UPDATE 3-Exxon to try to develop biofuel from algae

* $600 mln investment over next 5 to 6 years

* Final development could cost billions

* Exxon shares edge higher (Adds investor comment, share price)

By Tom Bergin and Anna Driver

LONDON/HOUSTON, July 14 (Reuters) - Exxon Mobil Corp (XOM.N) will invest $600 million over the next five to six years on trying to developing biofuel from algae, even though the oil major has said renewables will be only a small part of global energy supply.

Exxon, placing its largest financial bet on renewable fuels, is forming a research and development alliance with Synthetic Genomics Inc, a privately held company that focuses on gene-based research, the company said on Tuesday.

The project, which would cost billions to fully develop, is in its initial stages, so commercially viable biofuel made from algae would be many years away, Exxon told reporters on a conference call.

"We need to be realistic," said Emil Jacobs, vice president of research at Exxon. "This is not going to be easy, and there are no guarantees of success."

Spending on the algae fuels project will require only a fraction of Exxon's annual capital budget of $25 billion to $30 billion, but it will be the world's largest biofuels development project of its kind, said Craig Venter, genome pioneer and founder of Synthetic Genomics.

Exxon's algae research will not likely silence critics who have argued that the oil major needs to sharpen its focus on renewable and cleaner-burning fuels, but it is a step in the right direction, said Fred Burke, president of Johnston Lemon Asset Management.

"I think it's terrific," Burke said. "It indicates to me that they are reaching out and trying some alternative ideas when frankly I didn't have the idea that they were doing that before."

Even though renewable energy sources are forecast to show rapid growth, crude oil, gas and coal will meet nearly 80 percent of global energy needs through 2030, Exxon said in its latest energy outlook.

BUILDING IN CALIFORNIA

As one of its first steps, the Exxon and Synthetic Genomics plan to build a research facility in San Diego, the companies said.

Other companies, including Europe's largest oil company by market value, Royal Dutch Shell Plc (RDSa.L), are also researching the possibility of generating motor fuel from algae, but all parties agree a commercial solution is years off.

Exxon said it reviewed the viability of all other types of biofuels and determined the algae project was best after considering factors including environmental performance and economies, Jacobs told reporters.