Valero Energy Corp. (VLO) has entered into a five-year agreement with Mission NewEnergy, an Australian company, to obtain biodiesel made from jatropha. Mission is an Australian biofuel refiner. Jatropha is a family of oilseed plants that can grow on marginal soil. It is treated as one of the best sources for future biodiesel production.

Under the terms of the agreement, Mission will supply up to 60 million gallons of biodiesel per annum next year onwards. The agreement allows Valero to buy a 25% stake in Mission, double the amount of supply as well as extend the contract by an additional five years. The value of the contract could be as high as $3.5 billion.

With this transaction, Valero is trying to diversify its fuel supplies. We view this transaction as an important step for the company following the acquisition of assets from VeraSun Energy Corporation, an ethanol refiner in the U.S., in March this year.

When the refiners in the U.S. are facing with uncertainty regarding future regulations for greenhouse gas emissions and the potential for higher requirement of biofuels including ethanol, this agreement is a step in right direction, in our view.

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