Shell is Europe's largest oil company, posting $6.92 billion in net profit in the third quarter. A Shell spokeswoman in London declined to say how much money the investment represented.

"This is a 2.5 hectare (6 acre) demonstration project, and it will take up to two years to complete," Shell spokeswoman Olga Gorodilina said of the project. Whether it proceeds further "will depend on the results," she said.

Like corn, sugar cane, palm oil, soya and various kinds of grasses, algae has long been considered a candidate crop for furnishing vegetable oils useable as a replacement for diesel, reducing greenhouse gas emissions.

Amid current worries over global warming, scientists and entrepreneurs are seriously re-evaluating alternatives fuels.

Shell competitor Chevron Corp. and the U.S. Department of Energy's National Renewable Energy Laboratory announced a similar project in October.

"Construction of the demonstration facility on the Kona coast of Hawai'i Island will begin immediately," Shell said in a statement.

"Algae hold great promise because they grow very rapidly, are rich in vegetable oil and can be cultivated in ponds of sea water, minimizing the use of fertile land and fresh water."

Shell will form a majority-owned joint venture to build the project with Delaware-based HR Biopetroleum Inc., which has expertise in growing algae.

Shell said it plans to test several kinds of algae to find the optimal oil-producing strain, and it will also add carbon dioxide to the algae's growing tanks to test how much it aids growth.

If it works as hoped, future algae farms would be located near traditional fossil fuel-based power plants, and siphon off some of their carbon dioxide to help the algae grow and reduce overall emissions.

If tests are successful, the next step would be the construction of a 100 hectare (250 acre) project to test commercial viability, Gorodilina said.

A full-scale commercial production facility would occupy 20,000 hectares (50,000 acres), but she could not say when that might be built.

"Algae have great potential as a sustainable feedstock for production of diesel-type fuels with a very small CO2 footprint," said Graeme Sweeney, a Shell executive overseeing the project, in a statement. "This demonstration will be an important test of the technology and, critically, of commercial viability."

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