Royal Dutch/Shell Group is taking a minority stake in a small Canadian technology company as part of what is expected to become a broader partnership, a deal that marks the oil industry's first major investment in the bioethanol industry and a dramatic boost for the growth of the alternative fuel.
Sources say the deal between Ottawa-based Iogen Corp. and Royal Dutch/Shell is a first step in what the two companies hope will eventually lead to the use of bioethanol -- fuel made largely from corn stock, hay and other agricultural waste -- in North America's millions of automobiles.
Iogen sources say that under the deal the Anglo-Dutch oil giant will provide the privately held Canadian company with the much-needed capital to create a faster path to commercialization, a guaranteed customer and, eventually, the distribution network that bioethanol and other alternative fuels now lack.
"You've got to figure out how to get it in people's cars," an Iogen official said.
The deal, the result of about two years of discussions between the two companies, could also mark the leap that is required to create the supply needed for any alternative fuel to support its market.
Brian Purdy, an analyst at Acumen Capital Partners Ltd. in Calgary, said distribution is a significant barrier for any alternative fuel. "That's going to be the real key for penetration."
For Royal Dutch/Shell, the deal gives the oil giant a step ahead of rivals such as Exxon Mobil Corp. and BP PLC in the tepid struggle to control the fuel sources of the future. "It's an opportunity for these guys, but it's not a very expensive foray," said William Lacey, a research analyst at FirstEnergy Capital Corp. in Calgary.
The growth of bioethanol would also create a major boost for the agricultural sector, which could find a market for organic material now largely left in fields. The use of bioethanol in automobiles would also go a long way toward fulfilling Canada's commitments to the Kyoto Protocol of 1997 -- an international agreement to fight global warming through the reduction of fuel emissions -- and toward creating a market for agricultural waste.
Bioethanol differs from ethanol, which is now available as a small part of a gas mixture at many Canadian retail stations, because it uses farm waste instead of corn and other food sources, and because it can be used in much greater quantities.
The development of an alternative fuels market has been a long, slow process that first generated widespread attention following the 1970s oil crisis. After fading during the 1980s, when oil prices tumbled, alternative fuels made a resurgence in the early-1990s with the growth of the environmental movement.
Interest in alternative fuels sputtered again later in the decade as oil prices fell and technological hurdles proved stronger than had previously been believed. The Kyoto Protocol added new interest.
Since then, legislators, particularly in the United States, have been moving toward the mandatory use of alternative fuels.
"The world is now ready for a greenhouse gas-reduction fuel," said an Iogen source.
Royal Dutch/Shell has predicted that renewable energy will make up 50 per cent of global energy demand by 2050, and has earmarked $500-million over the next five years for renewable investments.
Iogen, which has earlier received investments from the federal government and Petro-Canada, expects it will start to build commercial plants in 2004 and be able to provide a commercially available product in 2006. Iogen has about 100 employees but expects to increase that by about 50 within a year.