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Algae has become a key energy theme seemingly overnight. Once considered mere pond scum, the unique microscopic plant has emerged to become one of the most proclaimed fuel sources of the future. Indeed, algae was the original creator of oil, and today's underground pools are the direct result of prehistoric algal blooms. More importantly, as crude oil becomes ever more difficult to find, the thought of reproducing our own oil becomes ever more a reality - a thought not lost on Big Oil.

Back in July 2009, Exxon Mobil (NYSE:XOM) surprised the world in announcing that it would initiate a new algae-based fuels research program. The company even showed a sincere willingness to support the effort by backing it up with a commitment worth up to $600 million. The company partnered with Synthentic Genomics for a program dedicated to the development of photosynthetic algae.

Exxon's heavy investment appeared to have given credence to industry. Within a month oil rivals Chevron (NYSE:CVX) and BP (NYSE:BP) entered into their own research agreements in the field. Chevron invested in Solazyme (NASDAQ:SZYM). BP invested in Martek Biosciences, now a subsidiary of Royal DSM N.V. Even Royal Dutch Shell (NYSE:RDS.A) had an algae play through its joint venture Cellana, which it had initiated in 2007.

Nearly three years later, and the results have served as a reminder as to the risks involved with investing in a nascent industry. BP's relationship with Martek (now DSM) appears to have pursued a yeast-based technology platform over one that utilized algae. Royal Dutch Shell parted ways with Cellana. And little progress appears to have been made with Synthetic Genomics in regards to commercializing an algae-based fuel solution.

Yet one of the unique success stories that is slowly unfolding in the algae realm is that of Solazyme. In its S-1 Filing, the company asserted that it reasonably could produce its product at $3.44/gallon if so done in a built-for-purpose commercial plant. Whereas most algae companies are struggling to conceptualize, prove, and scale their technology, Solazyme has been producing at a commercial level in 75,000-liter tanks through contract manufacturers since 2007. Even the US Navy has had a particularly keen interest in testing the company's fuels. The Navy has already conducted numerous experiments utilizing the algae-base fuel in their own warships (frigate, destroyer, helicopter and marine riverboat).

As a creator of renewable triglyceride oils, Solazyme creates a higher margin product when compared against petroleum. Such oils are able to be used in everything from jet fuel, to food, to cosmetics, to lubricants, to chemicals, and etc. In terms of margins, Solazyme has realistically asserted that it can produce 30-60% gross margins for its fuels, 30-60% for its chemicals, 40-70% for its nutritionals, and an impressive 60-80% gross margin for its skin & personal care divisions.

For all the company's success to come, Solazyme's name (Solar + Enzyme) continues to serve as a consistent reminder of the photosynthetic origins of the company's initial business model. Solazyme used to be a company that experimented in photosynthetic algae with the ambition to create biofuels. But despite their best efforts, the company soon realized it had to reinvent itself. For the founders a photosynthetic approach failed to be cost effective. And therein lies the current difference between Solazyme and most other algae companies. Solazyme's algae technology no longer uses light. It utilizes a heterotrophic process, in which Solazyme feeds sugars to its modified algae strains, which in turn yields oil in an enclosed and scaleable environment.

It's this very story that should continue to raise the question of whether or not the traditional photosynthetic algae company can actually succeed at all? Solazyme found that it couldn't when it gave it a try. Even to date, no algae company has been able to deliver the kind of product volume that Solazyme has been able to do or at a reasonable price tag.

One begins to wonder then if Exxon Mobil inherently made a mistake in its avenue of research. Assuming the company can eventually bring the costs down with a breakthrough discovery, the issue of scalability remains an ongoing problem. The same goes with providing enough light exposure or consistency throughout a particular batch. Additionally, if the company pursues a strategy of open ponds, a video such as the one here is quick to remind of the abundant contamination issues that are sure to coincide.

Is Exxon wasting its capital when it comes to exploring photosynthetic algae research? Only time will tell. As it stands, the technological accomplishment appears far from ready let alone the logistical infrastructure needed to implement it. But with each passing month, an algae company that isn't reliant on photosynthesis that is ready now, such as Solazyme, stands active in pursuing additional production capacity.

Disclosure: I am long SZYM.

Source: Is Exxon Mobil About To Waste $600 Million On Algae Research?