Royal Dutch Shell plc has plans to strike a deal with Brazil’s Cosan for a $21 billion a year ethanol joint venture. Shell will become the first major oil company to access ethanol on this scale. The deal will be Cosans largest entry into fuel distribution as well. Cosan purchased Exxon Mobil’s Esso chain of service stations for $1 billion in 2008. Shell and Cosan’s 50/50 joint venture features 4,500 filling stations nationwide.
The companies plan to more than double ethanol output to up to 5 billion liters a year from about 2 billion now, according to Shell’s downstream director, Mark Williams.
“Brazil’s aim is to become an ethanol exporter,” according to Cosan Chairman Rubens Ometto. “Shell has distribution facilities throughout the world that we could use in a much more integrated way.”
While sugar is at 29-year highs, and Brazilian ethanol is derived from sugar cane, it may become difficult to keep production economical, although most analysts predict sugar prices to decrease by 2011, according to Reuters.
Shell has taken its position on ethanol becoming the first major oil company to joint venture with an ethanol producer. Other companies have looked into Brazil as well. Bunge Ltd bought sugar and ethanol producer Moema for $452 million in December, according to Reuters.
The Shell/Cosan joint venture is a major move connecting the largest sugar cane producer with a company that has great distribution and technology in Shell. The joint venture could promote cellulosic ethanol production down the road that would ease demand for food-based material used in ethanol production, like corn and sugar.
Other oil companies may choose to follow suit by gaining exposure in ethanol production, but Shell and Cosan have a strong first step. Grain demands will continue to grow with an increasing global population and changing diets, so further technology on cellulosic ethanol production could solve long-term food supply issues in the future.
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