Since the beginning of the year, Brazil’s ethanol industry has generated more than its share of news. Today brings the announcement of a joint venture between Royal Dutch Shell (RDS-A) and Cosan Limited (CZZ) worth an estimated $12 billion.

The deal involves distribution and retail sales of cane ethanol inside Brazil. In 2008 Cosan bought the Esso unit of Exxon Mobil (XOM) for almost $1 billion and recently purchased another national chain of filling stations for an undisclosed sum. The JV with Shell will control about 4,500 retail sites in Brazil and sell about 17 billion liters (a little more than 4 billion gallons) of fuel annually. The JV will squeeze about 2 billion liters of ethanol a year of its own.

The ethanol business in Brazil, particularly the mills that squeeze the sugar cane, is still dominated by family owned firms. A couple of relatively recent big deals include agribusiness giant Bunge Ltd’s (BG) purchase of Brazilian producer Moema for about $452 million and British oil giant BP plc’s (BP) $1 billion investment in a Brazilian biofuel maker.

The Shell-Cosan deal centers on the marketing end of the ethanol business. This is probably a smart move because ethanol use in Brazil has grown, with government support, for more than 30 years. Brazilians own many flex-fuel cars that can run on pure ethanol as well as a gasoline/ethanol blend.

Ethanol is so pervasive that the government recently had to cut the mandated blend from 25% ethanol to 20% because of low supplies. The country produced about 23.4 billion liters of ethanol in 2009, lower than expected because heavy rains stopped the cane harvest.

Cosan, for its part, has come under fire for its labor practices. The government has put the company on a black list for mistreating employees, making them work in slave-like conditions. US retail giant Wal-Mart (WMT) has temporarily suspended its contract with Cosan as a result of the black list. Even the government’s development bank has refused to lend Cosan any more money until it cleans up its act. The company denies the alleged treatment and is seeking to reverse its blacklisting.

Shell has made a pre-emptive move at the end of the marketplace for ethanol where it can make money. Cane growing, squeezing, and refining are locally-owned and trying to negotiate volume deals could easily get more complicated that they’re worth. Of course other big oil companies could buy into cane mills, as Petroleo Brasiliero (PBR) has done, but even Petrobras only plans on owning production of about 4 billion liters by 2013.

BP is the only other supermajor that has made a significant investment in Brazilian ethanol. Exxon and the others are sticking with hydrocarbon extraction, in partnerships with Petrobras in the huge oil and gas discoveries made offshore Brazil in the past couple of years. Shell might have stolen a march on its competitors here.

Paul Ausick

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