Wall Street Journal: Thai 'Biofuel' Sector Takes Off

Thai 'Biofuel' Sector Takes Off
As Asia Seeks Alternative to Oil
By PATRICK BARTA
Staff Reporter of THE WALL STREET JOURNAL
September 22, 2005; Page C14

BANGKOK -- Two years after emerging as the world's biggest new source of oil demand, Asia is getting serious about developing more homegrown oil alternatives, including renewable "biofuels" such as gasohol -- a mixture of gasoline and fuels made from the region's abundant crops.

For years, Asia mostly ignored such alternatives, especially when oil was cheap. But with oil prices hovering above $65 a barrel -- and competition for overseas oil heating up -- many Asian countries are re-examining overlooked domestic energy sources.

Gasohol is a prime -- if somewhat offbeat -- example. It is created by combining traditional gasoline with ethanol, a fuel that can be made from crops like sugar or corn. Though analysts are skeptical gasohol will ever replace ordinary petroleum products, some believe it could at least help make a dent in Asia's mushrooming reliance on foreign crude and help ease pressures on the global oil market.

Thailand is leading the pack. As fuel prices continue to rise there, gasohol prices have actually become cheaper at the pump than those of traditional gasoline. Platts, a commodity-industry news service, said demand for gasohol in Thailand increased sixfold in the first five months of this year compared with the same period a year earlier.


Esso Thailand, a Thai unit of Exxon Mobil, plans to install gasohol pumps at all 650 of its Thai stations by 2006; currently, it has 22 stations selling the fuel. Tuesday, Thailand's largest oil refiner, Thai Oil, said it plans to invest as much as $250 million to build a plant to make ethanol from cassava roots.

Other Asian countries are hopping on the bandwagon. Malaysian government officials said yesterday they are working on a national biofuels policy that aims to promote palm oil as a base for diesel fuel by 2007. Officials said the plan could include palm-oil "biodiesel" pumps at gasoline stations as well as subsidies to make the fuel more attractive. Malaysia is the world's biggest producer of palm oil.

Last year, the Chinese government issued a rule ordering mandatory use of gasohol in five provinces; and gas stations in some areas have stopped selling normal gasoline altogether. Gasohol initiatives are expected to extend to at least 27 cities in China by the end of this year.

Renewable fuels such as gasohol now satisfy only a tiny fraction of Asia's soaring energy demand, and the region's thirst for oil continues to grow. According to the International Energy Agency, Asia's daily oil demand is expected to work out to slightly more than 24 million barrels a day this year, 2.4% higher than in 2004. While that percentage growth is less than experienced last year, it still is twice the rate of increase North America will have in 2005.

Many analysts question whether biofuels are worth the effort given Asia's massive petroleum demand. Some studies have argued that the benefits of gasohol are wiped out once other factors -- such as the cost of fuel needed to raise crops for ethanol -- are included.

"Even a big [gasohol] program is small potatoes," said John Vautrain, an analyst in the Singapore office of international oil-and-gas consultancy Purvin & Gertz. In many cases, he notes, gasohol programs wind up helping farmers more than consumers of fuels.

All the recent interest in gasohol in Asia suggests the region is at least starting to think more seriously about ways to reduce its dependence on foreign oil, which is a potentially positive development for the global economy. Some countries, such as Brazil, have succeeded in making gasohol a major part of their fuel supply.

Meanwhile, Asian countries also are beginning to devote more resources to energy conservation. Some countries, like China, are making enormous investments in other nonoil energy sources such as nuclear power.

The growing interest in alternative fuels also bodes well for some Asian companies, analysts say.

Sean Darby, a Hong Kong-based equities strategist for Nomura International, is recommending clients switch away from stocks tied directly to oil, which he believes carries more risk, given its unusually high price and volatility. But he continues to believe long-term demand for power will remain high, which means investors should keep looking for energy plays. If investors avoid oil stocks, companies tied to alternative fuels look good, he said.

"What you're getting is very, very cheap [fuel] alternatives that governments ought to have initiated a long time ago," Mr. Darby said. Now that oil prices are high, "that tends to galvanize governments" to make investments in alternative fuels or create incentives for private companies to do it on their own, he adds.

However, trying to sort out which companies to invest in is hard. Many analysts don't follow ethanol producers. In other cases, ethanol production is handled by large companies of which primary investments are in other businesses, making it difficult to determine the value of their ethanol operations.

Nevertheless, Mr. Darby singles out a couple of Thai companies with "buy" ratings because of their strong position in the latest ethanol boom. One is Lanna Resources, a Bangkok-based company that mines coal but also controls one of Thailand's ethanol producers.

Nomura International also likes Khon Kaen Sugar Group, which is building an ethanol plant due to be completed in November.

In some ways, it is hardly surprising that countries such as Thailand would push for more gasohol. Besides not having enough domestic oil, the country is a major producer of sugar and the world's biggest exporter of molasses. Both commodities can be used to make ethanol.

Earlier this year, Thailand said all state-owned cars must run on gasohol or other alternative fuels. The government also has said it plans to phase out some popular gasoline products entirely in favor of gasohol by 2007.

--Kullawee Pongpattanajit in Bangkok and Ellen Zhu in Shanghai contributed to this article.

Write to Patrick Barta at patrick.barta@wsj.com