Shell Gets Serious About Bringing Biofuels to Market. Finally
Big Oil has dabbled in biofuels for years, but the financial commitment was never significant and investments tended to focus on research, not bringing the product to market. That is, until now.
Shell (RDS) has finalized an agreement with Brazil's Cosan in a joint venture valued at $12 billion to turn sugarcane into ethanol and power -- a deal that proves the oil company is serious about commercializing biofuels. It also brings advanced biofuels company Codexis (CDXS) and cellulosic energy firm Iogen Energy -- two of Shell's earlier biofuel investments -- into the deal as well.
To be sure, Shell isn't the first oil company to dive into biofuels. Take Exxon's (XOM) $600 million partnership with Synthetic Genomics to develop next-generation biofuels from photosynthetic algae, for example. But Shell's joint venture is worlds apart from Exxon or any other previous biofuels investment. For one, Exxon's money went into a research program, not large-scale commercialization. And the investment is miniature compared with Exxon's capital spending budget of between $25 billion and $30 billion a year. The biofuels industry certainly welcomes investment on the R&D side. But what it really needs is a partner with money, resources and a retail network -- ahem, Big Oil -- to bring biofuels to market.
Here's why the Shell-Cosan venture is so promising:
- Cosan is a giant in the sugarcane biz. The company's crushing capacity is 60 million tons per year from 23 mills;
- Shell and Cosan have a huge retail presence. Between the two, there are 4,470 retail sites in Brazil.
- Annual production capacity will add more than 2 billion liters, or 528 million gallons, to Cosan's existing 18 billion liters, 4.75 billion gallons, per year in ethanol sales. The joint venture will create one of the world's largest ethanol producers and distributors.
- It's not just about ethanol. Under the venture, the partners also will generate electricity from sugar cane bagasse -- the residue from sugarcane ethanol.
Shell and Cosan may someday expand this beyond Brazil, but for now the venture can focus on scaling up its production. Plus, it just doesn't make financial sense to try and break into the U.S. market right now. Brazilian imports of sugarcane ethanol get slapped with a 54-cent-per-gallon tariff once it enters the U.S., where it competes with corn ethanol.
Photo from Flickr user Sweeter Alternative, CC 2.0; Photo of sugar cane on truck from Shell
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