MELBOURNE - Australian biodiesel company Mission NewEnergy has signed a five-year deal with Valero Energy Corp to supply up to 200,000 tonnes of biodiesel a year, potentially worth up to $3.5 billion.

Oil refiner Valero was also given the rights to buy up to 25 percent of Mission at A$0.45 a share, Mission said on Friday.

The news helped push up shares in Mission NewEnergy, which has operations in Malaysia and India, by as much as 32 percent.

Mission said it will supply Valero with biodiesel produced from jatropha, an inedible perennial oil seed plant, and with palm oil based biodiesel.

It plans to initially use crude palm oil as the feedstock for its biodiesel plants, ultimately replacing it with jatropha oil.

The increasing demand for biodiesel driven by the Renewable Fuels Standard and coupled with this long-term supply agreement solidifies the United Sates as a key market for Mission going forward, the company said in a statement.

The first shipment under the agreement is expected by the end of June 2010.

Mission said it was considering various financing options to meet its funding needs given the size of the deal with Valero.

Shares in Mission NewEnergy were up 11.3 percent to A$0.395 at 0320 GMT. (Reporting by Victoria Thieberger; editing by Jonathan Standing)