Sterling Biofuels signs MOU to develop Malaysian palm oil mill

Australia's Sterling Biofuels International Ltd announces that it has entered into a Memorandum of Understanding to develop a palm oil mill in the Lahad Datu region (Sabah) where its biodiesel plant is located (map, click to enlarge). The same company earlier acquired a stake in a Malaysian company with a licence to develop a new palm plantation which will allow it to obtain feedstock supplies at less than half the current market price.

The development of the mill will be undertaken jointly with a local partner who will provide access to minimum quantities of raw material (oil palm fruit bunches) for the mill. This is required for the purposes of obtaining a mill licence.

Sterling, which will own 70% of the joint venture, will manage the construction and subsequent operations of the mill. During the initial phase, the mill's capacity will be 45 tonnes per hour but this will increase to 90 tonnes per hour after the second phase. When completed, the mill will have the capacity to supply 100% crude palm oil (CPO) which can be refined for use in the biodiesel plant.

The development of the palm oil mill represents an extension of Sterling's participation in upstream activities within the palm oil/biodiesel value chain. This initiative, when fully operational, will contribute towards security of feedstock supply for the biodiesel plant as well as result in total potential savings of up to RM180 (A$62) a tonne compared to our current feedstock costs. - CRS Paragash, Group Managing Director

Due to Sterling's palm oil industry experience and the fact that the technology for a palm oil mill is well established, the company thinks the mill will be ready for operation by 1 January 2010 (within 24-30 months, time taken to construct and ready the new mill for commercial operation):
energy :: sustainability :: biomass :: bioenergy :: biofuels :: palm oil :: biodiesel :: Sabah :: Malaysia ::

The cost of developing the mill is expected to be funded through equity contributions from the joint venture partners as well as non-recourse debt. Sterling's 70% share of the equity contribution is estimated at $2.8 million. This is expected to be funded from Sterling's existing cash balances.

The time frames associated with the development of this palm oil mill have been designed to complement the development time frames associated with recently announced oil palm plantation development. The 24-30 month development timeframe for the mill fits in well with the 5-6 year development program for the oil palm plantation.

Earlier Sterling Biofuels announced the acquisition of a 70% stake in a Malaysian company that has development rights over 10,600 acres of land earmarked for an oil palm plantation in Malaysia. The acquisition was significant as it marked the start of Sterling’s participation in various upstream activities within the palm oil/biodiesel value chain. This upstream strategy will:

• position Sterling to better manage its feedstock requirements and protect itself against future adverse spikes in the price of its palm based feedstock;
• eventually enable Sterling to capture the best margins within the palm oil/biodiesel value chain wherever they may occur; and
• provide Sterling with a greater degree of feedstock price stability when assessing whether to increase its biodiesel production capacity from its existing 100,000 metric tonnes per annum.

Through a newly incorporated wholly owned Malaysian subsidiary, Sterling acquired 70% of the issued capital of UTE Power Sdn Bhd (“UTE”) which is controlled by a company listed on the Malaysian MESDAQ market. UTE has been granted the right to develop 10,600 acres of fertile land owned by a state government body into an oil palm plantation. The development rights are for a period of 60 years with an option to renew for another 30 years.

Under the relevant agreement, UTE will pay to the state government body an agreed annual payment. In return, all proceeds from the plantation will belong to UTE. The first annual payment due on the date of execution of the agreement with the state government body has been paid.

The participation allowed Sterling Biofuels to enter the oil/biodiesel value chain without the high start up costs normally associated with an investment in an oil palm plantation. When the plantation matures, it will have the potential of providing the equivalent of 20% of its current feedstock requirements at under RM1,000 (A$346) a tonne compared to the current crude palm oil price of RM2,534 (A$877) a tonne.

While current Malaysian rules on foreign equity ownership restrict Sterling’s ownership of UTE to 70%, Sterling will apply for Malaysian regulatory approval for the ability, should it choose to do so, to acquire a further 15% of UTE from the initial promoters. This option to purchase additional equity in the plantation development is exercisable over the next 4 years at an agreed price.

Development of the plantation is subject to Malaysian environmental impact assessment and approval which the company is confident of obtaining in due course. Sterling has also applied for membership of the Roundtable on Sustainable Palm Oil and intends to comply with the principles for sustainable production and use of palm oil developed by the Roundtable.

References:
Sterling Biofuels: Sterling Biofuels Extends Upstream Participation - Development of Palm Oil Mill [*.pdf] - September 25, 2007.

Sterling Biofuels: Sterling Biofuels kickstarts upstream strategy - Acquires rights to develop oil palm plantation - 13 Sept 2007

Roundtable on Sustainable Palm Oil.