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? Getting rid of all that debt will improve the company’s credit rating and that will lower Cosan’s cost of capital. The $1.6 billion in cash (above the debt being transferred to the joint venture) being contributed by Shell will help expand the joint venture’s production and distribution network (so Cosan will own half of a more valuable business.) And the lower cost of capital and the cleaner balance sheet at Cosan will give the company the ability to raise more capital to expand its sugar and ethanol production in Brazil.
Cosan is on my Jim’s Watch List https://jubakpicks.com/watch-list/
Anyone who believes that biofuel is going to be the answer to our future energy needs should take the time to read and understand Patzek’s paper (above link). Much of it is reasonably accessible to a non-expert.
I should add that Patzek’s paper includes the following sentences:
“The solar power captured by industrial tree and sugarcane plantations is minuscule
when compared with an oil reservoir (for a limited time only) and with solar cells (for practically infinite time). To make things worse, what little solar energy is captured by the plants goes in
tandem with a disproportionate environmental damage and a negative free energy balance. We
conclude that government and industrial funding for “renewable energy” sources will be spent
much more wisely on the development of large-throughput, efficient technologies of manufacturing
solar cells (possibly poly-crystalline silicon-based cells).”
Note: “negative free energy balance” means, in practical effect, that more energy is consumed than generated in the overall cycle of plant production and use. Even for sugarcane ethanol.
viwi – Patzek was quite adamant that all biofuels, including ethanol from sugar, are not going to help us out much. That’s not to say that you can’t profitably produce some ethanol from sugar – the question is just how much ethanol. Money is not the only factor – the relative cost of energy is important. For example, people will not pay more for energy if they are starving for food. If you’re interested, an extended version of his argument is here:
http://www.oilcrisis.com/patzek/ThermodynamicsEnergyFromBiomass.pdf
Patzek’s talk was focused on the medium time scale outlook – something like 20 to 50 years – where he sees an energy crunch coming. On that time scale, he was also dismissive of solar PV and solar thermal as potential large-scale replacement energy sources. His two main objections seemed to be (1) the difficulty of scaling up this resource to the required size on the required time scale (that actually struck me as one of his weaker arguments), and (2) for PV, the energy storage problem. On a longer time scale, I don’t know what he thinks.
I was really impressed by Patzek. Not only did he give an excellent, well-founded presentation, but he fielded one question after another for about 20 minutes from an audience full of skeptical physicists, and defended his position successfully on every point.
My own opinion is that solar PV, solar thermal are likely to be important, large-scale future energy sources. I think Patzek is probably right that biofuels can replace only a small fraction of current fossil fuel production. Greater energy efficiency will certainly be important.
P.S. I forgot to mention that the biggest chunk of money is needed to overcome the most powerful lobby in Congress, the energy lobby.
DanH:
Everything is about the money, i.e. how much you are willing to pay for your energy. You need pure energy – build solar power plants (now they are not that expensive and are fast to build). If you need something to drive your car (other than electricity, for which you need batteries, which at the end are not cheap) – biofuels can provide not just a temporal solution, but a long term solution. Ethanol from sugar canes is not expensive, if it is produced somewhere where it is hot and there is plenty of water (Brazil is a fine example; however, there is an import tax on it in the US, since it is treated as an agricultural product). Do not like sugar canes? There are several options, but most of them, such as algae, are still rather expensive and/or are difficult to scale up. However, it is all about the money …
Ed. Absolutely agree. If the economy starts being starved for energy, opinions on nuclear will change just as quickly. No doubt about that.
I forget one of the most important points of Patzek’s lecture – he spent a lot of time on it. I’ll paraphrase again. The future is much more uncertain that we think. Complex systems are inherently unpredictable, and nothing is more complex than the global human economy interacting with its environment. Complex computer models of this system do more harm than good. He regards his own projections on our energy future as having about a 55% chance of being right. If you are near someone who thinks they are 100% right, run.
DanH,
If we desperately need more power, cutting down the time schedule to build a nuclear plant will become much easier.
Ed, FYI Prof. Patzek’s comments on nuclear. In principle, could add significant energy generation capacity on the required time scale. But as things stand, not likely to happen in the West due to cumbersome and lengthy time schedule to permit and build a plant (~ 20 years), along with large number of plants needed to make a difference. Will add significant capacity soon in one country, China. But in his view China’s nuclear program is being carried out recklessly, and is likely to be plagued with problems of reliability and possibly serious nuclear accidents. Paraphrasing here, of course.
