National Biomass Strategy 2020: New wealth creation for Malaysia’s biomass industry

1.62 (5.70)

2.23 (8.09) 0.71 3.00 Kuantan 5.09 4.99 (6.15)

2.45 Bintulu

3.70 (8.26) 1.84 6.43 Port Klang (9.77) Tawau Kunak (1.76) (1.60)

4.02 PasirGudang Pasir Gudang 0.40 0.37

5.75 (7.39) (7.4) 1.36 1.23 3.12 4.28 SOURCE:, M. Islam et al.; K. Haron et al.; H. Kalid et al;. Lazaro A. et al.; ICIS; MARDI; MPOB; Field visit; Interviews 15 Assessing the best uses of Malaysia’s oil palm biomass Malaysia could benefit from an additional RM 30 billion contribution to GNI by utilising the biomass from the palm oil industry for a portfolio of higher value-added downstream activities. This would result in more and better jobs for Malaysians, as the country would begin producing high-value products out of a resource that is currently little used in advanced industries in Malaysia. A concerted effort by government, academia and the private sector with private investment in the order of RM 20–25 billion cumulatively over the next 5–10 years and government involvement in the form of policies and targeted incentives to reduce risk is necessary for the nation to achieve this goal by 2020. Different uses for biomass have very different risk-return profiles, given different technological maturities, global demand potential and competitive dynamics. Malaysia already benefits from producing wood products, animal feed, energy, and using biomass directly on the field as fertilizers today. Biomass-to-energy plants are being built to take advantage of the Feed-in-Tariff. Additionally, the first pellet plants, which will allow the export of oil palm biomass, are currently being set up. The bigger prize is in higher value and higher risk applications. Producing bioethanol and biobased chemicals from biomass will offer increased wealth as well as new and better jobs. However, the technologies to convert lignocellulosic biomass into bioethanol will only be available on a commercial scale between 2013 and 2015 as illustrated in Exhibit 5. An additional 2-3 years of optimisation of this technology platform will be required for cost-competitive production of biobased chemicals. The development of research and commercial capabilities as well as the know-how to convert lignocellulosic biomass into sugars will allow Malaysia to tap into the high- value opportunities in biobased chemicals. Downstream technologies of today The downstream technologies to produce wood products, bioenergy and pellets are already well known and available on a large commercial scale across the world and the first installations are on the ground in Malaysia. Today, oil palm biomass is already used as input in the wood industry to produce products such as plywood and medium-density fibre boards (MDF). Large scale pellet plants with more than 750,000 tonnes annual capacity already exist in countries such as Brazil and Sweden, and that technology can be applied in Malaysia. 16 EXHIBIT 5 Timeline of technological availability 2020 2020 OPF juice Biobased- pathway chemicals •Bioplastics •Nutraceuticals Lignocellulosic •Other pathway 2015 2013-15 Bio ethanol • Petrol substitutes • Diesel/jet fuel Biofuels Biobased- substitutes chemicals Today Other Fertilizer Pellets Wood industry Bioenergy • Animal feed • MDF • Co-firing at mills • Chemical fertilizer • Plywood • Biomass to energy • Flooring The transformation of biomass to energy already takes place in Malaysia, but on a smaller scale than that practiced in Europe. With the new renewable energy feed-in tariff system, biomass-to-energy plants of a similar scale to Europe will have to be constructed in Malaysia (see Malaysia’s renewable energy target). Downstream technologies of tomorrow 1st generation bioethanol and biobased chemicals – using food crops such as sugarcane, cassava or corn as feedstock – are already produced at commercial scale today, at plants such as the 400,000-tonne ethanol plant and 100,000-tonne lactic acid plant in Thailand based on cassava and sugarcane feedstock, or similar ethanol plants in Brazil based on sugarcane feedstock. In contrast to these existing technologies that use food biomass as inputs, emerging 2nd generation technologies are exploring the use of non-food, lignocellulosic biomass (e.g., forest and agricultural residues). The term lignocellulosic biomass refers to the main building blocks of plant matter: lignin, cellulose and hemicellulose. There is strong evidence that 2nd generation technologies to convert lignocellulosic biomass to bioethanol while still in the development stages will likely mature by 2015. Commercial plants have already been established (e.g., Beta Renewables in Crescentino in northwestern Italy, Shengquan Group in Shandong Province in China) and an estimated 700 million liters of 2nd generation bioethanol is projected to be commercially produced by 2015 globally. However, technological uncertainty does still remain around the step of breaking down the biomass into individual sugars that can subsequently be fermented into biobased chemicals in a manner similar to existing 1st generation approaches. 