picture-126LS9, perhaps the company to watch synthesizing biofuels and chemicals from organic feedstocks like switchgrass, has brought in $25 million in a new round of capital from Chevron Technology Ventures, Khosla Ventures, Lightspeed Venture Partners and Flagship Ventures.

This is the second big win, the South San Francisco company has had recently. In May, it also landed a deal with corporate giant Procter & Gamble to make consumer chemicals from renewable and sustainable sources. Right now, its claim to fame is its production of UltraClean Diesel through microbial one-step fermentation. Right now, it’s doing it on demonstration scale, claiming that commercial distribution could occur as soon as 2013.

LS9 says that its biofuel’s big advantage is that it could sell for $45 to $50 a barrel (a fact it hopes to prove by 2011), still cheaper than the average price for a barrel of oil. That said, remaining cost competitive will be vital to the company’s success and that of its major competitors like Codexis, Genomatica, Coskata and Solazyme. The more affordable oil becomes, the more challenging it will be for them to market their more experimental products.

LS9’s technology works like this: A strain of e. coli has been genetically engineered to convert sugar into a methyl ester that is structured very similarly to existing brands of clean diesel. The microbes take in the feedstocks and secrete the oil-substitute without dying. A lot of other biofuel companies are forced to kill the microbes they use in this process.

Chevron has been placing a lot of emphasis on biofuels recently, also investing in Codexis, another company relying on custom-designed microbes. It has also supported research and development at Solazyme, which just won a 20,000 gallon contract to supply diesel to the U.S. Navy for further product testing.

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