BIOFUELS BOOST TO BULGARIA

Bulgaria's biofuels industry has only been operating for a couple of years. But already around 25 installations are in place and many firms are lining up to exploit the competitive assets of relatively low-cost farming and labour as well as expected subsidies and incentives. The biofuels industry (fuel deriving from biological material) is now sufficiently big for traders to note an upward pull on the price of that great Bulgarian staple - sunflower oil.

Local firms are also meeting the challenge. The Slunchevi Luchi, or Sunny Rays, refinery - part of the giant Chimimport conglomerate - is close to completing a biodiesel factory at Provadiya worth almost $21 million. The refinery hopes to produce the first trial batch of biofuel in August. It is also planning a plant for bioethanol in Varna, worth a little over $67 million. Then there is Evro Etil, or EuroEthyl, which invested $10.7 million in a bioethanol plant in Alfatar that came into production late last year. Now it intends to spend another $20.2 million expanding it. Finally, Kristera floated a $6 million corporate bond in May with a view to building a biodiesel plant.

Foreign companies are also attracted to Bulgaria's biofuels industry. Spain's bio-energy firm Green Fuels Corporation has announced that it is planning to invest up to $94 million in a biofuels plant near the northern town of Pleven, with an annual capacity of 45,000 tonnes of biodiesel and 60,000 tonnes of bioethanol. The municipality of Pleven is also reportedly negotiating with as yet unnamed Swedish entrepreneurs who are contemplating another $94 million plant - this one only for bioethanol.

When Rumen Ovcharov, former economy and energy minister, visited the United States in March he spoke to market leader Galveston Bay, who reportedly also expressed considerable interest. And everywhere there are signs that productivity in biofuels is soaring. Late last year capacity in place for biodiesel alone was around 140,000 tonnes.

Industry experts estimate this could soon reach 400,000 tonnes. This is convenient because Bulgaria now subscribes to the EU target of raising biofuels' share in total transport fuels to 5.75 percent by 2010 and 10 percent by 2020.

But Bulgaria has to overcome various challenges before this happens. First, there is concern over quality. Besides the refineries, there are estimated to be about 100 garage producers of biofuel. Obviously, little of their output is up to standard. Nor, for that matter, is everything produced by the refineries themselves. Recently, Austria's OMV, a big player on the local petrol retailing market, was quoted in the local press as saying it would like to add biodiesel to its range but could not find a local Euro-compliant producer. That will change as refineries under development come into production, OMV officials added. There is also the question of hefty Bulgarian excise duties on fuel.

Biodiesel has been exempt since the beginning of 2006, but nothing else has. And that is just for pure biodiesel. There has been no tax advantage to putting an admixture of biodiesel - or any other biofuel - into conventional fuels. This situation will soon be remedied by a special law on renewables and biofuels currently being passed by parliament. This will favour admixtures and also provide exemptions for biomethanol, bioethanol, and biomethyl ether, which can all be used as a fuel additive.

Subsidies are also needed to encourage production while the cost of conventional energy sources - petrol and diesel - is lower. Brussels is offering a subsidy of a little over $60 per hectare planted for the raw material used in making biofuel. Bulgarian authorities recently issued the ordinance needed to put the scheme into practice. Unfortunately, to qualify for the subsidy, farmers need to have a signed contract with a refiner, who in turn needs to make a cash deposit of close to $80 per hectare to guarantee that the crops grown will be processed into biofuels. This ordinance was published just a week before the deadline it laid down for submitting that guarantee, so rendering the paperwork impossible. The EU reconsidered this requirement and introduced a new rule in March that no deposit is required if the refinery in question is a registered producer of biofuels. However, Bulgaria has yet to install a registration procedure.

All signs are that Bulgaria will become a successful producer of biofuels once it has sorted out these minor legislative, bureaucratic and financial issues.

*Andrew MacDowall, Oxford Business Group analyst