandates are believed to assist in distorting prices

fo r feed grains, a vital input for Australian feedlots. The lot feeding sector has however,

supported second generation research into producing biofuel from feedstocks other than

grain.

2. Import Regimes for Biofuels

Australia has placed tariffs on imported ethanol, which can be imported below the cost of local

production. The tariff rate, $A 0.38143 cents per liter is expected to reduce the

competitiveness of imported fuel ethanol, particularly from Brazil. The production cos t of

Brazilian ethanol is reported to be well below the cost of production for Australian ethanol.

However, according to industry sources a tariff on imported biodiesel has not been applied.

3. Australian Energy Situation and Outlook

a. Liquid Energy Outlook

According to ABARE, demand for petroleum products is projected to increase at around 1.5

percent per year out to 2014. This figure has been revised downwards from two percent

previously projected by ABARE. This revision takes i nto consideration the recent global

financial crisis and its impact on economic growth over the period.

However, production of liquid energy (as crude oil and condensate) is forecast to peak by the

end of 2012 and any increase in consumption from this point in time will likely need to be met

by increased imports.

Post anticipates that as the local production shortfall begins to accelerate post 2012, domestic

production of biofuel as an “import replacement” will begin to grow in significance.b. Fuel Prices

Prices for transport fuel (both petrol and diesel) have decreased significantly since the peak of

2008. Furthermore, in 2009 the price of diesel fell below the price of petrol for the first time

since the beginning of 2007.

Post anticip ates that the recent fall in the retail price of transport fuel will likely offset, at least

partially, the benefit gained from the fall in cost of feedstocks such as grain.



### Author Defined:

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