“If research and development milestones are met,” ExxonMobil says, the company expects to spend $300m internally on the project and $300m more to SGI, based in La Jolla, California.

“The real challenge to creating a viable next generation biofuel is the ability to produce it in large volumes which will require significant advances in both science and engineering,” says Craig Venter, founder and chief executive of privately-held SGI.

"The alliance between SGI and ExxonMobil will bring together the complementary capabilities and expertise of both companies to develop innovative solutions that could lead to the large scale production of biofuel from algae,” says Venter, a scientist who decoded the human genome last decade.

ExxonMobil and its partner say that algae could yield more than 2,000 gallons of fuel an acre of production versus 250 for corn, the main feedstock for US ethanol.

“After considerable study, we have determined that the potential advantages and benefits of biofuel from algae could be significant,” says Emil Jacobs, vice president for research and development at Exxon’s research and engineering unit.

He notes that growing algae does not rely on fresh water and arable land otherwise used for food production. Algae has the potential to produce large volumes of oils that can be processed in existing refineries to manufacture fuels that are compatible with existing transportation technology and infrastructure, according to Jacobs.

Both companies will now work to identify algae strains that can be quickly converted into low-cost oils and that can also absorb larger amounts of carbon dioxide than existing ones. Another challenge is to develop systems for large-scale harvesting of algae.

Fuels developed from algae have similar molecular structures to oil-based products such as diesel and jet fuel.

In recent years ExxonMobil has been under fire from environmental groups and members of Congress for not doing more to develop alternative energy, despite having world-class research facilities.

Even so, the company has invested more than $1.5 bn since 2005 on activities that improve energy efficiency and reduce greenhouse gas emissions. Initiatives include technologies to improve automobile efficiency, such as tire liners that keep tires inflated longer, advanced fuel-economy engine oil and light-weight automobile plastics.

As well, the company is researching enhanced engine efficiency, has developed an improved lithium battery separator film for hybrid electric cars, and sponsors what it says is breakthrough research into ways to improve solar energy, biofuels and carbon capture and storage.