The announcement came as something of a surprise to the industry as Exxon has been the most macho of the traditional oil companies. While BP and Royal Dutch Shell have invested in alternative energy research for some time, Exxon has been openly skeptical of the field. Rex Tillerson, its chairman and CEO, famously called ethanol "moonshine." Greenpeace and other environmental groups have long been critical of the company's stance.

All this makes the move more significant. Exxon would not be putting money into algae-based fuels if it did not believe they hold real promise. Until now, research has been conducted by a range of startups backed by venture capital, typically in the tens of millions of dollars or less.

Exxon estimates that algae could yield 2,000 gallons of fuel per acre each year. In comparison, palm trees yield 650 gallons and sugar cane 450 gallons. Corn, the most common source of biofuel in the United States, enjoying as it does a federal subsidy, generates only 250 gallons per acre per year. It also takes a considerable additional investment of energy to turn it into ethanol, and it competes for land with food-producing agriculture.

There are more than 40,000 types of algae, and they are immensely resilient. Unlike corn ethanol they would not compete with agriculture for food and water. They can be grown on land unsuitable for food crops and do not need fresh, clean water. Some even thrive in salt water.

"Algae consume carbon dioxide and sunlight in the presence of water, to make a kind of oil that has similar molecular structures to petroleum products we produce today," said Emil Jacobs, vice president for R&D at Exxon's research and engineering unit.

"That means it could be possible to convert it into gasoline and diesel in existing refineries, transport through existing pipelines, and sell it to consumers from existing service stations."

Sapphire, a California company, has tested the algae-based fuel it has developed on Continental Airlines flights. A blend of 50 percent algae-based fuel was used in a Boeing 737-800 last January.

"Continental's primary role in the demonstration was to show that the biofuel blend would perform just like traditional jet fuel in our existing aircraft without modifications of the engines," Holden Shannon, Continental's senior vice president for global research, told Congress last month.

Jacobs stressed that this will be a five- to 10-year development project. If it is successful Exxon would likely invest billions of dollars to produce algae-based fuel on a commercial scale.

Exxon is partnering with biotech firm Synthetic Genomics, whose founder, Craig Venter, did pioneering work sequencing the human genome. Synthetic Genomics will receive up to $300 million of the money committed.

Synthetic Genomics plans to build a test facility in San Diego to study various strains of algae. Venter would genetically engineer the most suitable strains to maximize their productivity. Up to 50 percent of algae cells can be made up of the oil they produce, known as lipids.

Speed of growth of the algae is another factor, as is harvesting their oil. Venter hopes to develop a strain from which oil can be continually extracted, rather like milking a cow daily.

The potential applications are wide. The Pentagon's Defense Advanced Research Projects Agency awarded contracts of $20 million and $15 million to two San Diego research firms to develop an algae-based replacement for military jet fuel.

The United Kingdom's Carbon Trust estimates that enough algae-based fuel could be produced by 2030 to replace 12 percent of current jet fuel consumption or 6 percent of road transport diesel.

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