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DJ USDA Attache: Russian Government Takes No Steps -2-

Dow Jones Commodities Service The supply of gasoline and diesel to agricultural enterprises has decreased every year since the turn of the century (see Table 3). According to official data, supply of automotive gasoline in 2006 was 1.43 MMT, 10 percent less than in 2005, and supply of diesel fuel decreased in 2006 by 8 percent from 2005 . Fuel is largely used in spring sowing and in the period of harvesting, and effectiveness of use of fuel depends on many factors such as weather, climate, soil, crops, and management. The data on comparisons of different regions by effectiveness of use of gas and fuel are not available, but very approximate calculations show that regions with improved technologies, favorable climate and better soil (on average), such as Southern Federal District, and Volga Valley Federal District receive higher yields per unit of used gas and diesel fuel. Thus, in 2006, 34 percent of automotive gasoline and 30 percent of diesel fuel were supplied to farms of the southern Federal District, which produced 33 percent of all Russian grain crop and almost 57 percent of the oilseeds harvested in 2006. The Volga Valley Federal District received 18 percent of gasoline and 25 percent of diesel fuel, and produced almost 27 percent of grain and 19 percent of oilseeds. While the Central Federal District received 19 percent of gas and 19 percent of diesel fuel, and its share in grain production was 17 percent, and 13 percent of oilseeds production. Shares of Siberian Federal District in the automobile gas and diesel fuel supply were 16.8 percent and 16.2 percent respectably, while the share of this district in grain crop was 15.3 percent of grain crop and only 4 percent of oilseeds crop. Given the regional differences in fuel use, and the general decrease in agricultural fuel stocks, there are several reasons to investigate the use of alternative fuel sources such as biofuel. However, the Ministry of Agriculture's fuel policies concentrate on alleviating farmers' short-term financial difficulties related to rising fuel prices rather than long-term solutions. The Ministry continues to lobby for federal fuel subsidies, and has not yet pushed for investment in alternative fuels, even in regions where this may be more cost-effective. The Ministry of Agriculture calculates that in 2007, the fuel "needs" of farmers will total 2.33 MMT of automotive gasoline and 5.9 MMT of diesel fuel. Federal diesel subsidies for agriculture amounted to 5.0 billion rubles (US $192 million dollars). In 2007, subsidies are expected to reach 7.5 billion rubles (US $290 million dollars). This is in addition to any subsidies that may be provided to farmers at the regional level. Biofuel Production Capacities According to the mass media, for one of the recent biofuel conferences more than 20 Russian biofuel producers have registered. There are no official data on the actual production of biofuel, and most experts concede that most production is likely still in the experimental stage. Biofuel awareness continues to increase, however, and interest in the potential for bio-mass, rapeseed, and bio-diesel is growing, particularly at the regional level. Bio-ethanol Experts believe that Russia has 10 potential bio-ethanol plants, although only one (the Titan company based in Omsk, Siberia) is operating. High excise taxes on alcohol (23.5 rubles per liter) limits the production of bio-ethanol for domestic use. Bio-ethanol is classified under the general alcohol category, and Russian legislation does not distinguish bio-ethanol from other alcohols intended for beverages. This contrasts sharply with other nations, where bio-ethanol is usually exempt from excise duties. One loophole exists in this legislation: when alcoholic products are exported, the excise duties are returned to the producer. Essentially, bio-ethanol could be produced for foreign markets duty-free without changes in the domestic legislature . The vice-president of the Russian biofuel association Mr. Ablayav gamely notes that any Russian plant that produces an ethyl alcohol (such as vodka) can easily switch their production to bio-ethanol. The cost of production (without the excise taxes) would equal 9-10 rubles per liter since the specialized equipment needed to prepare alcohol for food consumption is not needed. He estimates that this costs is even lower than the cost for vodka production, and conversion would be easy for plants. Other experts are a bit more cautious (and some would say pragmatic); only plants with a capacity of 1.4 billion liters of more can easily switch their production lines. They also expect that the transition will require investment in technology, and that these changes may be quite expensive. The relatively high cost of grain production and increasing grain prices further constrain bio-ethanol production in Russia. If grain prices continue to increase, using grain as the source of biofuel will not be economically feasible. On the other hand, alternative sources such as sugar beet molasses may be an