DanH,
Eventually, we’ll end up going to nuclear power for most of our energy. The key to that will be battery technology, which will have to improve immensely over what we have now.
PS he also sees the environmental constraints on most new sources as a severe problem. “The environment sustains us, not the other way around.”
Just attended a talk by Tadeusz Patzek, one of the leading experts on world energy supply. A summary: World oil production is peaking now. World-wide coal production will peak sometime during the next ten years. Oil reserves in the middle east are overstated, perhaps by a lot, and are not verifiable by western experts. There is plenty of fossil fuel left, but it can only be extracted at a finite rate and at increasing high and perhaps prohibitive cost. Economists understand costs, but do not understand limits on the feasible rate of extraction. New oil supply is coming mostly from deep offshore drilling, heavy crude, oil sands. New supply from Iraq may help – a little. China is shutting down some of its steel mills and other energy intensive industry for lack of coal supply. The only signifcant cushion in fossil fuels is shale gas. North America is better situated than other regions due to its relatively large remaining coal and shale gas resources. On the other hand, the US economy has been built on a cheap energy model – almost twice the energy per capita as Europe – and will have an added burden of adjustment when energy prices start to rise. Biofuels including ethanol are not an option for replacing a very substantial part of current energy supply. The realistic sources of biofuel are either too small, displace too much food production and/or result in too much load on the environment. If you doubt that, consider this number: the current total energy use per person in the US is about 100 times the energy contained in the food used, per person. We have our heads in the sand. A severe shock to the world economy sometime during the next 20 years or so, due to depletion of easily accessible energy supplies, cannot be discounted.
Some things to think about.
i owned Click Commerce about 4 years ago and it was bought by ITW…..their portfolio of companies is huge (http://en.wikipedia.org/wiki/Illinois_Tool_Works). they reported 13% revenue growth last quarter and said they were seeing robust global demand for early-cycle consumables, no pullback in Europe, and that current demand levels were sustainable. future PE of <12 and 3% dividend.
bibg: I’ve talked about the fracking with Natural Gas Exploration a few times on this blog. I’m in PA where a lot of exploration is going on and the information that is shown in Gasland is representative of what people are experiencing in the northern tier. In PA, the legislature is so starved for the money they get from the gas companies that they aren’t thinking about the regulations that need to be in place to protect the people and to protect the land. This method of obtaining natural gas is a relatively new technique and as always, the companies are trying to get in and get their positions before the environmental legislation catches up and imposes stricter regulations. What they are doing here are establishing the wells, then just letting them sit until their is a need for Nat. Gas. The other problem in PA is the legislature didn’t impose a severance tax and the trucks they are using on the roads to transport the water to and from the wells are too heavy for the roads and tearing them up. The gas companies are saying they don’t have to pay and so the taxpayers of PA will be left footing that bill. Mansfield, PA, a place I lived for a while and still visit frequently is basically becoming a boom town. They built hotels to make room for the workers. Once the gas is gone, Mansfield will dry up.
My guess is, IF our legislature imposes stricter regulations, the companies will ask the wells that are already established to be grandfathered in. I may be wrong since they still have to frack the wells to get to the “goods”. NY is watching PA and seeing how it screws up so they can avoid the mess PA gets in before they allow drilling. The companies are already starting to explore the Shenendoah Valley of VA. It worries me.
java12jack,
I’m always amazed when I find a big company like ITW that I never heard of. It just goes to show how many companies are out there making stuff behind the scenes.
On the surface, it looks like a solid company. Although it does show some growth potential, it’s already pretty big. It might make a good long-term hold.
Ed,
What are your thoughts on ITW?
If the documentary is accurate based on current practices it would make a lot of sense to push the Frac Act with our representatives.
Jim – off topic, but just watched Gasland on HBO and wanted to get your thoughts. Based on the documentary natural gas fracking was having a huge impact on polluting air and water. Thought this might be something you’ve done some digging on and get your opinion. This could have a big impact on a lot of natural gas plays long term.
This seems like an awfully large project considering it will only produce about 1/2 a day’s worth of US consumption.