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The government program to blend bioethanol and biodiesel with subsidized fossil fuels has floundered on lack of preparation and falling biofuel prices and won’t meet its target production level before at least 2011, an official said.

The biofuels industry, complaining that prices are insufficient to cover production costs, suspended sales to PT Pertamina in February.

The state-owned oil and gas company, mandated by the government to blend the biofuels with fossil fuels for sale at its gas stations, used the Platts Singapore benchmark price for its purchases from biofuels companies.

However, industry officials say the actual biofuel price was anywhere from 40 percent to 130 percent higher than the Platts price, causing investors to halt production in February until the government issued a decree to base the benchmark price on actual prices, Evita Legowo, director general of oil and gas at the Energy Ministry, told members of the House Commission VII on energy issues on Wednesday.

The program also miscarried on issues like lack of molasses to produce ethanol and insufficient coordination between the central and district governments in developing the fuel, Legowo said .

“What we could do to support the industry is give tax incentives to companies that were established before 2007, set a biofuel benchmark price, and create a molasses-selling scheme,” she said.

Globally, biofuels production has soared on government subsidies, partly in an effort to cut greenhouse gas emissions from fossil fuels and also in an effort to supplement skyrocketing crude costs, which topped out at $147 per barrel in July 2008 before collapsing back to about $40 earlier this year.

Crude prices have since recovered to above $62, but that is still far below what it costs to make biofuels, making them uneconomical without subsidies.

Through April, the Indonesian government provided the industry with a Rp 99.4 billion ($9.6 million) subsidy for biodiesel, which was to be blended on a 10 percent-90 percent ratio with diesel, and Rp 1.5 billion for bioethanol to be blended 5 percent to 95 percent with gasoline.

A total of 1.02 million kiloliters was then sold to Pertamina, according to the directorate general of oil and gas at the Energy Ministry, which augmented the subsidy by Rp 774.5 billion this year.

“To cover their losses, the ministry is proposing a biofuel subsidy averaging Rp 2,000 a liter for next year,” Eva said. “However, the mandatory biofuel-blend target is not likely to be achieved until after 2010.”

Rukmi Hadihartini, Pertamina’s processing director, said that by March, one producer had supplied only 822 kiloliters of bioethanol, 42 percent below the company’s initial target.

“Most of the producers are waiting for a ministerial decree on biofuel prices and they halted their production,” he said.

The ministry projects that palm oil-based biodiesel consumption should reach 580,025 kiloliters this year, with subsidies amounting to Rp 580 billion. Pertamina is required to use at least 1 percent biofuel in the fossil fuel blends it sells, 2.5 percent for industrial fuel clients and 0.25 percent for fuel used by PT Perusahaan Listrik Negara.