Shell Bets Big On Ethanol With Cosan (CZZ) Partnership

By Sam Hopkins of
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I’m in Washington, D.C. today for the American Council on Renewable Energy’s RETECH Expo, where I’m mining the showcases and speakers for new stock picks. Not every technology or company here will be a home-run investment. To tell the truth, many of them won’t even make it ten years without being bought out or folding…

Others will make headlines and drive market returns, like longstanding Green Chip International play Cosan (CZZ) is doing right now. Cosan is entering into a joint venture with an oil giant that could be worth $12 billion, and its happy beginning to 2010 signals a renewal of interest in ethanol and entrance of some unlikely participants into the biofuels fold.

Cosan, a Brazilian company that processes more sugar than anyone else in the world, is now joining with Royal Dutch Shell the #2 oil producer in Europe. And this isn’t a new trans-Atlantic trade Shell is inaugurating… Rival BP (BP), Europe’s top petroleum producer, has been piping pounds into a smaller Brazilian sugarcane ethanol producer called Tropical BioEnergia since 2008.

BP’s Brazilian biofuel foray cost it $500 million or so. Even though quarterly profits just dropped by 40%, Shell is paying Cosan $1.625 billion for half of its core assets. As part of the joint venture that will emerge, Shell is also taking on Cosan’s debt and opening up 2,740 Shell service stations to Cosan’s sweet, green fuel. Shell will also give Cosan two small Brazilian companies — Codexis and Iogen — where Shell has been investing in cellulosic ethanol.

Cosan stands to gain big from an efficient system of turning agricultural leftovers into fuel in its own right.  Of all the money and knowledge changing hands, one part is most important: By gaining access to Shell’s distribution system, Cosan will have the luxury of ramping up production without worrying if there will be buyers.

Shell wants to fertilize Cosan’s cane-based business. Cosan output now has to grow from 2 billion liters per year up to the 3 billion that will be needed to satisfy a total 4,500 fuel stations in Brazil. From there, it’s up to 4 and 5 billion liters annually and on to making ethanol a global commodity.

(Sugar) Ethanol as a Global Commodity

You’d be hardpressed to tell the difference between Shell and Cosan’s statements on this joint venture if you removed a couple of words. Very simply, each company wants access to the other’s expertise. “Cosan represents the best entry to sustainable biofuels in the market — the best entry of scale,” Shell’s Mark Williams said in London. In Sao Paulo, Cosan Chairman Rubens Ometto said the tie-up is intended to be “the step forward that was lacking, in spite of all our efforts, to make ethanol a global commodity.”

The next step is one that governments and consumers in the U.S. (which maintains a tariff on foreign biofuel) and Europe will have to take in order to give Shell and Cosan a real global market for their 2-3 billion liters of increased output. As it stands, Brazil’s ethanol exports aren’t living up to the state’s expectations. Outbound shipments of the renewable fuel jumped by 46% when the oil price surged to nearly $150 a barrel, then dropped hard as air went out of the crude price bubble.

That bull run in black gold made ethanol much more attractive… but Shell, Cosan, and anyone who’s being real about the industry knows that high oil prices will do more to make ethanol a global commodity than any sales pitch or “synergy boost” ever could. Low prices also help, as evidenced in Brazil where flex-fuel vehicles now account for 90% of new cars and truck sales.

Shell’s 45,000 stations around the world will pump biofuel to vehicles that can run on gasoline, ethanol, or a mixture of the two (Brazil mandates that all gasoline have at least a 20% ethanol component). As it stands, Brazilians are the end users of the vast majority of the ethanol that their country produces (about 25 billion liters annually).  And you wouldn’t know it from most of the media, but ethanol is more than just an automotive matter…

Flex-Fuel Power Plants Now Opening in Brazil
On January 19, the first ethanol-fired power plant whirred into action in Brazil. National oil company Petrobras (PBR) and American systems giant General Electric (GE) pitched in resources to turn an existing 87 MW plant into a flex-fuel power station that can alternate between natural gas and ethanol (which are both considered alternative fuels, even though only one is renewable). GE wants to see how its turbines can be adapted to work in flex-fuel plants in Brazil and in developed countries like Japan, where clean-burning power plants are gaining momentum.

My top takeaway from the GE/Petrobras collaboration on this flex-fuel plant in the Brazilian state of Minas Gerais is the following: Brazil’s water-dependent hydroelectric infrastructure teeters during the dry season in places where natural gas isn’t easily accessible.

It just so happens that wind power peaks at the opposite time of the year as the water in running rivers that drives dam-based generation. Ethanol and wind could supplant natural gas as the primary alternative source of electricity generation during the dry season in Brazil and other countries with similar climate.

President Luiz Inacio Lula da Silva said earlier this week in the Brazilian press that Brazil could be self-sufficient in natural gas after several pre-salt (read: incredibly deep) offshore fossil fuel pockets are tapped. That capacity is at least five years away. Ethanol is there now, and after wind power auctions started last December, 773 wind turbines will be turning across Brazil by 2012.

Shell, Petrobras, GE, and Cosan will surely push hard to get the government in Brasilia to initiate a nationwide “ethanol electricity” campaign to ensure that oil and automotive fuel aren’t the key determinants of sugar ethanol’s success.

As in so many other areas of the world, those communities that are now underserved by fossil fuels can benefit most from such clean energy advances.

Washington Waxes Brazilian

Brazil provides us with an example of a rapidly developing, energy-hungry economy in the Western Hemisphere where biofuel is a fact of life. Biofuel is also an investment imperative for energy investors and companies that want to make money in Brazil. As an important part of the #3 economy in the Americas, ethanol can’t be ignored by the top dog, the United States — even if our homegrown bet (corn) wasn’t as successful as we would like it to have been.

Corn ethanol will surely advance, as major crop science companies like Archer Daniels Midland (ADM) work hard to keep it on our energy menu, but any American move to advance ethanol should include a couple of calls to Brazil.

The Obama Administration completed its revised Renewable Fuels Standard (RFS2) this week. Involving the EPA, Congress, the Department of Agriculture, and college researchers, RFS2 will move towards a national goal of 26 billion gallons of biofuel production by 2022.

I’ll be gauging investor response to RFS2 here, and next week you can expect a full update on what the White House is doing.

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