Shell strikes record ethanol deal

Royal Dutch Shell PLC plans to make the biggest-ever foray into biofuels by an oil major, striking a deal with Brazil's Cosan to create a $21 billion US a year ethanol joint venture.

The venture, which will be the No. 3 fuel distributor in Latin America's largest country, marks Shell's entry into ethanol production and underscores the biofuel's lure as an alternative to gasoline. It also follows moves by British oil company BP PLC, which in 2008 took a stake in a Brazilian biofuel project and unveiled $1 billion in investments.

Cosan shares soared 10.7 per cent Monday in Sao Paulo after the deal was announced. Shell shares rose 1.1 per cent in London.

"It's a vote of confidence from an oil major for the Brazilian ethanol industry," said Jonathan Kingsman, managing director of the Lausanne-based Kingsman SA ethanol and sugar consultancy. "I expect more interest from the oil companies in Brazilian ethanol, both in production and distribution."

The 50-50 joint venture, with almost 4,500 filling stations nationwide, will better position Cosan and Shell to compete with the two top players in the market, state oil giant Petrobras and Ipiranga, a unit of Brazil's Grupo Ultra.

The deal calls for Cosan to transfer its sugar, ethanol, fuel distribution and energy generation units to the venture, with assets valued at $4.93 billion and debt of $2.52 billion.

Shell will contribute its retail fuel and aviation distribution business, valued at up to $3 billion, and inject $1.63 billion into the merged company in up to two years. In all, the value of the joint venture can reach $12 billion.

Cosan first branched into the fuel distribution business in 2008, when it acquired U.S.-based ExxonMobil Corp.' s Esso chain of service stations for nearly $1 billion. Cosan also agreed in December to buy a local chain of filling stations called Petrosul for an undisclosed sum.

While the deal will not immediately add to Cosan's cane crushing capacity of about 60 million tonnes a year, it will give it a deep-pocketed partner at a time when some of its smaller rivals are vulnerable to takeovers.

The companies hope to more than double ethanol output to up to five billion litres a year from about two billion now, Shell's downstream director, Mark Williams, said in London, without giving a time frame.

source: calgaryherald