Paul Woods, Algenol's chief executive, said he's known the technology for decades but that today's record oil prices and rising alarm about global warming make it time to produce the fuel.

"It really is a one-two combination that no other company can deliver," Woods told Reuters in an interview this week.

Several algae companies are trying to enter the biofuels business by drying and pressing the organisms to make vegetable oil that can be processed into biodiesel.

Woods said Algenol will use a process he invented in the 1980s to coax individual algal cells to secrete ethanol. That way, the fuel can be taken directly from the vats where the algae is grown while the organism lives on, using far less energy than drying and pressing the organisms for their oil.

Algenol plans to make 100 million gallons of ethanol, about the average annual capacity of one traditional US distillery, in Mexico's Sonoran Desert by the end of the 2009. By the end of 2012, it plans to increase that to 1 billion gallons -- more than 10 percent of current ethanol capacity in the United States, the world's top ethanol producer.

In addition to the US$850 million BioFields deal, the company has also received about US$70 million in funding from investors.

ALGAL LIBRARY

Algenol operates the world's largest algae library in Baltimore, Maryland to study the organism that can grow in salt or fresh water, and expanding the technique to locations beyond Mexico. The company is targeting to build algae-to-ethanol farms on coasts in the United States.

One US climate expert was cautiously optimistic about Algenol. "It has a lot of promise," said John Steelman, a program manager at nonprofit group the Natural Resources Defense Council. "We do not know if it's a great thing yet."

How well the system would work, what kinds and volumes of nutrients would be needed and how much water would be required are unknowns, Steelman said. And gaining market share from politically-established players in the US Midwest and Big Oil could be difficult, he said.

But the company has already made inroads into the petroleum system. BioFields has signed an agreement to sell the fuel to the Mexican government, probably through the state oil monopoly Pemex.

And algae's carbon-absorbing potential could be an advantage. Each 100 million gallons of ethanol from algae will absorb about 1.5 million tonnes of carbon dioxide, the company said. That gives Woods confidence that algae-to-ethanol is better emissions reduction technique than capturing the gas at power plants and socking it away underground. As a former natural gas company executive, he said he does not put faith in storing any gas underground permanently.

Another advantage of ethanol from algae, NRDC's Steelman said, is its sheer productivity compared to agricultural crops. Algenol estimates it can make 6,000 gallons of ethanol from an acre of land.

At that rate, Steelman said, if all US ethanol was made from algae it would only use 3 percent of the land that corn needs to make the fuel. "It's a huge advantage," he said. (Editing by Marguerita Choy)