Royal Dutch Shell is plunging into Brazil´s sugar cane ethanol industry in a $12 billion (£7.5 billion) venture with Cosan, the market leader, which has been accused by the Brazilian Government of "slave labour" practices.
The oil giant is buying a half-share in an ethanol production machine that will double in output to four billion litres a year by 2014. By combining Cosan´s ethanol factories with its own vast network of service stations in Brazil and retail and refining assets in North America and Europe, Shell hopes to create a river of ethanol flowing from Brazilian plantations to forecourts around the world.
Shell is also buying into an emerging controversy over the conditions in which biofuels are produced in poor countries. Cosan was put on a Brazilian Labour Ministry blacklist in December after an investigation in 2007 found that a canecutting contractor employed by Cosan was mistreating workers, employing minors and failing to supply drinking water at the workplace.
In January, Cosan secured a temporary injunction removing it from the blacklist, but the Brazilian Attorney-General´s office said that it would contest the injunction and a final ruling may take months. Wal-Mart in Brazil has resumed buying sugar from Cosan after suspending business dealings over the blacklisting.
Shell said yesterday that Cosan was a leader in improving labour conditions and had taken action swiftly when it became aware of the issues regarding the contractor. "We looked in depth at the case," a spokesman said.
Moreover, the oil giant´s interest delivered a demonstrable vote of confidence in Cosan, whose shares rose by more than 8 per cent in São Paulo yesterday – this after falls in recent weeks almost certainly caused by the slave labour allegations.
Ethanol accounts for about half of Brazil´s road fuel demand, with more than 90 per cent of cars being equipped with flex-fuel technology, capable of adapting to changing mixes of petrol and ethanol. Meanwhile, governments worldwide are tightening environmental regulation and Brazil´s ethanol industry has become a magnet for foreign energy companies seeking a quick and inexpensive solution to their search for green fuel.
In October Louis Dreyfus, a leading agribusiness, agreed to buy Santelisa Vale, Brazil´s No 2 sugar cane ethanol producer, and in December Bunge, a competitor to Dreyfus, paid $452 million for Moema, another sugar cane company. In 2008 BP took the plunge into plantations, investing $560 million in an ethanol joint venture involving Santelisa.
The Brazilian Government sees ethanol as a potential export earner. Petrobras, the state oil company, is planning to invest billions of dollars in pipelines, terminals and ships capable of transporting the fuel to overseas markets.
Shell already deals in six billion litres of ethanol every year, most of it as an additive for its US petrol retailing business. The oil giant will contribute its Brazilian retailing division, comprising 2,740 service stations, and its aviation fuel business, to the joint venture. It will pay $1.6 billion in cash and shareholdings in Iogen and Codexis, two technology companies engaged in the search for biofuel technologies that synthesise fuel from plant matter.
The joint venture will have a quarter-share of Brazil´s expanding retail road fuels market and a position in the electricity market, in which Cosan has seven co-generation plants generating power by burning sugar cane waste.
A Shell spokesman said that its Brazilian move would capture more value in a growing market and provide a platform for new biofuels. The company said that rainforest would not be affected as sugar cane is grown on farmland 2,000km from the Amazon.