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India’s Biofuel Moves Help Offset Swelling Oil-Import Bill

According to reports, a swelling oil-import bill that is hurting India’s economy and undermining its currency may become less painful thanks to policy shifts aimed at stimulating a long-neglected program to use green fuels.

The country is on track to meet a 5% ethanol target in its gasoline sales for the first time since it was introduced eight years ago, slashing billions of dollars from a record $120 billion in energy-import costs in the financial year ended in March—creating a financial burden that has been exacerbated by a 13% slide in the rupee’s value against the dollar since the start of May.

Production of ethanol may accelerate if the government introduces more measures early in 2014, as some expect. These could complement the dismantling six months ago of a system of state-fixed prices for ethanol from sugar cane that pegged them below half the level of retail gasoline rates. Most Indian ethanol is made from molasses, a byproduct of the sugar cane production process. The sugar policy change has reignited enthusiasm for green fuels in the world’s second-largest sugar cane producer after biofuel powerhouse Brazil.

Unlike the South American country, where gasoline sold at pumps must contain a minimum of 25% of ethanol, India has struggled for years to achieve its modest 5% target, but it should achieve the mandate for the first time this financial year, industry and government officials say. Last year the blending rate was around 3%.

Using a blend of 5% ethanol in liquid and gas fuels could reduce the current-account deficit and result in savings of $5 billion-$6 billion annually, said S.C. Sharma, a petroleum specialist at India’s Planning Commission, the country’s policy think tank. India imports about 75% of the oil it uses.

In August, Oil Minister Veerappa Moily said the prime minister had asked him to cut the oil import bill by $25 billion, and that he expected the 5% blending program would be fully implemented by March.

The state-fixed ethanol price of 21 rupees a liter meant that tenders from state oil companies in the past often received little attention from sugar processors, but since India removed most sugar market controls in April, the response to two tenders to supply 2.33 billion liters of ethanol has been good, and should be enough to meet the 5% blending goal, sugar industry officials said.

The Indian Sugar Mills Association says abundant monsoon rainfall has boosted the coming year’s sugar harvest, which may hit 25 million tons, up 5.5% on year.

Narendra Murkumbi, managing director of Shree Renuka Sugars Ltd., one of India’s largest sugar producers, confirmed his company had actively bid in the tenders, but didn’t provide details.

Import bills could be cut further if India increases the guaranteed price of biodiesel made from the hardy jatropha shrub, which grows in wasteland and requires little water, something that Indian government officials who declined to be named said might happen next year.

Projects to farm jatropha for the oil that can be crushed from its seeds previously failed to take off as most cultivation was of wild jatropha varieties, which yielded unpredictable amounts of oil, said Sandeep Chaturvedi, president of the Biodiesel Association of India.

Mr. Chaturvedi said he expected policy changes early in 2014 that would boost the biodiesel price to around 55 rupees ($0.89) a liter—a level where jatropha commercial production becomes viable. “The potential is huge,” he said.

For now, only a handful of players, including Reliance Industries Ltd. and state-run Hindustan Petroleum Corp., seem to be seriously pursuing jatropha projects, while “the rest have all gone into hibernation,” Mr. Chaturvedi said.

Others argue that India has been barking up the wrong tree.

India’s biofuel program should include biomass products such as corn cobs, sugar cane straws, leaves and fruit debris, which need to be broken down with specialized enzymes and new technologies if the country is to have 20% blending by 2017, said Divakar Rao, a member of the Karnataka State Biofuel Development Board. India doesn’t yet have a national program for biomass collection or pricing.

The business sector is starting to pay attention. On Wednesday, Finnish company Chempolis Ltd. and India’s leading oil and gas explorer Oil & Natural Gas Corp. signed an initial pact to build a refinery in India using biomass as a feedstock.

Private Indian company Praj Industries has already set up a pilot plant in India to produce biomass fuel with production costs some government officials say is only slightly higher than ethanol made from sugar.

G.S. Krishnan, South Asia regional president at Novozymes A/S, which makes enzymes that help break down plants for ethanol production, says the company is getting more enquiries from potential customers.

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