17 As a steep learning curve is expected in the first years of commercialisation, 2nd generation ethanol may initially not be cost-competitive with 1st generation ethanol from sugar cane. There are strong indications, however, that 2nd generation bioethanol is likely to be better accepted in the US and EU than 1st generation bioethanol, with specific targets already being set for the consumption of “advanced” bioethanol in the US. Local support tools such as a blending mandate, guaranteed offtake, and minimum price support could act as a buffer against volatility and uncertainty of international demand. Moreover, this drive for the 2nd generation biofuels could also expedite the development of a biobased fuel/ethanol intermediary which would, in turn, move Malaysia further forward in its development towards biobased chemicals that will ultimately be of such great value to the country. What must be kept in mind, however, is that the production of biobased chemicals from lignocellulosic biomass faces additional hurdles. Biobased chemicals derived from sugars can be produced on a commercial scale once the process of converting lignocellulosic biomass to sugars has been optimised at scale and the exact composition of the input is known. Although the production of other (non-ethanol) biobased chemicals from lignocellulosic biomass is slightly more difficult, small scale pilots are being built today, for example, a 1,000-tonne succinic acid plant in China’s Jiangsu Province. Production is expected to reach commercial scale between 2015 and 2020. An alternative route to derive bioethanol and biobased chemicals from oil palm biomass is to squeeze sugar juice from the basal part of the oil palm frond. Similar to sugar cane, the juice can then serve as feedstock for production of 1st generation bioethanol and biobased chemicals, and thus many of those products could be produced today. However, the juice of the oil palm frond contains less than 10 percent of the carbohydrates present. The remaining sugars are the building blocks of the insoluble, cellulosic material of the frond. Hence, from 1 tonne of wet weight oil palm fronds, 400 kg of sugars can be recovered by breaking down the cellulosic components, compared to only 40 kg of sugars from just the oil palm frond juice. While the use of sugar juice is unlikely to be the most economically viable in the long term, it could be used for the industry until the lignocellulosic route becomes fully matured. Business as usual Today, a majority of oil palm biomass is left in the field while the rest is mulched and returned to the field as fertilizer. In addition, in a business as usual scenario, by 2020, Malaysia’s palm oil industry will utilise 12 million tonnes of biomass p.a. for use in wood products and bioenergy. Currently, oil palm biomass makes up a small percentage of the input to the wood industry. This is expected to grow steadily to about 1 million tonnes p.a. by 2015. With industry growth and a higher share of oil palm biomass as input instead of rubber wood, the volume is expected to reach almost 3 million tonnes of biomass p.a. by 2020. In 2015, more than 3.5 million tonnes of biomass and, in 2020, close to 9 million tonnes of biomass will be used to produce energy so that the country can meet its renewable energy target (see Malaysia’s renewable energy target). 18 EXHIBIT 6 National Biomass Strategy 2020 would deliver incremental GNI of approximately RM 30 bn Average revenue per tonne of biomass bn RM GNI impact RM 1,000 2020 B2W scenario (Biomass to Wealth) 800 2015 35-39 11-12 600 400 2020 2015 2-3 6-7 Business as usual 1 200 Today 0 0 5 10 15 20 25 30 35 40 Mobilised biomass (tonnes) In all, the use of oil palm biomass in the wood and bioenergy industries could, by 2020, contribute RM 2.8 billion and RM 2.4 billion to GNI, respectively (Exhibit 6). The growth of bioenergy alone will create about 1,400 direct and 3,900 indirect jobs and require an additional private investment of RM 8–10 billion. Additional value creation: Biomass to wealth To fully capitalise on the biomass opportunity, an additional 20 million tonnes of biomass compared to a business as usual scenario could be deployed towards higher- value downstream activities such as pellets, bioethanol and biobased chemicals. Pellets Pellets is a natural entry point for capturing this opportunity since the technology is reasonably mature, the cost of developing infrastructure relatively low (i.e., RM 30–40 million per plant with a capacity of 100,000 tonnes) and the payback of 5-7 years relatively quick. Converting biomass to pellets will allow biomass owners in Malaysia to immediately capitalise on available biomass. Pellets produced in Malaysia can be shipped to other Asian countries such as Japan and Korea where there is already an existing market demand for biomass. Globally, the demand for biomass pellets is forecasted to reach ~20 million tonnes by 2020. Korean and Japanese policies have already created an increased demand for bio-based pellets in the region. In Korea, the first dedicated biomass power plant is scheduled to go online in 2013 in Dong Hae. By 2020, Korean demand for wood and biomass pellets is forecasted to reach 5 million tonnes. Meanwhile competition continues to increase. Malaysia, therefore, needs to accelerate speed to market, possibly also creating local demand to expedite the development of the industry. While Malaysia does have a distinct advantage in terms of proximity to the markets in Asia, to capitalise on the advantage, it must deliver in an efficient, proactive and timely manner. 