The 40-million-ringgit ($11-million) plant, to be built using technology developed by the board and Malaysia's national oil firm Petronas [PETR.UL], will process 60,000 tonnes of refined palm olein into biofuel each year.

"There are 10 companies, including non-plantation firms, bidding to operate the first plant," Yusof said after attending an investors' conference in the Malaysian capital.

"I think we can expect at least five more plants to be up and running in the next two years."

Malaysia's annual diesel imports are estimated at 10 million tonnes. By adding 5 percent olein at its pumps, it could save about 500,000 tonnes of diesel imports a year, Yusof said.

The combustion grade of the Malaysian palm diesel will be on par with winter-grade methyl ester produced from rapeseed, the top source of biofuel in Europe.

"But what makes the potential even greater is that palm oil at least $200 a tonne cheaper than rapeseed oil," Yusof said.

BIOFUELS GET NEW IMPORTANCE

Biofuels are taking on new importance worldwide as countries seek to cut emissions to meet the UN Kyoto Protocol, since burning the environmentally friendly fuel is considered to be carbon dioxide neutral and does not require emissions rights.

Some Malaysian firms, such as IOI Corp and Kuok Oil & Grains have already started building refineries in Europe to process the additional palm oil expected to land in that market for biofuel manufacturing purposes.

Rapeseed oil now makes up between 80 and 85 percent of the biodiesel produced in the EU, with soybean oil and a marginal quantity of palm oil accounting for the rest.

Yusof said rapeseed used to trade at a discount of $50 to palm oil about eight years ago but its price had risen steadily as its use in biofuel grew.

Likewise, palm oil prices could rise about 20 percent over the next year to touch 1,600 ringgit a tonne as Malaysia's biofuel plan gets underway, he said.

"At that price, it'll still be viable for us to make biodiesel," Yusof added. "Even if crude oil comes down to $40 a barrel, our palm diesel will still be competitive in countries where there are no fuel subsidies."

Malaysia, a net exporter of oil and gas, is one of the biggest subsidisers of fuel to ensure its people pay among the lowest pump prices for petrol and diesel in Asia.

But with crude oil reaching a record $70 a barrel, the government has been forced to cut back on the subsidies, which are burning a hole in its budget.

Palm diesel was one answer to the problem, Yusof said.