Shell Oil Bets on Brazilian Biofuels

SÃO PAULO—Big Oil is making one of its biggest biofuel investments to date with a $12 billion venture here that joins a major petroleum company with an ethanol producer. Cosan, Brazil’s largest biofuels maker, said today that it will merge its 23 ethanol-producing sugarcane mills with Royal Dutch Shell’s network of 2740 domestic gas stations. Research into a next-generation fuel—cellulosic ethanol from sugarcane—may have played a critical role in shaping the deal.

Until recently, Shell had been pooh-poohing ethanol, saying it didn’t plan to dive into production until more efficient, second-generation technologies came online. Following that strategy, Shell invested heavily in biotechnology companies like Ottawa, Canada-based Iogen Corp., which is developing cellulosic ethanol technology, and Codexis Inc. of Redwood City, California, a start-up that uses molecular methods.

Now, in a little noted part of the Cosan deal, Shell will roll its shares of Codexis and Iogen into the new Brazilian joint venture. Shell executive Mark Williams said in a press conference that the deal “is a big opportunity to accelerate the deployment of advanced processes.” The reason: Brazil’s sugarcane mills produce huge quantities of cheap cellulose in the form of sugarcane straw, a byproduct. And it isn’t just Shell eyeing those convenient piles of cellulose. Industry sources say many next-generation biofuels start-ups have been poking around Brazil.

Meanwhile, Brazilian companies are in need of new technology. For all its prowess in making cheap ethanol, Brazil, which spends relatively little on R&D, has fallen behind in the race to convert cellulose to fuel. “Iogen is pretty advanced in the conversion of cellulose,” Marcos Lutz, president of Cosan, said during a press conference in São Paulo. “The relevance to us is we have a lot of cellulose.”