ALAN KOHLER: Necessity has long been the mother of invention and oil prices hovering around $70 a barrel are inspiring industry, motorists and investors to come up with cheaper, alternative fuels. So far interest has centred on ethanol and biodiesel, with some big speculative investment money flowing into the emerging industries. It's also attracting on-going political interest. Just this week the National Party's Barnaby Joyce flagged a bid to mandate a target of 10 per cent bio-renewable fuel usage by 2015 but it's likely market forces rather than regulation will have to drive its up-take. Kathy Swan reports.
KATHY SWAN, REPORTER: As motorists resolutely charge up the highway of record petrol prices there's an increasing urge to scan the horizon for an alternative route. And so far, the direction sparking perhaps the greatest deal of interest is towards biofuels - a bucolic path spanning the wheat belt and cane country where the raw ingredients are found. While oil seed-blends making biodiesel are gaining traction, it's the raw alcohol of ethanol that's setting the pace.
DAVID SZYMCZAK, UNITED PETROLEUM AUSTRALIA: We sell it at discount to regular unleaded petrol and so customers love it.
MIKE MCGUINNESS, BP AUSTRALIA: When we first started looking at ethanol I think the price of oil was about $23 a barrel and now its up $70, $80 a barrel so that has played a big part in making ethanol, you know, economic.
KATHY SWAN: United Petroleum and sugar giant CSR joined forces to offer ethanol-blend fuel about a year ago. Sales are good and so is the sales pitch.
DAVID SZYMCZAK: Basically, the performance of the fuel is better. It creates a higher-octane because ethanol is a natural octane-enhancer. It also is a natural cleaner, so it keeps motorcar engines cleaner. It also is great for the environment.
KATHY SWAN: Timing is a great thing. Enthusiasm for ethanol has not always been so evident, as one of the major oil companies, BP Australia, freely admits.
MIKE MCGUINNESS: Well, actually, things have been a bit rocky because there was this issue with consumer confidence around ethanol in sort of 2000-2003 and ethanol really is a product the consumer want to - you know, must want.
KATHY SWAN: But consumer confidence is growing, investors are keen and industry players are coming on line. The Federal Government has set a target of producing 350 million litres of biofuels a year by 2010 - that is just a fraction of the 20 billion or so litres of old-fashioned fossil fuel that we are already using. But it will be an improvement on current production levels and industry incentives include getting a share of the Government's $37.5 million capital grants program.
DARRYL BUTCHER, AUSTRALIAN RENEWABLE FUELS: In pure cash terms, the Federal Government has been very supportive.
KATHY SWAN: Australian Renewable Fuels is among a handful of companies booking a seat in the new fuel market, producing biodiesel rather than ethanol.
DARRYL BUTCHER: Biodiesel has been somewhat in the shadow of ethanol but the facts of the matter are that most of the money under the Federal Government's Biofuels Capital Infrastructure Grants scheme went to biodiesel.
DR LEN HUMPHREYS, AUSTRALIAN BIO-DIESEL GROUP: Biodiesel is an alternative to fossil and bioethanol is an additive to petrol so I think each of them operate in different sectors.
KATHY SWAN: Sugar cane, corn, wheat and other plant material are used to make ethanol, which is alcohol. Biodiesel looks like wine and smells slightly like dinner, probably because of what it's made of.
DR LEN HUMPHREYS: There's tallow, which is a by-product from the meat processing industry, used cooking oil, which is obviously from the McDonalds and KFCs and there's canola. Canola is probably the most expensive and the used cooking oil is probably the least expensive.
KATHY SWAN: Backyard biodiesel producers would have been saving some cents lately, but it's not for everyone. And that's where the new producers come in.
DARRYL BUTCHER: When we first started this we were pretty lonely.
KATHY SWAN: Biodiesel plants like this one, Australian Renewable Fuels - officially opened in March - are popping up all around the country.
DARRYL BUTCHER: Our first plant has been commissioned in Adelaide and our second plant is now being commissioned in Picton here in Western Australia.
DANNY GOLDMAN, AXIOMENERGY: We are building the largest Victorian biodiesel facility. It'll be located in the Port of Geelong.
KATHY SWAN: Customer demand for biofuels is building but companies like the Australian Biodiesel Group have admitted some early teething problems, after not making as much money as expected from biodiesel sales last year.
DR LEN HUMPHREYS: It's that sporadic nature of getting consistency volumes in a very immature market that's trying to get used to handling what is, in effect, is a new fuel, albeits compatible with existing fuels. You have to change your habits, you have to change your logistics of how you deliver this fuel into a quite established system. That's what caused the below volumes of deliveries compared to the prospectus forecast.
KATHY SWAN: In a climate where companies failing to meet their targets are absolutely hammered, ABG's shareholders seem to have faith and the share price is still more than 30 per cent above it's listing price of six months ago. Such optimism is a feature of the industry so far.
DANNY GOLDMAN: The plant will be located on a piece of land right here.
KATHY SWAN: AxiomEnergy is building its plant at Geelong, near Melbourne, in a deal with transport behemoth Toll Holdings, which owns the site and is a likely user of biodiesel.
DANNY GOLDMAN: Our facility's strategically located so we can cut down on truck movements. Being very close to the actual pier, the incoming feed stock will be coming into our plant via pipelines and outgoing biodiesel will be going to our storage facility via pipeline as well.
KATHY SWAN: If all goes well, AxiomEnergy could expand and double the plant's capacity to about 300 million litres of biodiesel a year.
DANNY GOLDMAN: Over 15 billion litres of diesel are used in Australia every year, so there is space for a number of different companies out there producing biodiesel.
KATHY SWAN: It's all a welcome change for AxiomEnergy, which last year had to pull its float and refund about $40 million after plans to make diesel from waste plastic were put on hold pending a Government decision on how to tax such a product. AxiomEnergy may yet have another go at a public listing but right now other newcomers have been enjoying a dream run.
NATHAN MAHALINGHAM, MISSION BIOFUELS: Our strategy is to become a preeminent producer of biodiesel in this region.
KATHY SWAN: Mission Biofuels made a spectacular debut earlier this year and it's share price is holding up, despite the current jitters and despite not yet completing it's first plant in Malaysia.
NATHAN MAHALINGHAM: We offer investors a chance to participate in this industry globally because our production facilities are not based in Australia but based in Malaysia and we are selling to the European market.
KATHY SWAN: Mission Biofuels will use palm oil for feedstock. Others will rely on canola and other grains.
LEN HUMPHREYS: Between now and the next five years you'll see biodiesel probably taking up between 5 per cent of the total market. And as we use up 14 billion litres of diesel per year, that probably translates to something like 650 to 750 million litres of biodiesel that will be on the market in, say, two to five years' time.
KATHY SWAN: And that will increase demand for grains, which is good for farmers. But using grain for both food and fuel may push up prices, right at the time favourable excise treatment begins to be phased out from 2011, potentially making biofuels economically unfeasible. But biofuel producers are more than confident the benefits of their ethical investment will pay.
DARRYL BUTCHER: We're really not here to save the planet, we are here to make money.
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