A report by a Western Australian think tank says algae farming has the potential to generate $50 billion a year and create up to 50,000 new jobs across Australia.

Future Directions International says the west coast is ideally suited to build a biofuel industry from algae because of its abundant sunshine, innovative farmers and the resource industry's huge demand for fuel.

At Karratha, the US company Aurora Algae is expanding its microalgae operations with a $300 million facility being built next year to produce omega oils, aqua-feed and biofuels.

Marketing manager Paul Brunato says a $10 million pilot study over the last three years has proven the viability of production based on Nannochloropsis, an algae which the company breeds in California's Silicon Valley and imports to Australia under strict quarantine conditions.

"What we've learned is we can grow algae at tremendous rates here in the Pilbara," he said.

Aurora Algae's marketing manager Paul Brunato. ( ABC Landline )

"The species of algae we're working with ... is able to double in volume on a daily basis."

While the company's main profit driver is omega oil products for the health supplement market, it will subsidise ongoing biofuel production and hopes further research will realise the heroic predictions now being made for the industry.

"We can sell biofuel for market price no matter what it is and be profitable based on the omega-3s," he says.

"What we see when we look out over the desert area here is potentially the next Saudi Arabia of biofuel production."

Algae expert says biofuel boom still a pipedream

Murdoch University Professor Michael Borowitzka. ( ABC Landline )

Professor Michael Borowitzka from Murdoch University's Algae Research and Development Centre says the production of biofuels is not yet cost-effective.

His centre has studied about 400 algal strains in the last 15 years.

It was part of a recent biofuel pilot study at Karratha and is involved in a joint venture building a demonstration plant at Whyalla in South Australia.

Professor Borowitzka says biofuel can be produced for between 50 cents and 80 cents a litre.

"There's great demand for renewable sustainable fuels, the challenge is to produce biofuel cost-effectively," Professor Borowitzka said.

"It's still actually quite a long way away. We have to reduce the cost of production by at least a factor of 10."

Growing global demand for natural food colouring

The real money in algae farming, for now, is in functional health products such as food colouring which can earn as much as $3,000 a kilogram.

BASF operates the world's oldest algae farm at Hutt Lagoon, north of Geraldton, producing natural food colouring for global food and beverage manufacturers.

The farm harvests Dunaliella salina, a natural occurring algae, which turns pink when stressed, releasing a range of carotenoids, high in vitamins.

Production manager Harry Haikalis says there is a growing global demand for its products because of their high levels of antioxidants.

"We like to say it's food colouring, but the colour comes for free," he said.

Sean Murphy’s report on the algae industry in WA will be on Landline on ABC 1 from midday on Sunday.