19 Malaysia’s renewable energy target The Renewable Energy Policy and Action Plan sets a target of 4,000 megawatts of installed renewable energy capacity for 2030, raising the total installed capacity to 17 percent from less than 1 percent today. This target covers five individual types of renewable energy: biogas, biomass, solid waste, small hydro and solar photovoltaic (PV). The target for biogas alone is 410 MW installed capacity by 2030, which can only be achieved by the conversion of almost all mills to use biogas, already mandated through EPP 5 of the Economic Transformation Programme with a deadline of 2020. This can be achieved by capturing the biogas produced by the POME at the palm oil mills. To generate energy, a facility to capture the biogas must be constructed at a cost of RM 4–5 million and the existing boilers in the mills converted to use biogas as input at a cost of about RM 0.5 million. Importantly, this will supply Cumulative renewable energy the mills with sufficient power capacity target for solid biomass and steam to run their processing MW/Year facilities, and allow those mills 4% connected to the power grid to 800 supply some power to the grid. The target for biomass to energy 2% is to reach 1,340 MW by 2030.1 This can be achieved by a combination of 330 installing small power plants in the >1% vicinity of grid connected mills, or 110 larger, more efficient power plants closer to industrial clusters. The 2011 2015 2020 interim target of 800 MW in 2020 will require 6–9 million tonnes of biomass for this purpose, depending on the efficiency of the plants constructed. 1 National Renewable Energy Policy & Action Plan. KeTTHA. 2009 20 A series of incentives has already been put in place to catalyse the industry (e.g., tax breaks, business opportunity under the oil palm NKEA that will provide 10- 15 percent of capex for the first five new pellet plant applications). Mobilising 10 million tonnes of biomass for pellets by 2020 could create about RM 9–10 billion in GNI and about 5,500 and 6,800 direct and indirect jobs, respectively. In addition to the contribution to GNI and the creation of new jobs, pelletisation allows industry to mobilise its biomass and, in so doing, the logistics and infrastructure associated with mobilising the biomass can be established. This will be relevant for the development of the bioethanol and biobased chemicals industry. Bioethanol There is increasing evidence that the 2nd generation bioethanol market will be mature by 2015. Commercial plants (e.g., Beta Renewables in Crescentino in northwestern Italy and Shengquan Group in Shandong province in China) have already been established and over 700 million litres of 2nd generation bioethanol is likely to be commercially produced by 2015. The US has separate targets for 2nd generation bioethanol, and there is a possibility that the EU could establish a similar policy. However, demand coming from these markets is highly dependent on regulation. Incentives for the production of bioethanol, such as the expansion of EPP6 to include biobased chemicals to provide capex incentives of up to 40 percent and tax breaks have been put in place to catalyse the development of the industry. Biobased chemicals Biobased chemicals represent the largest potential for Malaysia. Currently, the global market for all chemicals amounts to more than RM 7 trillion. Of this, lignocellulosic biomass can supply about 0.6 percent, equivalent to a global market size of RM 48 billion, which is expected to grow to as much as RM 110–175 billion by 2020. By taking a diverse portfolio approach, Malaysia can produce as much as 1.6 million tonnes of biobased chemicals, with a market value of RM 7–9 billion. This would cover a broad range of chemicals from ethanol based chemistry like polyethylene and ethylene oxide, to amino acids like glutamic acid and serine, to other chemicals like polylactic acid and acetone. What will become the most attractive chemical to focus on is difficult to judge at this time, as is the most attractive way of deriving it (see The brave unknown). Producing 1.6 million tonnes of biobased chemicals would require 10–20 biobased chemical plants and a total investment of RM 10–15 billion by the private sector as well as the mobilisation of about 5.5 million tonnes of biomass. Seizing the biobased chemicals opportunity could lead to an increase in GNI of RM 14–15 billion and the creation of 2,500 and 13,400 direct and indirect jobs, respectively. As the advancement of biobased chemicals continues, several promising biobased chemicals are starting to emerge. The most successful ones combine competitiveness (time to market; technical feasibility; relative cost position to fossil- based products) with demand. Ethylene Glycol and Succinic acid belong to the group of chemicals that appear to be the most promising. 