Earlier this week, the world's largest oil major announced a five-year, $600 million partnership with Synthetic Genomics Incorporated (SGI), a California-based genetic engineering firm, to develop next-gen transportation fuel-from pond scum.

This algae-based bio-oil would so closely resemble the hydrocarbons in petroleum that it could be processed by refineries, be transported through pipelines and fill up car and airplane gas tanks without any upgrades or replacements needed. Sounds pretty fanciful, eh?

The partnership is an unexpected change of course for Exxon, who, for the past several years, has scoffed both at biofuels and alternative energy in general. After all, it was only two years ago that CEO Rex Tillerson famously accused ethanol of being "moonshine."

So will this new venture-one of the largest Big Oil/Bio Oil team-ups ever-signal a coming of age for the beleaguered biofuel industry? Or will it be subsidized ethanol all over again?

Why Algae?

Even as Tillerson was publicly turning his nose up at biofuels, Exxon (NYSE: XOM) was secretly weighing its options, assessing the scientific challenges and commercial viability of the various technologies on the market.

"It's fair to say that we looked at all the biofuels options," said Dr. Emil Jacobs, VP of R&D at ExxonMobil's Research and Engineering Lab in an interview with the New York Times. "Algae ended up on top."

Currently, most biofuels derive from agricultural crops: Ethanol, for example, is processed from sugarcane or corn, and biodiesel is distilled from plant oils, most commonly soybeans. But hydrocarbons can come from other sources too, like algae, that produce them directly and store them within their bodies as food for hard times. A kind of biological gold-bug mattress-stuffing.

Algae also offer several advantages that agricultural crops can't: They reproduce on their own, they can live in nonarable land and they don't need fresh - or even clean - water to survive. In addition, these single-celled organisms require much less space to grow: Current strains of algae can produce 2,000 gallons of fuel per acre, compared with 250 gallons for corn-based ethanol.

But best of all, the molecular structure of algae oil naturally resembles that of petroleum - not too surprising, considering much of today's crude oil was made by oceanic algae 500 million years ago.

According to the energy research group Carbon Trust, by 2030, algae fuel could sub in for more than 70 billion liters of fossil fuels used each year. That's about 12% of the total jet fuel yearly, or 6% of all auto diesel - an annual savings of over 160 million tons of greenhouse gases.

Until recently, however, the cost and technical challenges behind mass-produced algae oil have been prohibitively large, although as technology advances, the price tag has come down quite a bit. Still, according to the FT, the estimated cost of producing algae-based biofuel stands at $33/gallon - compared with $2/gallon to produce Saudi crude.

Carbon-Chomping Pond Scum

That's where Exxon comes in. Under the partnership, the company is funding a new SGI research lab in San Diego, where the genomics firm can research ways to enhance algae for mass production.

Genetic engineering is key, says J. Craig Venter, co-founder of SGI, and best known as the leader of the team who decoded the human genome. "It's the only way we can change the yield far beyond nature, and make the algae resistant to virus attacks, and so on," he told FT.

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