Report on the Joint Venture of Shell and Cosan Ltd

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Joint venture is a contractual agreement between one or two parties in order to execute a particular business or project in order to maximize the profit of the business. It has mutual understanding between the parties to share the profits or losses of the undertaking business.

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Joint ventures are co-operative of businesses in which two or more companies joined together. The companies on entering the joint venture may form a separate corporation or partnership. There are also some cases where the business entity retain their own individuality, while entering into joint venture agreement which is operated as a separate entity altogether.

What Happens In a Joint Venture?

During the process of joint venture the two companies should decide the terms and condition of the venture.

The terms are decided in order to get the benefits equally by all the companies in the joint venture.

When a joint venture is formed the parent companies pool together agreed resources like capital, human resources, profits risks etc.

They share business expertise, technology, distribution channels and sometimes, even clients.

Joint ventures are usually viewed as strategic alliances.

Benefits of joint ventures:

The main advantages of joint venture, where the two companies combines their technology and research which helps them to cut the cost of research and improve the quality.

The pooling in of human talent also helps to increase the efficiency of the business.

All the economic and financial risks are shared by the companies in the joint ventures.

There is greater financial support among the companies, which helps them to improve the performance of the company and maximize the profit of the company.

Joint Venture Trends:

According to Ian Hewitt, "the primary goal of joint ventures is to form cross border alliances to serve growing markets"

As companies focus on their core objectives, and they fail to concentrate on their technology and innovation of new products.

To fill these gaps of technology, joint ventures are the best way for the company.

Joint ventures of Shell:

In August 2010: Shell International Petroleum Company Limited and Cosan S.A. signed joint venture: Raizen

The project is to produce and commercialize ethanol and power from sugarcane and includes the distribution of various industrial and transportation fuels through the retail network in Brazil. It will develop the business opportunities to produce and sell ethanol and sugar globally. The value of the project is US$ 12-billion.

Cosan Ltd:

It is a holding company. It involved in the production of ethanol and sugar, the distribution and marketing of fuel and lubricants in Brazil. It also involved in logistics services in Sao Paulo, Brazil. It produces, sells imports and exports sugar, sugarcane, other sugar by-products and ethanol. It also involved in the distribution of fuel and other fuel by-products. It produces and markets electricity, steam and other co-generation by-products. The company is running the operation through Cosan, Cosan Alimentos S.A and Cosan Acucare Alcool S.A.(CAA).

Joint ventures between Shell and Cosan Ltd:

Deal Rationale:

Joint ventures of these two companies will made them to achieve leadership in their respective core businesses.

Shell is the global leading energy and petrochemical supplier and Cosan is the world leading producer of sugarcane ethanol and sugar producer.

These JV helps to develop the production of sugar and biofuels

These JV helps to develop the fuel distribution business in Brazil with the annual production of

Over 2 billion litres of ethanol

Shell contribution at IOGEN and CODEXIS will lead the JV to a unique position in the production of sugarcane ethanol

These JV helps to develop the Biomass technology between shell and cosan

The value of the share will also increase due the joint venture

Transaction Overview:

Source Created by Author 2011

Capital Structure of Joint Venture:

Management Company 50% 50%

Cosan 51% 49% 49% Shell 51%

Downstream Co

Sugar, Ethanol Co-generation

Ethanol Production Supply, distribution and sale of fuels in

Co-generating activities Brazil

Iogen and Codexis techonologies 4500 fuel station around the network

Source Created by Author 2011

Contribution of Cosan and Shell towards Joint venture:

Cosan

Shell

Total contribution -US $ 4,925 Million

Total Contribution - US $ 4,925 Million

Sugar and Ethanol Assets

Cash Contribution of $1,625 million

Sugar cane crushing capacity: currently ~60 million tonnes per annum from 23 mills

Brazilian downstream assets, including ~2,740 branded retail sites, supply and distribution assets, and the aviation fuel business, including the one recently acquired from Cosan

Ethanol production capacity:  currently >2 billion litres per annum; 

Its share interest in Iogen Energy;

All Co-generation plants

Its 14.7% share interest in Codexis.

Brazilian downstream assets, including ~1,730 retail sites, and supply and distribution assets;   

Ethanol logistics assets

Net debt of approximately US$2.5billion

Additional debt of R$500 million from BNDES

Assets not being contributed:

Cosan

Shell

Rumo

Exploration and production businesses

Stake in Radar

Gas and power businesses

Manufacturing and marketing of its lubricant business

Manufacturing and marketing of its lubricant business

Future cogeneration assets

Shell trading business

Retail Brands DaBarra and União

Shell brand

Scope of the Joint Venture to Shell and Cosan:

Because of this joint venture, the production and the sale of sugarcane ethanol and ethanol products in Brazil was increased by both Shell and Cosan Limited.

