Prospects for the Philippines' Fuel Ethanol Industry

By Ari Luis Halos, Marriz Manuel B. Agbon and Tamara | July 20, 2007
The recently passed Biofuels Act of 2006 created a sure market for ethanol investors in the Philippines, paving the way for the creation of a new industry—fuel ethanol production. The law, along with incentives, strong government support and the availability of land and technical manpower in distillery operations, makes the country a very good location for investment.

The Philippines created a large market for ethanol when it passed its biofuels law. Republic Act 9367, or the Biofuels Act of 2006, was signed by Filipino President Gloria Macapagal-Arroyo Jan. 12, 2007, and came into effect Feb. 6, 2007. The law is expected to bring a number of benefits to the country. Commercial production of ethanol from sugarcane, cassava or sorghum will help the island nation diversify its fuel portfolio and ensure its energy security. It could also generate employment, particularly in rural regions, as investors put up biofuel crop plantations and processing plants. Also, the shift to these plant-based fuels for transportation will help reduce pollution. Due to the many advantages of biofuels use, lawmakers consider this law one of the most important pieces of legislation passed in recent years.

The Biofuels Act requires oil companies to use biofuels in all "liquid fuels for motors and engines sold in the Philippines." All gasoline sold in the country must contain at least 5 percent ethanol by February 2009. By 2011, the mandated blend can go up to 10 percent—a potential market of 594 MMly (157 MMgy) of fuel ethanol. This figure is expected to increase by approximately 30 MMly liters per year (7.9 MMgy), according to the Philippines Department of Energy (Table 1). The increased ethanol production is supported by the increase in registered vehicles, which is growing at an average rate of 5.83 percent per year, according to the Department of Transport and Communication (Figure 1).

Aside from granting a number of incentives to biofuels producers, the law also empowers the Department of Energy to stop the operation and confiscate the products of businesses that refuse to comply with the minimum ethanol blend. It also introduces penal provisions against the law's violators where company officials can be incarcerated for one to five years and the company fined at least 1 million Philippine pesos (PHP), or approximately US$22,000.

The Philippines' biofuels law is distinctive in that it imposes a minimum biofuel blending requirement on a national basis and also contains penal provisions for noncompliance.

Feedstock Situation
While there were four feedstocks—sugarcane, corn, cassava and sweet sorghum—initially identified for ethanol production, sugarcane is expected to be the predominant source of ethanol. Sugarcane, corn and cassava are already cultivated extensively in the country, although they are used mainly for animal feed and human food use. High-yielding varieties of sweet sorghum are being tested at the Mariano Marcos State University in the northern province of Ilocos Norte. National multi-location trials are also underway. According to the Department of Agriculture, surplus sugarcane can be tapped for the ethanol program.

The Philippines is a sugar-producing country, and sugarcane is grown mainly in the islands of Negros, Luzon, Panay and Mindanao. Despite growing demand for sugar, the Sugar Regulatory Administration says there are still 90,750 hectares (224,000 acres) of sugarcane available that can be used for ethanol production (Table 2).

Some studies show that on average, sugarcane farmers produce 65 metric tons of cane per hectare that could yield 70 liters (18.5 gallons) of ethanol per metric ton. Conservatively, the country can produce 4,550 liters (145 gallons) per hectare per year using sugarcane as feedstock. However, with the breeding efforts of the Philippine Sugar Research Institute Foundation and the Sugar Regulatory Administration, high-yielding varieties of sugarcane are available. These varieties are able to produce 109 tons of cane per hectare on average.

Investors may also bring in genetically modified crops because legislation, systems and procedures are already in place to handle them. In fact, Bt corn was approved for release in the country as early as 2002, and several other genetically modified crops have been permitted for release. Companies may bring in higher yielding and more insect- and disease-resistant crops for higher feedstock productivity and lower cost.

Because the Philippines produces sugar, molasses is available and used by the potable ethanol industry and in feed production. The 900,426 metric tons of molasses produced during the 2004-'05 milling season was insufficient to meet demand, and local distillers resorted to imports. Unfortunately, due to limited availability and high prices of molasses, these distillers are said to be operating at only 50 percent of capacity. Due to this, it may not be feasible to construct new fuel ethanol plants that use only molasses as feedstock.

Technical Pool
The Philippines has a wide pool of manpower available for the ethanol industry. The country produces 400,000 college graduates each year. Approximately 10 percent are engineering graduates, many of whom end up as construction or operations engineers in the Middle East and elsewhere. In addition, the country also produces agriculturists, microbiologists and chemists.

Furthermore, there are many technical personnel experienced in alcohol production because of the country's large number of distilleries. The Philippines has a robust alcohol industry, and one of the country's top corporations made its fortune in alcohol. In addition, a number of public institutions, such as the National Institute of Molecular Biology and Biotechnology, and the National Science Research Institute, maintain collections of yeasts and have new strains to optimize ethanol yields. A number of private and public institutions continue to develop technologies and manpower in support of the alcohol industry.

Incentives and Government Support
The Philippines' Board of Investments grants the fiscal and non-fiscal incentives to priority projects, such as those in biofuels (Table 3). The law granted additional incentives to biofuels investors in addition to the existing investment incentives (Table 4).

In addition to incentives, the Philippine government, through the Department of Agriculture, plans to provide additional support to biofuel producers and farmers (Table 5), including PhP3.4 billion (US$73 million) over the next five years. The money will go into nursery development, crop protection, irrigation, training, information programs, information technology development, farm-to-market roads construction, market development, research and development, and general support for the program. The research and development program aims to continue the development of high-yielding varieties of sugarcane, test new crops and cellulosic ethanol production, improve quality assurance, and distillery waste and effluents management, and other projects to ensure the sustainability of the industry.

Conclusion
A number of factors are converging to make the Philippines an excellent biofuels investment site. Aside from providing a number of incentives for investors to put up distilleries, the government also plans to develop more infrastructure and support research and development to improve feedstock handling and productivity. Also, it has a large pool of technical manpower that can be tapped by the fuel ethanol industry. Finally, by mandating the blending of ethanol into all gasoline sold nationwide and imposing heavy penalties on oil companies that do not sell fuel with the minimum blend, the law assures investors of a large local market for ethanol.

Strong government support, a good technical base and a law on biofuels make the Philippines an ideal ethanol investment location.

Ari Luis Halos teaches industrial engineering at the University of the Philippines, Los Baños. He is also part of the Philippine government's Technical Working Group on Biofuels. Reach him at alchalos@uplb.edu.ph. Marriz Manuel B. Agbon is the focal person of the Department of Agriculture for biofuels and head of its Agribusiness Lands and Investment Center. Reach him at marriz_agbon@yahoo.com or +63 2 9267976. Tamara Jean C. Palis is project development officer at the Department of Agriculture Agribusiness Lands and Investment Center. Reach her at tameyrah@yahoo.com.

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