21 In its effort to strive towards complete success, Malaysia is working to ensure that further downstream processing and manufacturing of chemicals is captured within the country by encouraging the building of plants within chemical clusters. Summary In total, the additional value creation from pellets, bioethanol and biobased chemicals represents a possible GNI increase of RM 30–34 billion by 2020 and the creation of 66,000 jobs, respectively compared to business as usual (Exhibit 6). For this opportunity to be realised, an additional 20 million tonnes of biomass must be mobilised beyond those required in a business as usual scenario, which includes the wood industry and bioenergy. The realisation of this opportunity for Malaysia will also require active private sector participation and investments amounting to RM 20–26 billion. Initiatives until 2020 Many initiatives will have to be launched before future technologies can become commercially attractive. Mills will have to switch from burning biomass to using biogas and begin mobilising biomass for pellet plants and other end uses. Different conversion technologies will need to be tested, starting with demo plants and leading up to commercial scale plants and, before 2015, an industry around 2nd generation bioethanol will have to be developed. Given the higher risk and return of future technologies, private sector participants might choose to jointly develop and scale up future downstream end uses. However, it is important to Malaysia’s success in developing new higher value industries that these building blocks for future scenarios are laid today. 22 The Brave Unknown Three main biomass conversion technology platforms are being explored today: thermal, biological and chemical. Thermal conversion: Biomass is first broken down into syngas using heat and low oxygen concentrations. Subsequently, a range of thermo-chemical processes can be applied to generate fuels or chemicals. Biological conversion: Biomass is treated by chemicals and/or enzymes to produce sugars, which are then fermented into the desired fuels or chemicals. Chemical conversion: Biomass and sugars are treated using chemicals only in a variety of methods to produce fuels or chemicals. Pilot scale plants employing each of these technologies have been completed for both biofuels and biobased chemicals. At this stage of development it is impossible to predict a winning technology platform and it is likely that several technologies will emerge depending on what specific end products are desired. Thus no specific technology is expected to become vastly dominant across the biobased chemical industry. Lignocellulosic biomass Biological Thermal Thermal Thermal Biological Chemical Conversion conversion conversion conversion Conversion conversion (Fermentation) (Gasification) (Pyrolysis) (Gasification) (Fermentation) Biobased Bio ethanol chemicals SOURCE: WEF The Future of Biorefineries, 2010; Cellulosic Ethanol: Feedstocks, Conversion Technologies, Economics, and Policy Options, Randy Schnepf, Congressional Research Service, 2010 23 Capturing the RM 30 billion opportunity To realise this opportunity, Malaysia must move decisively and ensure that the right structures, regulatory framework and incentive packages are put in place. This chapter delineates some of the incentives and strategies that have been put in place to encourage this development: • Joint Venture (JV) clusters to help aggregation of biomass –The creation of JV clusters will help alleviate the risk of vertical market failure between the owners of biomass and downstream users, such as biobased chemical refineries and pellet plants. Downstream opportunities require the mobilisation of a large amount of biomass in a single location. No single owner has sufficient scale to mobilise a sufficient amount of biomass, hence the need for JV clusters. JV clusters would normally consist of a number of mill owners co-located in the same area. On a mill by mill basis, the scale of individual mills is too small to mobilise sufficient biomass for higher value downstream uses. This is why the scale provided by the structure of a JV cluster would reduce the risk that would need to be taken by individual mill owners. Ideally, JV clusters would take ownership stakes in downstream industries, thereby giving the owners of biomass a share in the additional value creation. JV clusters can and should have different investment strategies, e.g., one might be regionally focused on producing very cost-competitive pellets, while another might take a complete portfolio perspective by supplying to all possible end users. It is imperative that such partnerships are