BP is to buy a Brazilian biofuels company for $680m (£424m) in a "watershed moment" in the oil major's plans to expand its sustainable fuel business.
The Companhia Nacional de Açúcar e Álcool (CNAA) deal includes 83 per cent of the Brazilian company's shares as well as an agreement to refinance its long term debt.
BP will gain 2,500 employees, two working ethanol mills and one more under construction, along with sufficient sugar cane to supply them. At full capacity, it will be able to process 15 million tonnes of sugar cane per year, producing 1.4 billion litres of ethanol.
BP has a presence in Brazil's biofuels sector through a 50 per cent stake in Tropical BioEnergia. But the CNAA deal is a different order of magnitude.
"This is a watershed moment," Philip New, the vice-president of BP Biofuels, said. "It is a foundation step for turning biofuels into a fully fledged business in BP."
The company is already betting big on green fuel. Since 2006, it has put more than $1.5bn into the business, and it is also investing $500m in the Energy Biosciences Institute in California.
"Biofuels are the only real alternative to crude oil if we are looking for decarbonised transport fuels and a broader set of supply options," Mr New said.
So far, Brazil is by far the largest market, with around half of all transport fuel made from ethanol from sugar cane. The other major growth area is the US, where ethanol from corn starch contributes around 10 per cent of fuel.
In the US, BP is focusing development efforts on cellulosic sugars, extracted from the cell walls of highly dense plants. Last year, the company bought a cellulosic biofuel business - including a demonstration plant in Louisiana – from Verenium for $98m. It is also building one of the world's first commercial-scale cellulosic facilities in Florida.
In the UK, the proportion of biofuel is currently less than 3 per cent. But BP and British Sugar have plans for a large-scale biofuel factory in Hull, to be up and running by early 2012. The facility will take the UK's surplus of high-starch, low-protein wheat – which is currently exported to Europe – and turn the starch into ethanol for biofuels and high-protein animal feed.
"The important thing about the CNAA deal is that it gives us a material business upon which to grow in Brazil, and also a base from which do something similar with cellulosic biofuels in the US and in other parts of the world in future," Mr New said yesterday.
The company roundly dismissed claims that biofuels add to pressure on food prices, stressing that the cane is grown on low-yield land with little capacity to support the human food chain.
"Biofuels can be done well, or done badly, just like anything," Mr New said. "It is massively simplistic to say that because people have found a way to turn some biomass into fuel it is contributing to increasing food prices."
Rosneft rejects TNK-BP
*State-owned Russian oil giant Rosneft yesterday dismissed rival TNK-BP's claims to a slice of its $10bn (£6.2bn) tie-up with BP.
TNK-BP – the 50/50 joint venture owned by BP and the Alfa-Access-Renova consortium of four Russian oligarchs – says the BP/Rosneft share-swap and Arctic exploration deal violates its shareholder agreement and that it is entitled to a piece of the action.
Rosneft thinks differently. "Rosneft once again underscores that it did not conduct and is not conducting any negotiations with the AAR group or TNK-BP," the company said in a statement yesterday. "TNK-BP has never been considered a potential participant in the alliance due to its lack of required competence."
Igor Sechin, the Rosneft chairman who is also a deputy prime minister of Russia, was similarly unmoved. "Russia has the right to choose its own partner," he told a news agency.
The BP/Rosneft deal is currently frozen, pending arbitration between BP and TNK-BP. Meanwhile, TNK-BP has put forward plans for it to act as an intermediary in the share swap arrangement.