Crude Palm Oil: Should It Be Sold As Is or Processed Further To Green Diesel?

Background

Currently, Indonesia is the world’s largest producer of palm oil. It has 7,3 million hectare area of palm plantation and produce CPO (Crude Palm Oil) with capacity of 19,4 million tones per year. But 70% of those production is exported to other countries. Ansari Bukhahari from Indonesia Industrial Department says that Indonesian Government targeted CPO export maximum is only 50% of national production. To reach the target, Industrial Department will revitalize petrochemical and oleochemical industry to absorb those production (Kementrian Perindustrian Indonesia, 2009). One alternative product that can absorb a lot of national CPO production is green diesel.

Green diesel (naphtha with 17 to 18 carbon chain) is a form of biofuel that can be used as diesel fuel like pertamina solar or pertadex. It is made from hydrotreatead palm oil through hydrodeoksigenation and decarboxylation reaction. It also considered better than it precedent, biodiesel, because it has several competitive advantages, such as production process does not use toxic compound, higher cetane number, more stable, higher heating value, and lower greenhouse gas emission (Kalnes, 2008). Production of green diesel has a good impact to environment, and suit to government regulation, such as Perpres 5/2006 about energy mix Indonesia (in 2025, 5% or about 2,4 million kilolitre of total Indonesia energy needs is supplied by biofuel energy). But, does green diesel really profitable from business point of view? Now using managerial accounting theory of relevant cost, we’ll analyze whether Indonesia crude palm oil should be sold as is or processed further into green diesel.

Analysis

Production process of green diesel requires CPO and hydrogen as raw material. The decarboxylation process release propane as byproduct and besides green diesel itself, propane still has economic value. If we model the production process using HYSYS, then 1 tones of CPO produce 861,9 kgs of green diesel also 49,8 kgs of propane. NESTE Oil, one of the biggest green diesel producer, expected cost of converting CPO into green diesel is $220,0 per ton (Loveday, 2011). International price of CPO on March 14^th 2013 is $764,0 per ton (Palm Oil HQ, 2013). Green diesel can be sold at a price of pertadex, 10.500 rupiahs per liter, because it has the similar quality to pertadex. If propane produced assumed to be sold as fuel, then its price is $ 2,80 per gallon (Executive Office of Energy and Environmental Affairs, 2013). Exchange rate on March 15^th 2013 is 1 $ = 9550 rupiah (XE Currency Converter, 2013). Then the calculation is as follow:

Sales from further processing:
	Sales price of green diesel (861,9 kg x 1/0,780 l/kg X 10500 Rp/l)	Rp  11.603.724,33
	Sales price of propane (49,8 kg x 1/0,201 l/kg x 1/3,785 gallon/l x 3,13 $/gallon x 9702 Rp/$)	Rp    1.986.754,92
Total revenue from further processing				Rp  13.590.478,25
Less sales revenue from CPO (1000 kg x 764000 $/kg x 9702 Rp/$)				Rp    7.412.328,00
Incremental revenue from further processing				Rp    6.178.150,25
Less cost of further processing (1000 kg x 220000 $/kg x 9702 Rp/$)				Rp    2.134.440,00
Profit per ton CPO from further processing				Rp    4.043.710,25

 

Conclusion

Green diesel is a promising technology that can provide cleaner renewable energy and can absorb national production of CPO. It can be profitable if it can be sold at the price of pertamina pertadex. In conclusion, based on managerial accounting, CPO should be processed further into green diesel.

References

 

Executive Office of Energy and Environmental Affairs, 2013, http://www.mass.gov/eea/energy-utilities-clean-tech/home-auto-fuel-price-info/propane-price-surveys.html

Garrison, R. H.; Noreen, E. W.; Brewer. P. C., “Managerial Accounting”, 13^th Ed., McGraw Hill, Singapore, 2010

Kalnes, Tom. Marker, Terry. Shonnard, Dr. David. Koers, Kenneth. “Green Diesel and Biodiesel, A Technoeconomic and Life Cycle Comparions.” 1st Alternative Fuels Technology Conference 18 Feb. 2008.

Kementrian Perindustrian Indonesia, 2009, http://www.kemenperin.go.id/artikel/1226/Ekspor-CPO-Ditarget-50-Persen-Produksi-Nasional

Loveday, E., Green Autoblog, 2011, http://green.autoblog.com/2011/09/28/worlds-largest-renewable-diesel-refiner-says-cost-of-fuel-is-wa/

Palm Oil HQ, 2013, http://www.palmoilhq.com/palm-oil-prices/

XE Currency Converter, 2013, http://www.xe.com/currencyconverter/convert/?Amount=1&From=USD&To=IDR