biomass owner owned and controlled so that the owners are able to choose between different portfolios depending on their investment preference without interference. The government, however, can facilitate the establishment of such partnerships and provide capabilities, expertise and advice where required by the biomass owners. • Transparency of potential opportunities and adopting a portfolio approach – The Government will play a role to ensure transparency of potential downstream uses, starting with the National Biomass Strategy 2020. There will be a natural tendency for companies to focus on lower-risk opportunities. It will, however, be critical that biomass owners adopt a longer-term view to extracting higher value from the biomass from opportunities in bioethanol and/ or biobased chemicals. • Oil Palm Biomass Centre (OPBC) – The creation of a consortium of upstream and downstream companies to accelerate the development of lignocellulosic 24 conversion technologies benefits all companies in the industry. The ultimate objective of the OPBC, therefore, is to accelerate time-to-commercialisation of the biobased chemicals opportunity. The OPBC focuses on developing technology, accelerating implementation and producing intellectual property for further commercialisation of technologies to convert lignocellulosic biomass into higher value-added uses such as bioethanol and biobased chemicals. Incentives to support the development of a pellet industry, bioethanol, biobased chemicals and/or intermediate products have also been established. These include: • Pelletisation Capacity Incentive – The production and export of biomass pellets to markets with steeply growing demand can generate RM 9–10 billion GNI in impact and provide about 12,000 new jobs in Malaysia. The pelletisation capacity incentive (the Pellet Business Opportunity incentive under the palm oil NKEA) has already been put in place and provides 10-15 percent in capex incentives to the first 5 successful applicants for new pellet plants in Malaysia. Pelletisation technology is already economically viable, allowing mill owners to generate immediate value from their biomass and encouraging, in turn, the immediate mobilisation of biomass. To illustrate, a medium sized pellet plant of 100,000 tonnes capacity p.a. requires an investment of RM 30–40 million and has a payback period of 5-7 years. • EPP 6 Developing Oleo Derivatives – The scope of EPP 6 has been expanded to include biobased chemicals derived from lignocellulosic biomass. This expansion in scope has helped reduce the risk for private sector investment in this area and provided support for the set-up of commercial scale plants. EPP 6 provides capex incentives of up to 40 percent to local investors for the establishment of a biobased chemical facility. • Tax incentives – The Government has established a series of tax incentives to cultivate the establishment of downstream industries. These incentives can be applied in addition to the previously mentioned EPPs and capex incentives but are mutually exclusive to one another. —— BioNexus Status: The BioNexus Status is awarded through the BiotechCorp to companies that participate in “value-added biotechnology and/ or life science activities”. These companies, on achieving this status, receive tax breaks and can apply for funding. It is usually awarded to companies seen as complying with the criteria of “bringing benefits to the overall biotechnology and life sciences industry in Malaysia”. Going forward, still greater funding is expected to be granted to higher value-added production. —— Pioneer Status: This is an incentive that is awarded by MIDA to manufacturing businesses. Such companies receive 30 percent exemption from taxable statutory income for five years and 100 percent exemption if investments are made in promoted areas, i.e., the States of Sabah, Sarawak, Perlis and the designated “Eastern Corridor” of Peninsular Malaysia. In the near future, 100 percent exemption will also start being provided to “high value added” production in non-promoted areas. 25 —— Investment Tax Allowance: This is awarded by MIDA to companies with high capex and R&D investments. Under this, companies are allowed to offset 60 percent of the qualifying capital expenditure they incur within five years against 70 percent of their statutory income. The allowance increases to 100 percent if the investment is made in a promoted area. Going forward, 100 percent exemption will also be provided to “high value added” production in non-promoted areas.1 1 For more information on MIDA incentives, visit http://www.mida.gov.my/env3/index.php?page=manufacturing-related-services 2 For more information on BioNexus status, visit http://www.biotechcorp.com.my 26 Forestry based biomass The National Biomass Strategy 2020 was always intended to cover a wider range of biomass opportunities for the Nation, from various sources. After Oil Palm Biomass, Forestry related biomass is the next sizable opportunity for the country. While there are forestry activities across the