It's the first project to receive funding under a restructured National Research Council, which earlier this week announced it would focus on technologies that can help businesses, rather than on more general scientific endeavours.
"Today's announcement is an excellent example of exactly the type of thing that the NRC's new direction will achieve," Gary Goodyear, minister of state for science and technology, said Friday
NRC president John McDougall added: "I can confidently state that such a project would rarely, if ever, have happened under the previous operating model at NRC."
Canadian Natural, one of Canada's biggest energy companies, will contribute $6.3 million and Toronto-based Pond Biofuels will shoulder the remainder.
Pond's technology essentially feeds carbon dioxide emissions from smoke stacks — whether it's at an oilsands site, coal plant or factory — to algae.
Waste heat and water from Canadian Natural's operations will also be used to help the algae grow.
As it blossoms, the algae develops fat — in other words, oil, said Joy Romero, vice-president of technology development at Canadian Natural.
That oil can be blended with heavy bitumen to make it flow more easily through pipelines, or sold to refiners, who can turn it into diesel or gasoline. The company says the oil is of the same, if not better, quality as West Texas Intermediate, the key U.S. light oil benchmark.
The material left behind once the oil has been stripped out can be used as a fertilizer, which Canadian Natural needs as it looks to return used up oilsands mines to their natural state.
"It displaces something that we're currently purchasing," Romero said.
John Parr, Canadian Natural's vice-president of thermal projects, added that the biomass is high in protein and carbohydrates, making it a "perfect" animal feed.
"Certainly Alberta is cattle country, so there would be a great market there for it I think as well."
The algae technology could reduce emissions by 15 per cent at Canadian Natural's massive 110,000-barrel-per-day Horizon oilsands mine north of Fort McMurray and by 30 per cent at its steam-driven Primrose operations.
Canadian Natural president Steve Laut said the algae technology will be shared with the Canadian Oil Sands Innovation Alliance, a group of 12 oilsands companies that share environmentally friendly technologies without intellectual property concerns getting in the way.
He said pursuing such a project would be "very difficult" without government support.
"To say this would have happened without them is naive," he said.
"We needed the NRC to get that base technology to where we are today. Pond Biofuels brings an important part of it and we're here to make the commercialization and the implementation of it go."