Arod

Quantitative Methods - II Assignment 2

3/12/2010
The Philippines’ Rising Bioethanol Industry

Submitted By:

Group - 7

Table of Contents Executive Summary 3 Question 1 4 Solution 4 Question 2 4 Solution 4 Question 3 5 Solution 5 Question 4 6 Solution 6 Question 5 6 Solution 7 Question 6 8 Solution 8 Question 7 8 Solution 8 Exhibits: 9 Exhibit 1 9 Exhibit 2 10 Exhibit 3 11 Exhibit 4 12 Exhibit 5 12 Exhibit 6 12 Exhibit 7 13 Exhibit 8 14 Exhibit 9 15 Exhibit 10 15 Exhibit 11 15 Exhibit 12 16 Exhibit 13 17 Exhibit 14 18 Exhibit 15 18 Exhibit 16 19

Executive Summary
The government of Philippine has mandated blending of gasoline with bioethanol. The objectives are to reduce dependence on imported fuel, reduce environmental footprint and generate local employment. The objective of the case study is to analyze various costs based on the availability of different raw materials and the logistics situation unique to its geography. The costs are being estimated with respect to year 2007.
Geographically, the country is composed of fragmented clusters of small islands. For administrative purposes, the area is divided into 12 different regions as shown in the exhibit 1. Some of the regions are grouped together to form major producing regions. These are – Northern Luzon, Southern Luzon, Visayas and Mindanao. Northern Luzon consists of regions I, II, III; Southern Luzon – Regions IV-A, IV-B, V; Visayas – Regions VI, VII, VIII; Mindanao – Regions IX, X, XI, XII. The raw material is transported form farm to distillery via trucks. This cost is generally born by the farmers and hence not to be considered separately. From distillery it can be further transported to oil depots in the same region for blending via lorry. If it is to be transported to distilleries in other regions, it has to be shipped via water using tankers. The cost of road transportation is US$ 0.00413 per litre per 20 kilometres. The cost of sea transport for various routes is provided in Exhibit 6.
Bioethanol can be produced with the help of five different raw materials – Sugarcane, Cassava, Corn and Sweet Sorghum and Molasses. The area under harvest as well as the cost of harvesting is different for each raw material (except molasses which is derived from sugar). The yield of ethanol per hectare of produce and hence the cost of production per hectare is different for different for each raw material. The case provides data upon the area under harvest for each raw material upto the year 2005. The same can be forecasted to estimate the area under harvest in 2007. Also, the price of the feedstock was also very speculative depending on yearly harvest etc. The use of sugarcane is being promoted for two reasons – it has a huge local sugar industry which can provide the sugarcane as well as the molasses and hence lobbied actively for the law. Secondly, from the experience of Brazil, the cost of production for sugarcane has been found to be the lowest. Cassava also provides low cost of production; however the price is highly speculative. The cost of production from molasses and corn were relatively higher and hence it was more beneficial to use them in the beverage industry.
Philippine has adequate labour availability required for the ethanol industry. Around 40,000 individuals graduate from college each yearly with many of them from related fields like agriculture, microbiology, chemistry etc. Hence, the labour supply need not be considered as a constraint.
Based on the above data, the Department for Agriculture has to formulate strategies to maximize the incentives for the proliferation of the ethanol industry. This would involve estimating optimum mix of the raw materials required as well as the optimum supply strategy within and among different regions to minimise the cost. This would help the department to come out with adequate budget proposals for the incentive package for the industry as well as to build the required infrastructure to support.

Question 1
How much it will cost to produce Bioethanol in San Carlos Bioenergy Inc’s facility in Region VI, then ship it to Subic and eventually transport it by lorry to Pandacan, Manila?
Solution
Assumption * Nearest port to San Carlos Bioenergy Inc’s is Cebu and it lies in Region VI of Western Visayas. * Transportation cost through pipe is assumed to be same as lorry transportation cost. * Distance between San Carlos city and Cebu port deduced from website as 132km. Question 1 | Total Production per year (in litres) | 20000000 | Production Cost ( in USD) | 9180000 | Distance between San Carlos city and port Cebu (in km) | 132 | Transportation Cost from Distillery to port Cebu (in USD) | 545160 | Shipping cost from port Cebu to post Subic (in USD) | 553940 | Distance between port Subic to Pandacan, Manila (in km) | 130 | Transportation Cost from port Subic to Pandacan, Manila (in USD) | 536900 | Total Cost (in USD) | 10816000 | Total Cost per litre(in USD) | 0.5408 |

Question 2
How much on average it will cost to produce bioethanol from sugarcane in the Visayas and bring it to Grater Manila area? How much does this estimate differ from your answer to Question 1?
Solution
Assumption * The distillery is located in Central Visayas which is in Region VII and the nearest port is Cagayan de Oro. * Transportation cost through pipe is assumed to be same as lorry transportation cost. * Distance between Bohol city (Central Visayas) and Cebu port deduced from website as 50km. Question 2 | Total Production per year (in litres) | 20000000 | Production Cost ( in USD) | 9180000 | Distance between San Carlos city and port Cebu (in km) | 50 | Transportation Cost from Distillery to port Cebu (in USD) | 206500 | Shipping cost from port Cebu to post Subic (in USD) | 144230 | Distance between port Subic to Pandacan, Manila (in km) | 130 | Transportation Cost from port Subic to Pandacan, Manila (in USD) | 536900 | Total Cost (in USD) | 10067630 | Total Cost per litre(in USD) | 0.5033815 | | | Difference in cost per litre between Q1 and Q2 (in USD) | 0.0374185 |

Question 3
What are the possible constraints in the problem? Solution
Following are the constraints encountered in the problem as per the assumptions done:
Xijk means amount of bio-ethanol produced in region i, sold in j, produced using the crop type k (corn – 1, sugarcane – 2, cassava -3)

X111 + X121 + X131 + X141