Nation in the Peninsular as well as in Sabah and Sarawak, the only large-scale opportunity for a fully integrated biomass hub is the state of Sarawak. This is mainly a function of existing forestry activities, proximity, land availability and infrastructure. Sarawak is a natural hub for forestry activities and holds most of the Nation’s forestry resources. A high- level assessment was conducted to size the opportunity of using biomass materials from forest plantations, residues from sawmills and veneer mills in Sarawak. This chapter reviews the potentially available quantities and cost of forest-derived and dedicated biomass feedstock, possible end-uses, as well as economics and benefits until 2020. We will also present a view on how this opportunity compares to and can link to other downstream activities in the State. The National Biomass Strategy 2020 seeks to establish possible portfolio scenarios to create new industries such as solid bio-fuels (pellets), liquid biofuels (bio-ethanol) and bio-based chemicals, integrated with existing activities such as pulp and paper, engineered wood and other products. A combination of these activities would optimize the potential impact on incremental GNI and high-value jobs creation for the State. In analysing the feedstock availability, fibre source and cost of mobilisation, we took into consideration the following sources: • Sawmill and veneer mill residues and woodchip. • Wood from existing plantations established for proposed pulpmills, and chiplogs from plantations established for veneer and sawlogs. • Harvest residues produced as a by-product of log production from existing plantations. • New plantations on pulpwood regimes established primarily for producing biomass. • New woody and non-woody short rotation plantations such as grasses, canes and bamboo. 27 Another consideration is the different paying capabilities for various downstream uses such as engineered wood, pulp and paper, furniture, pelleting, biofuels, energy, and bio-based chemicals for these fibres. The respective wood-paying capabilities (WPC) depicted are calculated based on the price difference end-users can afford to pay for the fibre with break-even as the threshold. Resources and mobilisation Sarawak has sources of fibre from log-processing residues, existing plantations and potentially new plantations. We examined the suitability of each resource as potential feedstock for pellets, biofuels and bio-based chemicals, and made the following findings: • Residues from sawmills and veneer mills are available in large volumes but the WPC of the existing users (for particleboard, MDF and export woodchip) is greater than that of pellets and bio-based chemicals, thus cost of feedstock could be prohibitive to certain industries. • Transportation costs have to be minimised in order for biomass pellets, biofuel and biochemical processing to be economically viable. This could be possible if these downstream manufacturing facilities are close to the biomass or plantations rather than in central locations in the State. • Bintulu seems a logical site for biomass processing. There is potentially 1 million BDMt/annum available, at an average cost of USD103/BDMt. (from existing planted Acacia Mangium plantations) • Other areas may seem logical collection points for plantation biomass, but typically would require the establishment of new plantations. The WPC of pellets, biofuels and bio-based chemicals is too low to attract investment in new plantations. • Harvest residues from plantation forests are an affordable feedstock for manufacturing pellets, but are unsuitable as feedstock for biofuels and bio- based chemicals that require wood without bark. Potentially, about 520,000 BDMt/annum of harvest residues could be mobilised around Bintulu area. • Bamboo and perennial grasses can grow on flat land to produce fibre with a delivered cost below the WPC of a pellet plant (Table-1), assuming minimal land- holding costs. However, it would be unlikely that it would produce sufficient returns for it to compete for land with high value crops such as oil palm. The feedstock volumes potentially available are shown in Exhibit 8. The most promising feedstock is forest residues and dedicated short-rotation crops. 28 EXHIBIT 7 Delivered costs of all considered grass species is significantly below timber Delivered cost of grass species and Acacia Growing USD per BDMt Harvesting Transportation 120 27 • Grass species are 56 100 90 percent cheaper than Acacia resulting in a very 80 cost completive 30 alternative for bioenergy -56% 60 and biofuels 42 • Especially harvesting 39 39 costs make the difference 40 47 13 18 11 as they are about 4 times 20 13 14 higher than for Acacia 12 compared to grass 13 12 14 13 species 0 • Grasses could be grown Arundo Napier Bamboo Acacia on steep terrain but would Grass require manual harvesting Assumes minimal land costs and have a cost of about USD53/BDMt SOURCE: Poyry Analysis EXHIBIT 8 Only harvest residues and grasses are viable for pellets (at USD180/T CIF) Average cost