Making fuel from algae is nothing new, and a lot of organizations, from the smallest start-up to the biggest oil companies, are trying to find the best way to do it. But most of the effort has been on replacing diesel fuel or kerosene. Sapphire wants to replace petroleum.

"We designed it to be a completely fungible product with crude oil," Pyle says. He says the company has refined its algal crude into 91-octane gasoline, diesel fuel and kerosene chemically identical to conventional fuels. He wouldn't disclose how the process works or what it costs but said it is competitive with deep-water oil drilling and extracting petroleum from tar sands.

Sapphire also avoids the food-for-fuel debate that has plagued crop-based biofuels because it uses algae and works on non-arable land with non-potable water. Pyle wouldn't say where Sapphire plans to build the demonstration plant it will have running later this year, but it's reportedly working in Oklahoma and may locate its facilities in the South and Southwest. It hopes to have a full-scale plant up and running within five years, producing 10,000 barrels of green crude a day. The company has lined up more than $50 million in funding from investors like ARCH Venture Partners.

Ramping up to that level of production without killing the algae can be tricky, one expert said, and the environmental impact of green crude remain to be seen. Even if it is carbon neutral, the algal fuels will emit pollutants that contribute to smog and ozone, says Don Anair of the Union of Concerned Scientists.

"You're still going to get combustion emissions. You aren't eliminating those with algal fuels," he says, echoing a point the California Air Resources Board made. Still, Anair is cautiously optimistic.

"The fact that there is a lot of interest in finding a better way to fuel our transportation system is encouraging," he says. "This is one avenue to pursue that has very good potential."

Photo by Sapphire Energy.