Indonesian Firm Picks Green Fuel Not Mill

JAKARTA—PT Medco Energi, Indonesia's largest private oil-and-gas producer, has scaled back plans for a large pulp and paper mill and other forestry investments in Indonesia's remote Papua province at a time of growing global concern over the impact of deforestation on climate change.

Last year, Jakarta-based Medco, which is looking to diversify its revenues, said it was planning a 500,000 ton-per-year pulp and paper mill in Merauke district, on the southern tip of Papua, a sparsely populated California-sized Indonesian province that is covered in rainforests and home to only 2.5 million people.

The company also said it was looking for investors in the Middle East to participate in a food and biofuels project in Merauke, possibly on as much as 1 million hectares.

Those plans raised concerns among environmental groups. Until now, Papua's remote location has spared its natural forests from the destruction that paper mills and palm oil plantations have wrought on other Indonesian islands.

Medco has dropped plans for its pulp and paper mill and instead is focusing on a smaller-scale $70 million facility to produce wood pellets, a potential "green" fuel, said Aradea Arifin, the finance director of Medco's Papua operations, in an interview. It has also scaled down its food and biofuel ambitions and now plans to grow only a small amount of sugarcane.

The company is also working with Conservation International, the U.S.-based environment group, on a sustainable land-use plan for its mill that will set aside forest conservation areas inside Medco's concession.

"A pulp mill is very difficult in terms of the environment, so we changed," Mr. Arifin said in an interview.

Among other concerns, Mr. Arifin said the company wants to avoid social problems with Papuans, who use the forests for hunting and have in some cases attacked palm oil and forestry companies operating in the province. Medco also hopes its sustainable approach will allow it to get further forestry concessions from Papua's local government, whose governor, Barnabas Suebu, has declined to hand out large parcels of land to companies and says he doesn't want the province to be destroyed by rampant development like other areas in Indonesia.

Jatna Supriatna, the head of Conservation International's local office who began working with Medco last year, said he told the company's senior management that a large pulp and paper mill was going to cause "a problem with all the international NGOs" because of its impact on Merauke's eucalyptus forests. A wood pellet mill uses all parts of a tree, including branches, meaning it needs fewer inputs compared to a pulp and paper mill for the same production, Mr. Supriatna said.

Medco says it's hoping to cash in on increasing demand for wood pellets from companies in Europe and Asia that are under pressure to reduce their carbon emissions. Wood pellets are rising in popularity as a source of fuel to replace carbon dioxide-emitting coal in power stations and for heating.

Medco has teamed up with LG Corp. of South Korea, which has taken a 32% stake in Medco's Papua unit and will market the wood pellets overseas.

To be viable as a "green" fuel, Medco will need to prove that its wood pellet production doesn't lead to widespread forest destruction. Rainforests and peat lands are efficient absorbers of carbon dioxide, and their destruction through fires, forest-clearing or drainage releases the heat-trapping greenhouse gas back into the atmosphere.

The loss of rainforests accounts for about a fifth of greenhouse gas emissions globally. Despite its relatively small economy, Indonesia is the world's third-largest emitter of carbon dioxide behind China and the United States due to forest fires and drainage of carbon dioxide-dense peat lands, according to some estimates.

Climate change negotiators meeting in Copenhagen this week are focusing on ways a successor treaty to the Kyoto Protocol, which ends in 2012, could compensate investors in nations like Indonesia that forego revenues by preserving forests.

Medco's Mr. Arifin said the company has hired consultants to look at how it could protect forests in return for carbon credits, which can be sold to polluters in developed countries or traded on international exchanges.

Conservation International's study of Medco's 170,000-hectare forest concession in Merauke should be completed in the next couple of months, Mr. Supriatna said. The study, which is being prepared with input from a consultant from the University of Texas-Austin, will advise Medco on which areas it can selectively log and which should be protected for environmental or social reasons.

Medco says it is waiting for the study before it begins to cut trees in its concession area but is looking at setting aside at least 70,000 hectares of the total area for conservation. It is planning to build up industrial-wood plantations on the remainder of the land it clears, which take six years to grow.

A Medco mill has begun limited operations, using wood felled to make way for its production facilities, Mr. Arifin said. It plans to produce 100,000 metric tons of wood pellets in 2010 and 300,000 tons within two years.