Innovation is sweet but profit up front is sweeter still. Shell's $12bn joint venture with Brazilian sugar and ethanol producer Cosan is a bet on the growth of first-generation biofuels. The venture will get access to 2bn litres of ethanol capacity, making it the largest producer in Brazil and second globally. In addition to its extensive Brazilian retail distribution network, Shell will contribute $1.625bn in cash and assume Cosan's $2.5bn in debt. Furthermore, if almost as an afterthought, Shell will contribute stakes in two companies, Iogen and Codexis, that had been at the forefront of “second-generation” technology that allows producers to move away from food crops.
The dumping of these stakes, and Shell's sale last year of once highly touted biofuel researcher Choren, signals a lack of faith they will displace the profitable first-generation technologies any time soon. Five years ago, when George W. Bush touted cellulosic ethanol in his State of the Union address and excitement was running high, Shell had boasted that it was only years away from making such fuels economically viable. Shell chief Peter Voser recently admitted that this is probably a decade away.
For as long as the first generation is with us, Brazil looks an ideal place to be, especially if steep import tariffs for ethanol in the US and European Union ever break down. The energy input-to-output ratio for ethanol from sugarcane is 8.3 versus 1.9 for sugar beets, as favoured in Europe, and 1.8 for corn in the US. Other companies have made the same calculation. French commodities firm Louis Dreyfus last year bought Santelisa Vale to create the second-largest Brazilian ethanol producer behind Cosan. Earlier this month, US agribusiness company Bunge bought a controlling stake in Brazilian sugar processor Moema Group, while BP invested in plants being built by Tropical BioEnergia.