Just how combustible is ethanol, and the debate surrounding
its use, was demonstrated just over four years ago when the coalition
parties announced, before the 2001 election, a policy of introducing a
target of blending 350 million litres of ethanol and other biofuels
into Australia’s roughly 31 billion litre petrol and diesel market.

The policy was a sop to the National Party, the target was a drop in the bucket
and no-one in government expected it to
spark the political explosion that nearly brought the emerging ethanol
industry to its knees. But big Oil went to war and their target was Australia’s ethanol pioneer
and biggest producer, Dick Honan. Honan made the mistake of blending 20% ethanol with the petrol he
supplied. Most blended fuels internationally are 5% or 10%
(E5 or E10).

Cars using more than 20% generally need modifications and the strength of the ethanol in the blend Honan sold allowed
ethanol’s opponents to mount a campaign alleging ethanol damaged
engines and was dangerous. This was not true, of course, but
Honan had no time to respond before things got very political. Labor
got into the act, accusing Honan of using his alleged friendship with
John Howard to win special treatment for the ethanol industry.

This was a mighty distraction from the issue of ethanol’s cleaner
burning and octane enhancing qualities as well as the fact that it is
renewable. To his credit, Howard saw through the
anti-ethanol urgings and gave the oil companies an ultimatum at a
biofuels summit in September 2005: use ethanol blended petrol, or the
Government will make you.

They chose the voluntary route and the chief executive of Caltex Australia, Dave Reeves, emerged
from the meeting declaring that the key was “to encourage consumers to
buy ethanol-blended fuel and biodiesel,” which “are perfectly good

The ethanol industry is crossing its fingers that the promises the four
oil majors have made to Howard will be kept. Ethanol is expected to have a production cost of $US40–42 a barrel,
compared with the recent price of unrefined oil of about $US67. In
Australia, ethanol qualifies for
an excise rebate, which expires in 2010, by which time the industry is
hoped to be commercially viable.

The commitments made by the major oil companies to ethanol and biodiesel
not only underwrite the construction of more refineries and biodiesel
treatment plants, but open up opportunities for investors to tap into
this growing fuel sector. At this early stage most of the investors,
such as in Matthew Kelly’s Primary Energy group, appear to be
“strategic” but in the near future ethanol
producers are set to list on the ASX.

Once the program to introduce ethanol cranks up and
more and more refineries turn from being good ideas on paper to
bankable commercial projects, Australia’s superannuation funds will be
attracted to the growth of the industry – not just in Australia, but

So the Australian agreement between government and Big Oil (albeit with
a disguised threat in the background) is a first. The oil companies
have further incentive to offer ethanol and biodiesel blends since the
Commonwealth and the NSW and Queensland state governments all require
their vehicles to be run on biofuel.

For Australian investors the story is about to start. Among the listed
companies that the current agreements may affect are Caltex, CSR and
Ridley Corp. But the bulk of the action will occur when the road ahead is cleared of
its last political and regulatory obstacles by the Howard Government.
Then the super funds, which have been watching this sector closely,
will be ready to invest and an inevitable consolidation among the local
ethanol mills will trigger the first stockmarket floats in a new sector
of the resource industry.

Mark Westfield has no association past or present with the ethanol