ExxonMobil (NYSE: XOM) said it will spend $600 million to develop biofuel from algae. The petroleum giant, the most profitable company in the United States, will work in partnership with privately held Synthetic Genomics.

Exxon will spend $300 million on its research and provide $300 million to Synthetic Genomics, which was founded in 2005 to develop genomic-driven alternative energy. If the experiments prove commercially viable, Exxon -- which has $25 billion of cash on hand -- is prepared to make a even larger investment in the project.

The goal of the project is to create algae that can use the sun's energy to turn carbon dioxide into special oils that can be refined into fuel.

Current technology allows scientists to use algae to produce sugars that can be processed into biofuel, the same way starch from corn can be fermented into ethanol using enzymes. Exxon wants to figure out how to skip the sugar step and program the living algae to produce material that can be refined into gasoline or jet fuel.

Algae-based biofuel is already more efficient at creating fuel than ethanol produced from corn or sugarcane. The problem is cost.

Malcolm Brown is a University of Texas botanist who's been studying cellulose for the past quarter-century. He said the large-scale ponds that must be built to grow the algae are out of reach for most companies and must be funded by deep-pocketed investors like oil companies. Several other companies are seeking to commercialize cellulosic ethanol from other plant sources.

Exxon isn't the first oil company to try to develop algae-to-gasoline projects. Royal Dutch Shell funded a project with HR Biopetroleum in 2007 to try to produce commercially viable biodiesel. The project will grow algae in a roughly 6-acre plot using seawater ponds -- although algae can grow in fresh water as well, or even in highly polluted water.

Advanced biofuels -- like cellulosic ethanol and biodiesel, that are 50% cleaner than gasoline -- will see a massive run-up in demand. The federal government's production timetable for cellulosic ethanol calls for a 15,900% increase from 2010 to 2022 -- a rise from 100 million gallons to 16 billion gallons.

Don't expect to be pumping algae-based gasoline into your tank any time soon. Experts say it will take five or ten years before the process is commercially viable. Buy Exxon because you believe in its future as the world's leading petroleum company, not because of an experimental foray into algae.

-- Francisco E. Bermea

Francisco E. Bermea is a writer and researcher at StreetAuthority. Francisco Holds a B.A. in economics from the University of Texas at Austin. His experience has taken him around the world, including a stint at the prestigious Pontificia Comillas in Spain, where he studied finance and econometrics. Read more...

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