Generation game: Shell and Cosan team up on ethanol
A champion of futuristic biofuels embraces the old-fashioned kind
The Economist | Feb 4th 2010
Back to basics for Shell
RISING oil prices and mounting concern about global warming may have stoked demand for biofuels, but oilmen and farmers still have relatively little to do with one another. The biggest producers of ethanol are agribusinesses or farmers’ co-operatives growing maize (corn) in America and sugarcane in Brazil. Big Western oil firms such as Exxon Mobil and Royal Dutch Shell have confined themselves to trading biofuels and blending them into their wares, while dabbling in research into a “second generation” made not from sugar or maize but from straw, algae or agricultural waste. So the $12 billion joint venture unveiled on February 1st by Shell and Cosan, a big Brazilian producer of ethanol, marks something of a reversal.
In Brazil, the world’s most mature market for ethanol, the two firms will pool their retail operations. Globally, Shell’s sales network, which already distributes more biofuels than any other, will benefit from yet more juice. Shell will invest $1.6 billion over two years, with a view to increasing the venture’s annual output from 2 billion litres (440m gallons) to 4 billion litres or more. It will also throw in its stakes in Iogen, a Canadian outfit which is trying to make ethanol from straw, and Codexis, which makes enzymes to improve such processes. That should allow the new entity to capitalise on any technological breakthroughs in that area.
But Shell acknowledges that second-generation biofuels, contrary to earlier optimistic forecasts, could take as long as a decade to develop. Last year it sold its stake in Choren, an aspiring German producer of second-generation biofuels. Meanwhile, governments around the world are mandating the use of ethanol in an effort to reduce emissions of greenhouse gases. Brazil’s sugarcane ethanol performs much better than ethanol made from maize in that respect: Shell claims it produces 70% less carbon dioxide than petrol, mile for mile. And sugarcane needs less land than maize. That provides some defence against complaints that Shell and Cosan are depriving the poor of food, although sugar prices are at their highest for nearly 30 years.
If the combination constitutes an admission that Shell’s hopes for second-generation biofuels have stalled, it also marks an acceleration of Cosan’s ambitions. The firm has grown rapidly in recent years thanks to a series of mergers. With few obvious takeover targets left in Brazil, this deal offers the firm expanded horizons.
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