Green fuel under attack
The controversial law was passed by the Sejm last week after two committee referrals and a stormy parliamentary session involving 10 separate ballots. The law is intended to reduce greenhouse gas emissions, offer an economic boost to the agricultural sector and meet EU demands for the use of alternative energy sources by establishing compulsory minimum levels of domestically produced bio-additives for petrol, diesel and fuel oils.
Ban on imports
"From the point of view of competition this law is restrictive," Leszek Wieciech, government affairs manager at UK oil company BP. "At the moment the majority of fuels sold in Poland are produced by Polish refineries
Once imports are effectively stopped, there will be no alternative, and we will all be condemned to whatever is offered by local producers. This could be quite painful, but it depends on how domestic manufacturers behave. I hope they won't bow to the inevitable temptation to take advantage of the situation."
The law will restrict imports because it bans the sale of imported bio-additives made with imported ingredients. Fuel industry insiders also point to a technical factor which the law does not account for - the production of biofuel requires specially modified petrol.
While Poland's largest refiner, PKN Orlen, has stated that modifying its petrol to suit bio-additives poses no technical problems, petrol produced by foreign refineries will not be suitable.
The Agriculture Ministry expects imports of petrol to decrease by €60 million in 2003. After the introduction of biodiesel, imports will decline by up to €230 million by 2010.
Breaking international regulations
"The rape seed has to be Polish and the bio-component must be Polish," said Jacek Wróblewski, director of the Polish Organisation of Oil Industry and Trade (POPiHN). "You can manufacture fuel that meets the norms, but you can't export it to Poland. This is against EU regulations since it blocks the free flow of trade."
"This is in contravention of the Treaty of Europe and WTO regulations," Wieciech said. "It must be changed by the Senate."
The fuel industry is also up in arms over the bio-additive levels proposed by the law, which are considerably higher than in EU petrol, which currently contains a 2% bio-component, which is set to rise in 0.75% increments until 2010 when it will total 7.25%.
The government's original draft, produced by the Agriculture Ministry under the guidance of deputy minister Kazimierz Gutowski, a PSL MP, stated that from January 1 next year fuel producers and importers must add 4.5% ethanol derived from wheat or potatoes to petrol and 5% esters, a fuel compound derived from rapeseed oil, to diesel and other fuel oils by 2006.
While the parliamentary committee that prepared the bill for its third reading recommended a 3% additive level across the board, last week's heated dispute in the Sejm and its committees only achieved a postponement of the introduction of petrol additives until April next year.
Tax incentives
During last week's parliamentary debate MPs introduced an amendment binding the Finance Ministry to provide a tax incentive for fuel retailers. Fuel industry insiders are not satisfied. They are concerned that since the law does not fix tax incentive levels, the cash-strapped Finance Ministry will take advantage of the fact that bio-additives are compulsory to offer tax breaks that will not cover the additional cost of bio-additives and swell the price of petrol.
"The reason why the bio-additives are compulsory is because the government does not want to use tax incentives that would be effective since they cannot afford to," Wróblewski said.
"This is definitely an inflationary factor because it will cause an increase in fuel prices. The agriculture minister thinks it is just a matter of a few percent per litre. The truth will come out only when we know the level of tax incentives and the costs of it all.
"If the finance ministry had offered a sufficient tax incentive in the first place, refineries would have entered this market themselves. They would have created the demand necessary for production to begin. Because the minister didn't go that way, I suspect we will end up with tax incentives that will not fully cover costs."
If the Senate approves the bio-additive levels proposed in the law, biofuels will swell the gross domestic product by €125 million (zł. 500 million) and create 30,000-69,000 jobs, primarily in farming and biofuel processing and distribution, according to Agriculture Ministry estimates.
Since the law bans the sale of imported biofuels and the manufacture of biofuel using imported ingredients, the backbone of the economic benefits expected from the law is increased demand for ethanol, produced from wheat or potatoes and esters, derived from rapeseed oil.
The Agriculture Ministry estimates that the introduction of compulsory bio-additives to fuels will rocket domestic ethanol production from 50,000 tons in 2001 to 260,000 tons in 2003, requiring 800,000 tons of wheat or 2.4 million tons of potatoes. With demand for esters forecast to rise from 58,000 tons this year to about 400,000 tons in 2006 and 800,000 tons by 2010, demand for rape will swell by one million tons a year.
Who will benefit?
But market observers warn that farmers will not be the main beneficiaries of the law. With refineries legally obliged to buy biofuel since their stable clients and farmers are tied to long-term contracts for the supply of ingredients, bio-additive producers will be in the strongest position to dictate prices in the production chain.
"The question is how much will they want to earn on this and to what extent will fuel companies be forced to buy from them," Wróblewski said.
The manufacture of ethanol and esters for biofuels has attracted a lot of interest from investors. Energy magnate Aleksander Gudzowaty has leapt in by placing privatisation bids for three companies with bio-additive manufacturing capacity: Warsaw Fat Works, Leszno fermentation works Akwawit and Wrocław distillery Wratislava. His biofuel company Brasco wants to control 10% of the ester market and 20% of the ethanol market.
KGHM & RG joint venture
Copper mining giant KGHM announced a joint venture to manufacture and distribute biofuels with Rafineria Gdańska, with plans to invest €6.3 million (zł. 25 million) and produce 70,000 tons of esters a year. Interest in biofuel production has also been expressed by the Police Chemical Works and Kędzierzyn Nitrogen Works, which has ambitions to produce up to 80,000 tons of esters a year.
While the government expects to cut greenhouse gas emissions by 20% by introducing bio-additives to diesel and fuel oils, the biofuel law contains provisions that could end up harming the environment since it allows farmers to mix their own biofuels without the right of resale.
"It is difficult to imagine that these small producers will approach manufacturing waste in a different way to a bag of rubbish," Wieciech said. "Nobody thought that the degradation of soil and mainly water resulting from this law could be potentially huge."
Allowing small-scale biofuel production will also help to boost the black market for fuels, which currently thrives on selling heating oil as fuel and petrol smuggled from Poland's eastern neighbours.
"Knowing the ingenuity of the black market in Poland, we suspect that these low quality, cheap esters will be traded illegally and will find their way into retail distribution," Wróblewski said. "This is a danger to consumers, honest retailers and the budget."
