Shell and Cosan — oil and ethanol merger will deliver cellulosic ethanol from sugar cane

An exclusive post that connects to work CIGI’s Portal for North America conducted a few years ago. NOTE: after this article was published I spoke (Feb, 18 at 2:00PM EST) to Iogen who clarified some points. The edits/comments appear in bold.

Early this month, in a transaction estimated at US$12 billion, oil super-major Royal Dutch Shell and Cosan, one of Brazil’s (and the world’s) largest ethanol and sugar processors, agreed  to merge their respective Brazilian ethanol and fuel distribution businesses. The deal alone is noteworthy: it opens global distribution markets to Brazilian ethanol and makes Shell a major player in the ethanol market. Even more interesting, however, is the new joint venture’s (JV) position in second generation ethanol production. The JV will own a 50 percent stake in Canada’s Iogen – a global leader in the production of cellulosic ethanol (Shell’s 50 percent joint venture is in Iogen Energy and not Iogen Corp), and a 14.7 percent interest in California’s Codexis, a top developer of clean biocatalytic process technologies. All stand to gain from this transaction… except, perhaps, Canadian tax payers…

The Deal

The two companies signed an exclusive non-binding MoU with the intention of forming a JV in Brazil for the production of ethanol, sugar and power, and the supply, distribution and retail of transportation fuels.

Cosan will contribute 23 mills with a sugar-cane crushing capacity of 60 million tonnes per year and an ethanol production capacity of 2 billion litres/year. In addition, the JV will inherit Cosan’s seven existing electricity co-generation plants as well as two others currently under construction. Cosan will hand over its 1,730 retail stations – originally purchased from ExxonMobil in 2008 and from Petrosul in January 2010 — and its supply and distribution assets. Furthermore, the Brazilian partner’s net debt of approximately US$2.5 billion will be transferred to the JV.

In turn, Shell will chip in US$1.625 billion over two years into the JV, and deliver its Brazilian downstream assets including its 2,740 retail outlets, its supply and distribution networks, and its aviation fuel division. As mentioned above, Shell’s 50 percent stake in Iogen (Energy) and 14.7 percent interest in Codexis will also be transferred to the JV.

The lubricant divisions of both Cosan and Shell will not be part of this transaction.

The Potential

At a recent conference call with investors, the companies forecast annual revenues of US$21 billion. This is a significant venture. For Cosan, Shell’s global distribution network of 45,000 fuel stations opens doors to make ethanol a global commodity. In contrast, for the oil super-major, access to annual supplies of 2 billion litres of ethanol gives it a guaranteed supply that virtually none of its competitors can count on. Moreover, it delivers all the biomass Iogen needs to test cellulosic ethanol processes at the lowest possible cost. And that is worth a whole lot to Iogen.

The Iogen Story

A detailed story of Iogen is offered in the company’s Case Study published in CIGI’s Portal for North America. Here is a much shorter version.

Iogen is the brain child of Patrick Foody, an Irish immigrant turned Montreal entrepreneur, who since the early 1970s has relentlessly pursued the idea of making fuel out of vegetable matter. Through the years Mr. Foody and his sons spent millions and received millions in Canadian federal government support. There were successes, such as the company becoming the leader in enzyme technologies that deliver stone-washed denim, and challenges, such as the oil crisis of the 1980s, when the company had to regroup and “recreate” itself. But, finally, the high oil prices of the last decade reignited the interest in alternative fuels and lured in partners with deep pockets.

In 1997, in addition to Iogen’s own $30 million investment,  Petro-Canada contributed $15.8 million and Technology Partnerships Canada, an arm of Industry Canada, came up with $10 million in the form of a loan, repayable from future profits — all to expand Iogen’s  cellulosic ethanol demonstration facility, housed in a 1.2-hectare site next to the Ottawa International Airport. Then, in 2002, Shell came in with CAD $46 million for a 22 percent interest (Iogen does not confirm the amount of the interest Shell acquired but stresses that the company was never a partner in Iogen Corp. The partnership has always been in Iogen Energy). In 2003, Petro-Canada extended its investment in Iogen´s EcoEthanol™ program, although details are unknown. A few years later Goldman Sachs & Co. shelled out US$30 million for an undisclosed minority stake as did Volkswagen with a Cad$10 million investment. Finally, in 2008, Shell increased its stake (in Iogen Energy) to 50 percent for a “substantial amount.”

Still, for all the corporate support and relentless effort, it was still a challenge to graduate from the demonstration phase to industrial production, or commercialization phase in industry jargon. Towards this end, Iogen secured a US$80 million grant from the US Department of Energy to erect a plant in Shelley, Idaho, to produce 18 million gallons/year. As it was, the delays in disbursements of these funds were such that original construction budgets were inadequate. Ethanol fever in the US led to an unprecedented escalation in the costs of building an ethanol plant — estimated at US $500 million — leaving the company short millions. And although Iogen could also receive substantial loan guarantees — it was seeking US$200 million — those funds also failed to materialize in time.

Instead, it was the Canadian government that stepped up to the plate. While Iogen was courting the US funds, the Canadian government did not abandon its involvement with the company, nor its hope that a similar facility be built in Canada, possibly in Saskatchewan. Continued support has translated into Iogen having its original CAD $10-million loan through Technology Partnership Canada repayment schedule postponed indefinitely, and an additional CAD $7.7-million contribution announced in early 2007. A year later, the Government approved a $200 million loan guarantee to help fund the $500 million cellulosic ethanol plant to be constructed in a former pulp mill in Prince Albert, Saskatchewan — funded by Shell and Iogen (A funding application was made to Canada’s “Sustainable Development Technologies Canada” NexGen Biofuels Fund but no funding has been awarded as of Feb. 18, 2010.)

And this is where we are right now. It is difficult to assess the progress of the Saskatchewan. Iogen’s website only offer boilerplate information without actual updates (according to Iogen, engineering design work continues but construction has not started and a final investment decision has not been made). It is even more difficult to predict, however, Shell’s appetite for pouring millions into Saskatchewan to back a commercial plant now that Iogen has access to biomass for a fraction of the price. It might seem bad for Canada that this phase of the endeavour is likely to move to Brazil. The reality, however, is that it makes much more sense to test cellulosic ethanol in an area that actually has biomass. And all the technological investment Canada has poured into Iogen will still pan out, as the company remains a Canada-based corporation. Nonetheless, from tax-payers’ perspective, one can only hope that the promised $200 million loan guarantees get repaid fast, or even better, that they were not delivered in the first place (My own take: Given that no awards have been made from the NexGen Biofuels Fund there is hope that the most logical and efficient outcome may actually take place: that Canadian technology gets tested in Brazil and then, virtually everyone will be able to celebrate this accomplishment)

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One Response to Shell and Cosan — oil and ethanol merger will deliver cellulosic ethanol from sugar cane

  1. fuel hose says:

    Hi. I have been hiding for a while now on this website and finally wanted to get the courage up to say thanks to you. You’ve motivated me to start out my own blog. which I ‘m not sure if that will eventually work or not. Anyways..thanks for your insight into this crazy blogging world!

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