for a supply volume and WPC Maximum Potential Item Supply Volume Average Delivered Pellet WPC Volume (BDMt/a) (BDMt/a) Cost (USD/DMt) for (USD/BDMt) Mill residues 300 000 300 000 143 72 Export Woodchips 200 000 200 000 70 64 Existing plantations – 1 700 000 1 000 000 103 64 no pulpmill Existing plantations – 670 000 670 000 114 64-72 pulp mill proceeds New plantations 9 100 000 450 000 122 64 Harvest residues 520 000 400 000 54 64 Arundo donax – - 400 000 39 55 16 700 gross ha Bamboo – - 200 000 43 50 17 000 gross ha area SOURCE: Poyry Analysis Downstream uses The National Biomass Strategy 2020 reviews and provides information about biomass utilisation options that are commercial-scale ready or likely to reach commercial-scale over the next 5 years. In general, all reviewed end-uses i.e. pellets, biofuels and biochemical products, may have a low WPC relative to existing industries in Sarawak like wood panel, pulp and paper, logs and sawn timber. However, the biomass options have greater long-term sustainable economic and social benefits for the State as well as the opportunity to leverage these resources to get ownership stakes in downstream value activities. 29 • Pellet manufacturing has proven technology and while the market for pellets in Asia is currently small, it is expected to grow due to various Feed in Tariffs (FiTs) and renewable energy certificates (RECs) driven mainly by South Korea and Japan. Pellets currently have a lower CIF price than woodchip. Therefore, in order to cover the pelletizing costs, the cost for feedstock needs to be less than for woodchips. • Cellulosic ethanol can be produced from agricultural residues, other lignocellulosic raw materials e.g. woodchip or purpose-grown grasses. The cellulosic ethanol is chemically identical to first-generation bioethanol. It is a substitute for petrol, and can be a platform to eventual production of high value bio-based chemicals. The high capital investment cost is the main barrier to the economic viability of cellulosic ethanol. As ethanol is a substitute for petrol, a large increase to petroleum prices and/or incentives favouring ethanol will be required for cellulosic ethanol to have a WPC sufficient to cover the cost of wood in Sarawak. A pulpmill that has integration with a bio-ethanol plant could improve the profitability of both due to shared infrastructure costs. • In general, any process producing chemicals from woody biomass needs to be integrated to other wood processing, e.g. pulp, paper or sawmills. Recoverable chemicals represent a small portion of the woody biomass. The revenues from the chemicals cannot support the logistics, handling and processing of the entire wood flow. Although a dedicated chemicals production facility would not justify the large investments it requires, it can be a good and more stable source of additional income to supplement other existing downstream operations in the State that may have surplus wood fibre. Scenarios and macro economic impact The effect of wood processing on gross national income (GNI) and the creation of jobs under four scenarios for Sarawak could be high, depending on the scenario ultimately adopted by industry. These scenarios are being evaluated based on the assumption that the processing is economically viable. • Scenario 1: Business as usual assumes only production from plantations for export of woodchip and logs. • Scenario 2: Pulpmill will proceed but no pellets, biofuels or biochemical industries. • Scenario 3: Pulpmill integrated with pellet, biofuel and biochemical manufacture. Assumes the planned pulpmill goes ahead with a pellet plant, ethanol plant and N-butanol production. In addition, a pellet plant is built based on dedicated biomass. • Scenario 4: Value-adding from engineered wood production such as Laminated Veneer Lumber (LVL) production. In this scenario, plantation logs with good form and large sizes are channelled to LVL production and low-quality logs are exported as woodchip. 30 Exhibit 9 shows the incremental intake capacity of the processors under each scenario. All processors require wood, except for the pellet producers in scenario 3 which require 520,000 BDMt/a of harvest residues and 400,000 BDMt/a of grass. EXHIBIT 9 Assumed incremental intake of Processors for each Scenario in 2020 Export Pulp Mill LVL Pellets Etahnol Bio-chemicals Woodchip ‘000 BDMt Scenario 1 1800 Scenario 2 1750 Scenario 3 1750 920 330 200 Scenario 4 170 1100 As shown in Figure S-1 and Figure S-3, the analysis shows the large benefits to GNI and higher value jobs if more downstream facilities are setup in Sarawak compared to just exporting woodchips and other lower value add operations. EXHIBIT 10 Significant increase in GNI when moving into a more sophisticated bio based economy GNI impact over time 2015 million MYR 2020 2,367 • Size of impact on GNI differs 1,593 1,620 significantly between scenarios 1,296 • Time to impact differs between scenarios as a result of 620 dependency of different 186 technologies 131 0 reaching its commercial state Scenario 1 Scenario 