UK govt review casts shadow over biofuels industry

LONDON (Reuters) - A British government minister on Tuesday sought to reassure the biofuels sector as uncertainty about a review initiated by Prime Minister Gordon Brown cast a further shadow on the already struggling industry.

Brown said last week that Britain will push for changes in biofuels targets if a government review shows rising biofuels production drives up food prices and harms the environment. His comments came just days after the first target was implemented.

"I think you say with some confidence the current situation will remain and unless the evidence that comes out in due course dramatically alters the position then that is exactly where we are going to stay," transport minister Jim Fitzpatrick said.

Britain's Renewable Transport Fuels Obligation (RTFO) came into force on April 15. It requires suppliers of motor fuels to ensure a proportion -- initially 2.5 percent and increasing to 5.0 percent by 2010 - comes from renewable sources.

Fitzpatrick was asked at a conference organized by Biofuels Media if he would be prepared to bet on the 5.0 percent target for 2010 being maintained.

""At this point of time I think the answer is yes, probably," he told the conference.

The government review is expected to be issued in late June.

Doug Ward, a director of one Britain's leading biofuels suppliers Argent Energy, said the uncertainty was damaging.

"People find it impossible to raise money. Nobody is going to build a plant not knowing what is going to happen in two years time," Ward said.

The government review is in response to growing concerns about environmental and social impacts from biofuels production, much of it centered around the destruction of rainforests in countries like Indonesia for the production of palm oil, a crop that can be used to make biodiesel.

FOOD INFLATION

There is also concern that biofuels production may be a factor in rising food prices which has led to severe hardship and even riots in some developing countries.

"There is no way we want biofuels that lead to deforestation, displaced communities or exacerbate food shortages and this report will make sure we do not," Fitzpatrick said, adding Britain would be pushing the European Union to implement robust sustainability standards for biofuels.

European Union biofuels producers have suffered in series of setbacks in the last few months including reduced government support in top producer Germany and competition from subsidized imports from the United States.

Last week, European biodiesel producers asked the European Union to impose punitive duties on U.S. biodiesel, kicking off a transatlantic trade dispute.

"What it has meant is that the production capacity that was built in Europe, a lot of it is now standing idle," Ward said.

Biofuels Corp., which built Britain's largest biofuels plant in north-east England, was de-listed last year and the majority of its equity transferred to banker Barclays after the firm wracked up large debts.

Other producers have also struggled and D1 Oils announced earlier this month it was closing its UK refineries to concentrate on a venture with BP to develop a non-edible crop, jatropha, as a biofuels feedstock.

(Reporting by Nigel Hunt; Editing by David Evans)