option. Industry experts see a market for Russian biofuel in Europe and Japan. Both of these regions have biofuel commodity exchanges, and the markets are relatively developed. The potential size of the market for Russian bio-ethanol is estimated at 800 million liters. Current Omsk oblast The Omsk-based group of companies "Titan" is currently building a bio-ethanol plant with a capacity of 150,000 metric tons per year and is designed for grain processing. The Omsk oblast administration and the Ministry of Agriculture recently signed an agreement supporting this project despite the fact that the market for the plant's products has not been determined. To its credit, the Titan company does have experience in this area. In September 2006, they brought their first bio-ethanol production facility online in Kazakhstan. The "Biokhim" complex has the capacity to fill Kazakhstan's domestic needs, and the remaining product is exported to China. Planned In different regions there are plans to increase production of bio-ethanol. Foreign companies, or Russian entrepreneurs with foreign-backing, usually initiate these projects since Europe is the primary market for these products. Below are some planned projects: Volgograd Oblast The Volgograd regional administration submitted a proposal to the Ministry of Energy to construct a bio-ethanol plant in the region, with funding to be provided by the Russian Investment Fund. The project would create a facility capable of transforming 900,000 MT of grain into 300,000 MT of bio-ethanol, and 300,000 MT of distiller's dried grain (dry molasses). Rostov Oblast A bio-ethanol plant is planned in the Rostov oblast within the next two years. It will use corn, sugar beets, and fodder wheat for export-oriented bio-ethanol. The " Bashneft-Yug" company is also planning to build a bio-ethanol plant with a capacity 250,000 metric tons per year on "Azovryba" company's land. Oilseed crushing company "Aston" is also getting in on the act, and plans to build a bio-ethanol plant with an annual capacity of 250,000 MT. Penza Oblast The Israeli company Agrotor, Ltd. has preliminary plans to construct a bio-ethanol plant in Penza. The capacity of the plant has not yet been determined. Tomsk Oblast The existing alcohol plant "Extrasib" plans to expand its product offerings to include 15,000 MT of bio-ethanol annually. The source of the ethanol is unknown. Bio-Diesel Commercial-scale production of bio-diesel does not exist in Russia, although some farms are experimenting with vegetable oil fuels. Converting alcohol plants into bio-diesel facilities requires a much more substantial investment than is required for bio-ethanol, as the technological set-up is markedly different. In addition, Russia does not have a unified standard for bio-diesel production, which may stifle development until the regulatory environment is clear. The domestic food and feed industry have a high demand for grain and oilseeds, keeping prices high. Rapeseed is exported as a raw material for biofuel, especially as the European price for rapeseed is high. Rapeseed-based bio-diesel is the only bio-diesel that operates at low temperatures, and is in special demand in Europe. Soy oil and palm oil-based bio-diesel can be used only in southern Europe where the temperatures are generally warmer. Despite the technological and financial challenges to bio-diesel production in Russia, foreign and domestic investors are developing rapeseed processing and bio-diesel production plants in Lipetsk, Orel, Voronezh, Tambov, and Kurgan oblasts as well as some oblasts in Siberia. Industry experts point out that none of the projects have yet come to fruition. Most of the projects, even those that receive local administrative support, are oriented toward the export markets of Europe and Japan. Current There are no bio-diesel plants in Russia, and commercial production of bio-diesel does not exist. Planned Tomsk Oblast Tomsk-based company "Prodeks" plans to increase production of vegetable oils to 200,000 MT by 2009, and plans to invest 1.2 billion rubles in the plant. To achieve this volume, they plan to construct a rapeseed processing facility in Kemerovo oblast (at an estimated cost of 350 million rubles), but this is contingent upon the approval of the Kemerovo authorities. Many industry experts think that this project will be profitable only if the company can find external markets for the oil. Prodeks already operates two oil-crushing plants for processing sunflower seeds, rapeseed and soybeans, and sells rapeseed oil to Denmark. They are planning to supply increased amounts of rapeseed oil to other European countries for bio-diesel production. The "Prod Expo" group does not exclude the possibility of creating its own bio-diesel production facilities in an EU country. Experts largely agree that exports are the only way to consume the forecasted rapeseed production. Rapeseed is not used in the food industry in Siberia, and it is traditionally used only for feed and the production of oil varnish. (MORE TO FOLLOW) Dow Jones Newswires

Date:  13.06.2007

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