2 Scenario 3 Scenario 4 31 EXHIBIT 11 Job creation follows different scenarios as high level sophistication is not labor intensive Job creation over time 2015 FTE 2020 5,791 • Most jobs would 5,286 be created through the construction of 4,497 4,632 a pulp mill at Acacell site • Moving into biofules and biochemicals will not result in a large number of 1,237 additional jobs as they are much less 371 197 labor intensive 0 than the pulp and Scenario 1 Scenario 2 Scenario 3 Scenario 4 paper industry EXHIBIT 12 Moving to high value adding end uses could increase economic benefits Feedstock/ fibre biomass Wood chips Wood Pulp and Biobased Panels Biofuels Export pellets Paper chemicals GNI (MYR/m3 of fibre) 1 600 529 497 1379 2106 1585 Jobs (per ‘000 t of fibre) 2.45 0.35 0.51 0.91 4.1 5.5 SOURCE: Poyry Study and Analysis The LVL manufacturing scenario has comparable effect on GNI and jobs as a standalone pulpmill (but less high-level jobs). The pulpmill plus bioprocessing has the highest increase in GNI and jobs created, with an incremental increase in GNI of RM2.4 billion and 3,100 jobs created over the pulpmill-only scenario. 32 Conclusion The National Biomass Strategy 2020 could translate into an incremental RM 30 billion in GNI and an additional 66,000 new jobs by 2020. The outlook is positive. The NBS has looked into the availability and cost of acquiring oil palm biomass in Malaysia and found that 25 million tonnes of biomass could potentially be mobilised across Malaysia at competitive cost today. An additional 5 million tonnes could move to higher value uses by 2020. International players are both aware and interested in Malaysia. Appropriate technology to facilitate the opportunity is being developed: Biofuels from lignocellulosic biomass are expected to reach commercial scale around 2015, biobased chemicals between 2015 and 2020. Malaysian biomass owners have the opportunity to use their biomass to participate in additional downstream value creation, instead of simply supplying it to the open market. The Government has provided a lot of incentives to make it still easier to benefit from developments. It has established a biomass Task Force (1MBAS Task Force) that will act as the single point of contact for biomass-related activities and facilitate the dissemination of information and capability building. It has also put a series of enablers in place to catalyse industry. These include: Capex support for pelletisation plants; establishment of the OPBC industry consortium; expansion of oleo-chem EPP 6 into bio-based chemicals. Initiatives to create viability of investment in high value industries such as biomass pellet, bio-ethanol and bio-based chemical: Perennial grasses represent one of the lowest cost and effective source of feedstock sources. However, insufficient information is available about local growth rates and yields. Thus, the establishment of growth trials for and a project to identify areas of suitable land will reduce uncertainty, due diligence costs and time for potential investors. Chemical analysis on the components of harvest residues should be carried out to determine if the resource is suitable for the manufacture of pellets. • Given the lack of competition for the residues and the potentially low prices, Sarawak could consider making wood pellets out of Acacia Mangium harvest residues. Each component of the harvest residues, (bark, branches and leaves), should be tested for the concentration of silica, calcium oxide, phosphorus, chlorine, sodium, potassium, sulphur content as well as ash content and calorific value. The test results will indicate if the harvest residues are a suitable feedstock for pellets. • Proponents of the pulpmills should consider designs, which would allow for low- value heat and hemicellulose to be used by adjacent facilities for the production 33 of N-butanol and heat for the production of cellulosic ethanol, and pellets. The adjacent facilities have the potential to lower the pulpmill’s infrastructure costs and provide a source of income to the pulpmill from the sale of heat, hemicellulose and harvest residues. The onus is now on industry. Malaysia has a distinct advantage in terms of proximity to the markets in Asia. To capitalise on this advantage, however, industry must deliver in an efficient, proactive and timely manner. The Government will continue to review the National Biomass Strategy 2020, update it and include new elements as new development occurs. It will also seek to provide further incentives for facilitation. The Government of Malaysia is fully committed to making new wealth creation from biomass a reality for the nation. 34 Appendix A List of acronyms CPO crude palm oil EFB empty fruit bunch EPP Entry Point Project ETP Economic Transformation Programme FFB fresh fruit bunch GNI gross national income MDF medium-density fibre (for boards) MF mesocarp fibre NKEA National Key Economic Area OPBC Oil Palm Biomass Centre OPT oil palm trunk PV photovoltaic PKO palm kernel oil PKS palm kernel shells POME palm oil mill effluent