Shell Invests in Old School Sugar Ethanol

Earlier this week Royal Dutch Shell announced a joint venture with Cosan, one of Brazil’s largest producer of sugar-based ethanol. The deal confirms what’s been known for a while. When it comes to renewable energy, for Shell, it’s all about biofuels. 

Shell had dipped its toe in various wind projects in the recent past. It was a partner in the 613 megawatts London Array facility, but it walked away from that project and last year announced that it would drop all new investments in wind, solar and hydrogen energy. At the time, Then-Chief Executive Officer Jeroen van der Veer justified the decision by arguing that investment returns in wind or solar power were too small.

In terms of biofuel, the Cosan deal buys Shell some time.

Cosan produces sugar-based ethanol, however much of the R&D these days focuses on developing non-food-based biofuels, such as algae-based biofuels, which unlike sugar or corn, does not require large tracts of land to grow. Also, its use does not tighten regional food supply. This summer Shell competitor Exxon Mobil announced a $600 million partnership with Synthetic Genomics, a developer of  algae-based biofuel launched by J. Craig Venter, the scientist known for decoding the human genome in the 1990s.

Shell has also invested in next-generation biofuel as it holds a stake in Codexis, a California company that develop enzyme-based biofuel.

But as Shell’s new CEO Peter Voser, recently pointed out next-generation biofuels, of the sort being developed by Codexis and Synthetic-Genomics, are still a couple of decades away from going commercial.

So, until algae-based biofuel and other next generation biofuels become commercially viable, with the Cosan investment Shell will benefit from ongoing and growing demand for traditional sugar and corn-based biofuel in part bolstered by government-mandated blending requirements in North America and Europe.

As part of the deal, which was announced Monday,  Shell will contribute $1.6 billion in cash to the joint venture. It will also contribute assets including 2,740 service stations that will distribute Cosan’s sugar-based ethanol. For Cosan, the joint venture opens Shell’s extensive European and North American distribution network.

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