Energy. Oil. 

It's at the very heart of everything that drives modern society. It's much more than just the black stuff that comes out of the ground and then goes into our cars. Oil is central to every consumer good we buy, the medical devices we depend on for health, and as a feedstock to produce fertilizers for the food we eat. It's cheap, it's ubiquitous, and it's getting harder to find -- and harder to get at.

Corn ethanol is only slightly less carbon heavy than fossil fuel. Algal oils could change the game. Source: Unilever presentation.

Production of corn-based ethanol by agribusiness giants such as Archer Daniels Midland (ADM -0.91%) has helped offset consumption of gasoline, and similarly biodiesel for diesel, but both products compete with food crops for land and resources, and corn ethanol takes almost as much energy to grow and produce as it actually generates, meaning no significant environmental benefits. A recent deal between Phillips 66 (PSX -0.35%) and start-up Sapphire Energy, however, could alter the landscape significantly for biofuels, both environmentally and in functionality. 

Will these two companies -- along with the work happening at Solazyme (TVIA) -- finally deliver on the promise of biofuels to help the environment, while also not competing with our ability to feed the world?

Hydrogenosomes, algal oils, and the future of fossil fuels
Nature is an amazing and wonderful thing. My wife -- a biochemist -- did her postdoctoral work on an organism that has an organelle called a hydrogenosome. What's cool about this is that these little organisms produce -- as the name hints at -- hydrogen. Now, if some really smart people could figure out a way to capture this capability, refine it to a high level, and grow trillions of these organisms at a time, the hydrogen produced could be used in fuel cells. After all, the issue with the fuel cell for hydrogen cars is the lack of progress so far in producing hydrogen in a cost-effective manner, aside from as a byproduct of fossil fuel production. 

So while the little microbe my wife worked on -- which, by the way, has evidence linking it to cervical cancer -- has yet to be turned into a commercial-scale producer of fuel, both Solazyme and Sapphire have taken the production of various kinds of oils from algae to amazing levels over the past several years. 

Solazyme has delivered tens of thousands of gallons of algae-produced diesel to the U.S. Navy. Source: Solazyme.

Solazyme is producing a number of different types of oils from algae, including diesel and jet fuel distillates as well as customized oils for the packaged food, consumer goods, and personal care product markets, and counts chemical giant Dow Chemical and consumer goods conglomerate Unilever as partners. Unilever, for example is working to meet its pledge to consume only 100% renewable oils by 2020, largely because of what companies like Solazyme are accomplishing. 

Solazyme and Sapphire differ largely in how their proprietary algae produce their oils: Solazyme's engineered algae are heterotrophic, growing in the dark, in large fermenters and feeding off sugars from plant materials like corn or switchgrass. This is notably different than Sapphire's algae, which, like their wild cousins, are autotrophs, using sunlight and photosynthesis to do their magic. 

What does that mean?
It means that Solazyme's products will still depend on an agricultural feedstock and therefore compete with land that could be producing food. Additionally, the level of environmental impact will be a measure of the feedstock as well as the algae's efficiency at producing whatever oil it makes. On paper, Sapphire's algae crude could very well have a smaller carbon footprint, but that's debatable, and a number of variables could affect the actual end result. Sapphire as well is heavily focused on its one key product: crude oil.

Sapphire's 25-acre facility in New Mexico. Source: Phillips 66.

The company's premise is simple: By starting with crude oil, it can then leverage the United States' existing refining capacity to then generate the dozens of separate products that come from crude oil, beyond just diesel and gasoline. The agreement with Phillips 66 is targeted at reaching demonstration scale in 2015, and production scale three years later. The company has set its sights on producing 1 billion gallons of crude from algae by 2025. 

Final thoughts: Changing the world takes time
It's incredibly early in this story, but Solazyme and Sapphire have the innovative capability to do amazing things, and the financial backing of some significant players, like Phillips 66 and ADM, are helping move things forward. So far, it appears that algae are far superior to their plant cousins as ways to produce biofuels in a responsible and less carbon-heavy manner. 

When it comes to investing, Solazyme offers some interesting potential, as well as significant risk. Sapphire is still privately held, but at some point, an IPO is likely as both part of its steps to commercialization and as a chance for early investors to get paid. When it comes to the big boys like ADM and Phillips 66, these new advances just won't move the needle for investors. But when it comes to helping make a better planet and more effective use of already-strained resources, both companies are making a positive contribution and maybe saving the biofuels business at the same time.