A Baltimore, Maryland company, Algenol, has signed an $850 million deal with Biofields, a Mexican company, to grow algae for fuel production.

Algenol plans to make 100 million gallons of ethanol by the end of 2009 and to increase this to a billion gallons – more than 10% of the United States’ current ethanol capacity – by 2012. BioFields has signed an agreement to sell the fuel to the Mexican government, probably through the state oil monopoly Pemex.

Algenol has plans to expand the technique to locations beyond Mexico and is already targeting to build algae-to-ethanol farms on coasts in the United States.

Algenol will use a process he invented in the 1980s to coax individual algal cells to secrete ethanol. Paul Woods, Algenol’s chief executive, said he’s known about the technology for decades but that today’s record oil prices and rising alarm about global warming make it time to produce the fuel.

One advantage of ethanol from algae is its sheer productivity compared to agricultural crops. Algenol estimates it can make 6,000 gallons of ethanol from an acre of land. At that rate, if all U.S. ethanol was made from algae, it would only use 3 percent of the land that corn needs to make the fuel. Another advantage is  algae’s carbon-absorbing potential. Each 100 million gallons of ethanol from algae will absorb about 1.5 million tonnes of carbon dioxide.