Increase in the production and sale of sugarcane ethanol and ethanol based products in Brazil

Continuing development in first generation technology in Brazil and second generation technology in international partnership

Increase in the production and sale of steam, electricity and other co-generation products in Brazil

Growth in the distribution, commercialization and retail sales of fuel products and aviation fuels in Brazil

The annual production capacity of about 2 billion litres and significant growth aspirations, the JV is milestone for the production of ethanol in the world. The graph below shows the Shell and Cosan joint venture is comparable to 1/8th of current ethanol production form sugarcane as of 2010 -2019.

Source from googleimages.com

Benefits arising from the joint ventures of Cosan and Shell Ltd:

Increase competition in the fuel and biofuels industry in worldwide

More access to ethanol market

Shell's interests in Iogen energy and Codexis, which make the venture to develop next generation biofuels technologies.

Building a unique platform for the second generation technology

Upgrading of debt ratios by increasing the capital which inturn increase the cash flow

Improved business intelligence

Access to the highest standards in corporate managerment

The project helps to generate electricity from sugarcane

Future Steps:

The joint venture will start in the mid of 2011 and to increase the production of ethanol of about 2.2 litres per year. Raizen project will run 23 plants to produce ethanol by crushing 62 million tons of sugarcane. In addition to the production of ethanol 23 mills will operate for the production of four million tons of sugar and also planned to the increase the production upto six million tons in 2016.

Joint ventures with HR Bio Petroleum:

HR Bio Petroleum:

HR bio petroleum is a renewable energy technology company mainly focusing on the ultilisation of productive plants on earth and marine microalgae for the production of biofuels and other valuable products for reducing the industrial emissions of CO2. Their main activities involved in photosynthetic power and growing microalgae to convert sunlight and carbon di oxide into inexpensive oils, sugars and proteins for conversion into important products.

Joint Venture: Cellana

Shell and HR Bio petroleum had signed separate joint venture, called Cellana [12/11/2007] inorder to build a pilot facility in Hawaii for the growth of marine algae and for the production of vegetable oil which in turn converted into biofuel.

This joint venture is a further step for the Shell's effort for the development of new generation biofuels and non-food raw materials.

Construction of the pilot facility has begun on the coast of Kona on the Big Island of Hawaii. This site is leased from the National Energy Laboratory of Hawaii Authority [NELHA].

The size of the pilot project is 2.5 Hectare (269,000 SQ Ft) and the shell plans to expand it to 1,000 hectare facility after the completion of two years and later it will developed into full-scale commercial 20,000 hectare plant.

The pilot plant facility will focus on the growth of non-modified, marine microalgae in open -air ponds by using appropriate technologies. Algae strains used will be approved by the Hawaii agriculture department. These facilities will protect the local environment and marine ecosystem. After harvesting algae the small volume of production will used for the testing purpose.

Reasons for the Shell to sign this joint venture:

Once the production of algae comes into stream the shell able to target the European Union market like USA and other countries in 2year's time. The plan of EU is to use 5-75% biofuel used for the transportation in all fuels by 2010 and it will increase upto 10% by 2020.

According to the research company Frost & Sullivan Inc. biodiesel constitutes 80% of EU, so Shell believed that the project Cellana provide the opportunity to meet the requirement of EU.

Shell expected that the microalgae will produce 60 tons of oil per hectare compared with an average of 4 tons of oil per hectare for jatropha. Using algae as a feedstock for producing high grade diesel fuel

According to shell, transport-fuel demand will be rising 45 percent from 2006 levels to more than 60 million barrels a day by 2030, with the shareholding of biofuel expanding from 1 to 7 percent.

Current Situation of the joint Venture:

Today, it is one of the most advanced operations for the conversation of algae-to-biofuel for the companies and firms in United States

Cellana is still under the research and development process.

In January 2010, HR Bio petroleum had acquired the shareholding of shell from cellena and become the sole owner for the Cellena including six-acre demonstration facility in Kona.

But Shell has agreed to support algae development technology by providing the short term fund for the transition.

HRBP will continue to devlop the algae technology investment, it is also supported by corporate and project stateholders including the University of Hawaii, Hawaiian Electric Co., Maui Electric Co., the National Alliance for Advanced Biofuels and Bioproducts consortium, and the U.S DOE.

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