Shell and Cosan SA Industrio and Comercio, the world's largest sugar producer, finalized a multi-billion dollar joint venture today for biofuels and sugar in Brazil, and in the process gave the world of biofuel startups a reason to get out of bed tomorrow. 

Under the deal, Shell will contribute close to $2 billion dollars, 2,740 service stations, its ongoing activities in jet fuel, and its investments in Codexis (Shell owns 15 percent of that company) and Iogen Energy, another biofuel company. Cosan, for its part, will contribute 23 sugar mills and more than 1,700 service stations. The memorandum of understanding was first signed in Feburary. In all, the new venture has an estimated value of $12 billion.

Shell will also have the right to buy Cosan's half of the venture ten years from now.

On Sand Hill Road, let the high-fiving begin. VCs have plunked billions into biofuels over the last six years with little to show in the way of results. Many biofuel manufacturers such as Range Fuels and Mascoma have had to delay production and everyone has suffered from a swoon in oil prices. To generate revenue in the near term, many have diversified into green chemicals or food. Algae specialist Aurora Biofuels, for instance, is undergoing a transformation from a fuel company to one that will emphasize producing oils for omega-3s. (Story here--official announcement sometime soon.)

One of the big problems, according to Mohr Davidow's Erik Straser and Josh Green, among others, is that the large oil companies have not been willing to commit to biofuels. ExxonMobil will plunk money into futuristic Synthetic Genomics and run all sorts of algae ads. But oil companies have not announced widespread commercialization and production plans.

The Shell-Cosan deal changes that, or at least paves the way toward changes. On the face of it, Shell is serious about biofuels.

"The proposed joint venture is set to pool our complementary businesses, enhance our growth prospects in ethanol production globally and support our growth platform for our retail and commercial fuels businesses in Brazil," said Mark Williams, Shell Downstream Director. "Over the next 20 years, sustainable biofuels are one of the most realistic commercial solutions to reduce CO2 emissions from transport."

Granted, the whole thing could devolve into a oil company accounting game. It could also remain landlocked in Brazil. Still, on the face of it, it looks like there is a new, well-funded biofuel venture in the world with an eye toward commercialization. It got past the MOU stage.

Others may follow. And in turn, these new ventures with their fossil fuel funds could start to cherry pick biofuel startups as partners.

Codexis, which held a skeptically-viewed IPO earlier this year, can't complain.