02|02|2010 - 09h45Shell, Cosan Plan Ethanol, Fuel Distribution Venture in Brazil

Oil company is making a $12 billion investment in a joint venture with a big Brazilian ethanol producer.

By Bloomberg BusinessWeek

Royal Dutch Shell Plc and Cosan SA Industria & Comercio are seeking to merge fuel-distribution and ethanol assets in Brazil as part of an accord that may give them shared control of the world’s largest sugar-cane processor.

Under terms of a non-binding agreement signed by the two companies, Shell will contribute assets including 2,740 service stations and as much as $1.93 billion to a joint venture. Cosan will provide $4.93 billion of assets, including plants able to crush 60 million tons of cane a year and control of an ethanol- trading unit, according to separate releases from the companies.

The deal marks Shell’s entrance into ethanol production, Mark Williams, director of Shell’s downstream business, said today in a news conference in Sao Paulo. It will also boost The Hague-based oil producer’s access to the cane-based biofuel in Brazil and ease retail competition for Cosan, said Jason Kenney, head of oil and gas research at ING Commercial Banking.

“Shell is betting on an expansion of ethanol,” Peter Heijen, an Amsterdam-based analyst at Theodoor Gilissen, said in an interview today. “This is a deal that makes perfect sense.”

Shell will pay $1.63 billion in cash over two years and may make additional payments of $300 million in five years based on future gains of the venture, Cosan said in its statement.

The venture will have about 4,500 service stations, which would make them the third-largest network in Brazil, JPMorgan Chase & Co said in a note to clients today. Last year, Barra Bonita, Sao Paulo-based Cosan bought 1,500 sites and other assets in Brazil from Exxon Mobil Corp. for $826 million.

‘Difficult’ to Compete

“For Cosan to compete with Shell in retail in Brazil, it would be very difficult,” Kenney said today in a telephone interview from Edinburgh.

The Brazilian sugar-cane processor aims to use Shell facilities in the U.S. and Europe to boost its exports, Cosan Chairman Rubens Ometto said today at the news conference in Sao Paulo.

Cosan surged as much as 8.7 percent in Sao Paulo trading, the biggest intra-day gain since June 23. The stock rose 1.80 reais, or 8.5 percent, to 23.10 reais at 12:36 p.m. in Sao Paulo trading.

Shell shares gained 14 pence, or 0.8 percent, to 1,756.5 pence in London trading.

As part of the agreement, the venture will assume $2.5 billion of Cosan debt, representing all of the company’s net debt, Marcos Lutz, Cosan chief executive officer said on a call with analysts today. Shell and Cosan will share management of the venture, he said.

‘Sustainable Biofuels’

“We see joining with Cosan as a way to grow the role of low-carbon, sustainable biofuels in the global transportation fuel mix,” Shell’s Williams said in a statement.

The two companies have signed a non-binding agreement and will now have 180 days to conduct exclusive negotiations on a final agreement.

The companies didn’t disclose their respective holdings in the venture.

Cosan may have control of the ethanol operations with 51 percent, while Shell would control fuel distribution, according to Sao Paulo-based Valor Economico newspaper, which reported the transaction earlier today. Both Cosan and Shell would have the option to buy the other out in 10 years, Valor said.

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