The Hague, Netherlands-based Royal Dutch Shell (NYSE: RDS.A), one of the world’s largest distributors of first-generation biofuels, has made its latest move into next-generation biofuels, this time going green with algae.

The oil giant formed a joint venture with Hawaii startup HR BioPetroleum to build a pilot facility to grow marine algae and produce vegetable oil for conversion into biofuel.

Shell said it holds a majority share in the new venture, called Cellana, but financial terms of the venture were not disclosed.

The company said construction of the new facility is starting immediately on the Kona coast of Hawaii Island, at the Natural Energy Laboratory of Hawaii Authority site.

But it might be a while before we see commercial-scale production.

“This will depend on milestones at the two and a half hectare demonstration facility,” Olga Gorodilina, a Shell spokewoman, told the Cleantech Group. That plant is expected to do research for up to two years.

“The next step would be construction of a demonstration-scale commercial facility, let’s say 1,000 hectares. All being well, the step after that would be the construction of a full-scale commercial facility of about 20,000 hectares.”

HR BioPetroleum, founded in 2004, is already doing feasibility work on algae cultivation ponds leased from Hawaii’s Mera Pharmaceuticals, which has ponds up and running at the Natural Energy lab.

Mera, a marine biotechnology company developing nutraceuticals and medicines derived from microalgae, is a minority shareholder in HR BioPetroleum

Take a look at HR BioPetroleum’s team making plans in Kona >>

Shell’s investment in algae comes as the company divests some other green ventures, selling off its stakes in solar photovoltaics.

Calcutta, India’s Environ Energy-Tech Service recently grabbed Shell’s solar PV businesses in India and Sri Lanka for an undisclosed sum. Last year, Shell sold the bulk of its PV business to Germany’s Solarworld, announcing that it planned to focus on copper indium diselenide thin-film technology.

The company is still going strong in biofuels, selling over over 3.5 billion liters of biofuels made from food crops in 2006, mainly in the U.S. and Brazil.

Boosting its presence in biofuels made from non-food feedstocks, or next-generation biofuels, started five years ago at Shell, when it invested in Ottawa, Ontario’s Iogen to develop processing technology that could enable ethanol to be made from straw using enzymes.

In 2005, Shell also invested in Choren Industries in Germany to create a demonstration-scale biomass to liquids plant. That facility is expected to produce 18 million liters annually when it opens in mid-2008.

And just last month, Shell announced plans to take a stake in Redwood City, Calif.’s Codexis. Shell said it would work with the biotechnology company to develop enzymes that could be used to manufacture biofuels (see Shell, Codexis in biofuels agreement).

“We are exploring various opportunities in second generation biofuels,” said Gorodilina.

Shell is just the latest company to jump on the algae bandwagon, a feedstock that many consider promising, but not quite ready for commercial scale production.

Earlier this year, San Francisco algae production startup Solazyme made a deal to sell its oil to Seattle, Wash.-based Imperium Renewables, which opened a 100 million gallon per year biodiesel plant in Grays Harbor, Wash., in August (see Solazyme to supply algae oil to Imperium).

And Shell isn’t the only oil giant looking at the slimy stuff. Last month, San Ramon, Calif.-based Chevron (NYSE: CVX) signed an agreement to work with the U.S. Department of Energy’s National Renewable Energy Laboratory to produce transportation fuels using algae (see Chevron, NREL team up on algae biofuel).

Chevron said it would collaborate with NREL scientists to identify and develop algae strains that can be economically harvested and processed into finished transportation fuels such as jet fuel.

Shell said its new algae facility would grow only non-modified, marine microalgae species in open-air ponds, using algae strains that are indigenous to Hawaii or approved by the Hawaii Department of Agriculture.

The company said an academic research program will support the project, screening natural microalgae species to determine which ones produce the highest yields and the most vegetable oil. Scientists from the University of Hawaii, the University of Southern Mississippi, and Dalhousie University in Halifax, Nova Scotia, are participating in the venture.

Shell said once the algae are harvested, the vegetable oil will be extracted, with the facility’s small production volumes to be used for testing.