Cosan and Shell move, slowly, closer to creating the third largest ethanol (and from sugar cane not corn) producer in the world

It’s taking quite a while to get this one done. But the joint venture announced in February between Royal Dutch Shell (RDS) and Brazilian sugar and ethanol giant Cosan (CZZ) has finally moved to the signing of binding agreements.

The deal, when completed, would create the third largest ethanol producer in the world with annual production of 440 million gallons and a sales network of 4,500 stations. Estimated annual sales revenue would come to $21 billion.

The deal seems a natural: Combine Brazil’s largest processor of sugar cane (Cosan will contribute its 23 sugar cane mills, all of its co-generation plants, 1,730 retail outlets, and other ethanol assets to the deal) with 2,740 retail stations operated by Europe’s largest oil company. Throw in Shell’s 50% stake in Canadian cellulosic ethanol producer Iogen Energy and its 15% stake in U.S biocatalyst developer Codexis (CDXS) so that the joint venture can stay on top of the next generation in biofuels and you’ve got quite a package.

So why is this taking so long? Money. (What else is new?)

Cosan is transferring $2.8 billion in debt to the joint venture. That’s about $300 million more than in the initial draft agreement announced in the winter. In exchange Cosan has added its cogeneration energy business to the joint venture.

The advantages for Shell are pretty clear. The company gets a huge presence in biofuels at one stroke. Even better that biofuels business uses sugar cane rather than corn so it’s more efficient at producing fuel and doesn’t face any of the obstacles that come with diverting a food crop such as corn to fuel production.

What’s in it for Cosan? Read more