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solazyme.JPGContinuing the trend of major oil companies taking interest in producing biofuels from algae that Royal Dutch Shell started last December, Chevron has opened a deal with Solazyme, a San Francisco biotech startup.

The partnership follows an agreement Chevron made last year with the Department of Energy to produce fuels from algae, while Solazyme, which works in several areas outside biofuels, has become more focused on algae in recent months.

Solazyme also announced today that it has produced an automotive-ready biodiesel from algae and tested it in a standard diesel-engine car. The company has already tested the fuel in long-distance driving conditions and is displaying the fuel at this year’s Sundance Film Festival, underway now in Park City, Utah.

Algae is a logical source of fuel, as the organisms are naturally oily. However, companies face a challenge in scaling production to levels that will make the fuel cost-effective. Researchers must coax the algae into churning out the right kinds of oil at a greater than natural pace.

Other companies working on algal biofuels include Cellana, the joint venture between Shell and HR Biopetroleum, Aurora Biofuels (coverage here), and LiveFuels, whose founder, Rich Hilt, wrote a contributor piece for VentureBeat on the future of algae.

Solazyme itself has captured a fair amount of funding recently, taking in $8 million in venture funding and $7 million in venture debt last year (covered here and here). The terms of its agreement with Chevron weren’t disclosed.

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