Royal Dutch Shell plc (RDS.A) along with Sao Paolo-based Cosan Limited (CZZ) formally launched their multi-billion dollar joint venture ‘Raizen’. The venture will operate in Brazil as a prominent producer of the low-carbon biofuel –– ethanol made from sugar cane.
The leading Brazilian sugar-and-ethanol group, Cosan, increased its investment in the project to 5.24 billion reais, or $3.3 billion, as against 4.61 billion reais that was agreed upon when the venture was signed in August 2010. Shell's contribution remains unchanged at $1.62 billion.
Combining the advanced technological expertise of Shell with Cosan's long-standing experience in low-carbon biofuels commercial production, Raizen targets to produce and sell over 2 billion liters of ethanol every year. Supported by a chain of 4,500 Shell-branded service stations, Raizen will also distribute biofuels and over 20 billion liters of other industrial and transport fuels each year.
Biofuels are fast becoming popular among many countries as the alternative source of transport fuel, with Brazil being the clear leader. The country expects biofuels to constitute over 40% of its transport fuel mix by 2030 and Raizen's current annual production level will be enough to satisfy nearly 9% of Brazil's current ethanol demand.
With this endeavor, Shell is making a move from just a biofuel distributor to being a first-time producer. We believe that Shell’s involvement with Raizen will not only boost the company’s portfolio of alternative energy resources, but will lend a competitive edge over its Brazilian peer Petroleo Brasileiro, or Petrobras (PBR) – which is busy expanding its foothold in the biofuel market.
We are maintaining our long-term Neutral recommendation on the stock. Shell currently retains a Zacks #3 Rank (short-term Hold rating).
COSAN LTD-A (CZZ): Free Stock Analysis Report
PETROBRAS-ADR C (PBR): Free Stock Analysis Report
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