Southeast Asia's Clean Air Conundrum

Burning of Indonesian forests is causing widespread pollution. But it's done to grow crops for environment-friendly—and lucrative—biofuels

by Assif Shameen

If you live in Singapore or Kuala Lumpur, the last several weeks have been hellish for you. A miasma of choking haze has sent pollution readings off the charts and health authorities are warning of much worse to come. As in years past, the foul air is the direct result of raging forest fires across the waters in Indonesia's Sumatra region as villagers and farmers clear land for logging and the export of tropical timber and planting of a variety of agricultural products.

Yet there is a weirdly paradoxical twist to this year's frenzy of pollution-generating deforestation: Indonesia's slash and burn wave owes much to the soaring demand for environmentally-friendly biofuel.

Plantation companies based in Singapore and Malaysia are willing to pay top dollar for land that they can plant with oil palm trees that bear fruit to be crushed to produce palm oil, typically used for cooking products. However, palm oil is also a key element in the production of Asian biodiesel, which burns more cleanly than traditional diesel fuel.

MONEY MAKER.

The irony of setting fires and creating a pall of dirty air over much of Southeast Asia to boost production of cleaner energy hasn't been lost on environmental groups in the region. "Why are we burning our forests to plant something that we have been told will be clean, environmentally friendly fuel?" asks S.M. Idris, chairman of environmental lobby group Sahabat Alam Malaysia (Friends of the Earth). "This is technology gone mad."

Perhaps, yet there is also a lot of money driving the craze for biofuel, which is a blend of vegetable oils (or in the U.S., soybean oil) and traditional diesel fuel. Diesel blended with up to 10% vegetable oil in the total mix burns cleaner and does not require any engine modifications. Palm oil is one of Indonesia's biggest exports.

Oil palm trees grown close to the equator in Malaysia and Indonesia have a very high oil content. This makes palm oil one of the most economical of the vegetable oils that can be converted to diesel. Palm oil sells at a huge 15% to 40% discount compared with other vegetable oils such as rapeseed and soybean and is therefore commercially a more viable alternative energy source.

GREAT EXPECTATIONS.

All this explains why companies in Southeast Asia are raising serious money to be players in biofuel. When plantation owner Wilmar International—controlled jointly by Malaysian billionaire Robert Kuok and U.S. agricultural giant Archer Daniel Midland (ADM)—listed on the Singapore exchange earlier this year, its stock nearly doubled within four months on the news that it was building one of the region's biggest biofuel plants. (The plant won't come onstream until 2007 at the earliest.)

Another biofuel producer, Indofood Agri-Resources, owned by Indonesian billionaire Liem Sioe Liong, is expected raise several hundred million dollars in an initial public offering at the Singapore Stock Exchange next month.

When crude oil prices rose to the $78 a barrel range earlier this year, Southeast Asia began building up biofuel capacity. Malaysia has already approved over 5 million tons of biodiesel capacity while neighboring Indonesia has approved nearly 3 million tons.

CRAZY SPENDING.

Some 90 biodiesel plants are in various stages of construction and about 40 or so are on the drawing board in the two countries. The U.S. (the world's biggest oil consumer), by comparison boasts 86 biodiesel plants, with another 62 under construction.

Indonesian President Susilo Bambang Yudhoyono has described the biofuels sector as "a key engine of growth" in his country. Jakarta estimates some $2 billion could be spent on the biofuel sector in the country over the next four years and Malaysia could easily top that. "There is a lot of money being thrown at biofuel plants these days," says Yeo Howe, chief financial officer and executive director of IOI, one of Malaysia's largest plantations, whose own company has taken a wait and see attitude. "It's crazy."