Ethanol has attracted international attention as a clean fuel that can be distilled from crops including grains and sugar cane.

However, while Royal Dutch Shell , Caltex Australia Ltd and BP are against the government mandating ethanol use, they say they are willing to reach a voluntary agreement to use up to 10 percent ethanol in petrol.

Environmental limits, technical refinery constraints and a lack of local supply are being blamed by petrol refiners as obstacles to the large scale production of ethanol blended fuel.

"We have no bias for or against ethanol. We just treat it on its commercial and technical merits as a fuel," Caltex Government Affairs Manager Frank Topham said.

Concerns have also been expressed about the effectiveness of ethanol as a fuel as it only has around 70 percent of the energy content of petrol, according to Topham.

ETHANOL NEEDS GOVERNMENT BACKING

But a canegrowers symposium last week said an ethanol industry would not get off the ground without a government mandate requiring oil firms to use a blend of the renewable fuel.

"Under the present situation we can produce ethanol at the same price as wholesale gasoline," said Michael Wilson, project development manager of Australian Biofuels Pty Ltd, which has a 50 percent stake in the Mossman ethanol plant in Queesland.

"But to give us market access we require a mandate...so that the fuel companies will enter into long term contracts."

Sugar and building materials group CSR Ltd said it planned to sink A$60-80 million into a second ethanol plant in Queensland state but was waiting for better market conditions.

"We're considering building another plant but the big issue is market access, getting the oil companies to come on board," CSR distilleries general manager Rob McGregor told Reuters.

Also, Petro Fuel and Lubricants Pty Ltd announced in June a $70 million plan to build Australia's largest ethanol plant, producing up to 80 million litres a year after being commissioned in Dalby, Queensland, at the end of 2003.

However, the oil companies want the reid vapour pressure (RVP) levels - which measure the fuel volatility and control the amount of photochemical smog - raised if ethanol is to be used in petrol without millions of dollars being spent on refineries.

Shell Australia senior economist Peter Harris said the current RVP limit is 64 kilopascals (kPa) and that adding between one and 10 percent ethanol would add another seven kPa.

He said to remain under 64 kPa and blend ethanol with petrol would involve more than A$50 million being spent on Shell's Clyde refinery in Sydney.

"It's not about Shell being recalcitrant and not wanting to use ethanol, it's about technical refinery constraints. We would be in breach of Environment Protection Authority (EPA) guidelines if we blend ethanol," Harris said, adding that if Shell was able to get an EPA waiver it would start utilising ethanol in petrol.