San Ramon, Calif.-based oil giant Chevron [1] (NYSE: CVX [2]) said it signed an agreement to work with the U.S. Department of Energy's National Renewable Energy Laboratory to produce transportation fuels using algae.

Chevron said its Chevron Technology Ventures unit will fund the initiative but did not disclose the amount of the financing.

The company said it would collaborate with NREL scientists to identify and develop algae strains that can be economically harvested and processed into finished transportation fuels such as jet fuel.

"NREL operated the Aquatic Species Program for the Department of Energy for nearly 20 years, giving us unique insights into the research required to produce cost-effective fuels from algal oils or lipids," said Dan Arvizu, director of NREL (read the Cleantech Group's in-depth interview with Arvizu: Dan Arvizu’s big day [3]).

This is the second research project under a five year strategic biofuels alliance between Chevron and NREL announced back in October 2006.

The first involves bio-oil reforming, a process by which bio-oils derived from the decomposition of biological feedstocks are then converted into hydrogen and biofuels.

"Biofuels will play an increasingly important role in diversifying energy supplies to meet the world's growing energy needs," said Don Paul, VP and CTO at Chevron.

"Chevron believes that nonfood feedstock sources such as algae and cellulose hold the greatest promise to grow the biofuels industry to large scale."