With a Push from Calysta, Biofuels Economy Tilts Toward Natural Gas

10/29/12Follow @Tansey_Xconomy

Natural gas is best known to most people as a fuel burned to heat homes or generate electricity. Josh Silverman, chief scientific officer and co-founder of the Menlo Park startup Calysta Energy, sees it as an untapped raw material that, like crude oil, could be converted into high-value products from transportation fuels to plastics.

“The major use of natural gas is to burn it, which seems like a waste,” Silverman says.

But Silverman is working on a solution: genetically engineered microbes. Calysta has bred bacteria that feed off methane, the main ingredient of natural gas. The microbes in turn form the fats and other biological molecules that make up their cells, and those compounds can be processed into diesel fuel and industrial chemicals used to make consumer goods, Silverman says.

Calysta, a 12-employee company, has been working in stealth mode since its founding last year. But the startup made a public debut this month with the announcement of its business plan and the recruitment of a high-profile CEO, industry veteran Alan Shaw (pictured above right).

Shaw, the former CEO of the global industrial biotechnology company Codexis of Redwood City, said he spotted an opportunity as natural gas production soared and its price dropped. The gaseous hydrocarbon is an energy-dense resource, but it’s hard to transport without building pipelines or converting it into a liquid through inefficient chemical processes, Shaw says. Much of the potential supply is “stranded’’ in small and medium-sized gas fields and other sites such as landfills, he says. Natural gas is most widely used for heating and for fueling power plants, but its full value as a manufacturing raw material hasn’t been realized, Shaw maintains. Calysta plans to pioneer the use of natural gas as a biological feedstock for producing transportation fuels and industrial chemicals.

Josh Silverman, Calysta Energy's co-founder and chief scientific officer

Josh Silverman, Calysta Energy's co-founder and chief scientific officer

Calysta is well-placed to develop biological methods to process natural gas, Shaw says. The privately held startup draws on the expertise of its parent company DNA 2.0, the biggest US-based supplier of synthetic genes to researchers. In the industrial realm, synthetic biologists modify the DNA of microorganisms to make them more efficient producers of marketable compounds that range from drugs to biofuels. Calysta has an exclusive license to use certain DNA 2.0 intellectual property, and can also consult with about 60 scientists at DNA 2.0, which shares its Menlo Park address with its spinoff.

“It really is a convergence of great technology at a time when the market is real,’‘ Shaw says.

Calysta takes advantage of the naturally occurring microbes found in places that would be inhospitable to most living things, such as underwater volcanoes spewing methane, the major constituent of natural gas. The microorganisms, by converting the gas into bio-molecules eaten by other creatures, introduce an energy source into the food chain.

Silverman’s scientific team is trying to tweak the genes of the methane-gobbling microbes to make them more efficient at producing raw materials that can be absorbed by the industrial chemical “food chain.’’ Calysta is also studying enzymes from the same microorganisms as possible biocatalysts in reactors that could churn out specific building blocks for the manufacture of high-value fuels and chemicals.

But the key value of all these processes is that they will cheaply transform natural gas into liquids or otherwise transportable raw materials, Shaw says.

“You can put them in a truck and drive them anywhere you want,’’ Shaw says.

Calysta does not see itself as a competitor with companies like petroleum giant Shell, which has spent decades improving its chemical process for gas-to-liquid conversion. In 2011, Shell began production at its massive Pearl facility in Qatar, which is slated to churn out enough diesel to fuel 160,000 cars a day, as well as compounds for jet fuel, lubricants, and plastics.

Shaw says Shell’s high-temperature process can only be cost-effective at huge plants such as Pearl, which receives natural gas from Qatar’s North Field, one of the largest reserves in the world. By contrast, Calysta’s biological process can operate at a much more modest scale, making possible a network of distributed manufacturing sites close to small or mid-sized gas fields, Shaw says.

When Shaw was at Codexis, he oversaw a partnership with Shell for the development of enzymes to break down plant cellulose, a possible step in the conversion of biomass sources such as sugar cane stalks into fuels and chemicals.

But Shaw now sees the sugar-based biofuels industry as beset with problems, even though companies have successfully re-engineered microbes that feed on corn or sugar cane to produce ethanol, a renewable fuel component, and industrial chemicals. The main problem is that the feedstock, sugar, is too expensive to allow biofuels to compete with petroleum-based fuels, Shaw says.

By comparison, natural gas is cheap. In the wake of the US boom in shale gas production, the Nymex price dropped from almost $14 per million British thermal units (MMBtu) four years ago to less than $3 per million units, Pike Research analyst Mackinnon Lawrence said in a May report. The oil-gas price ratio, formerly stable at about 8 or 10 to one, reached a peak of 52 to one in April, Lawrence reported in June.

“The question is whether that’s going to hold,’’ Lawrence said in an interview with Xconomy. If it does, it could create significant opportunities for companies that are already incorporating natural gas into their processes, he says.

“You’re kind of seeing a pathway being beaten to natural gas,’’ Lawrence says. In addition to searching for new revenue sources, oil and gas companies may be motivated to find fresh uses for natural gas, because its release into the air could bring increasing liability, Lawrence says. New technologies can trace natural gas plumes back to their source.

A renewable fuel company, Primus Green Energy of Hillsborough, NJ, is tapping into the cheap natural gas supply as an additional feedstock for its thermo-chemical gasoline manufacturing process, which was originally developed to use wood chips.

Companies that use natural gas as an alternative feedstock for fuel production could be in line for government subsidies, depending on the result of an ongoing debate over the fate of the nation’s Renewable Fuel Standard.

Companies that process biomass now benefit from these government credits, Lawrence says. The federal incentives support a goal of adding 36 billion gallons of renewable fuel to the transportation fuel supply by 2022. But fuel production from biomass has not materialized to the extent that was expected. Some argue that the Renewable Fuel Standard should be scrapped, and others advocate extending the subsidies to natural gas-to-liquid producers.

Calysta’s natural gas fermentation method is now being tested at the lab bench scale of about one to five liters, Silverman says. Company researchers are still refining genetic modifications to the microbes that live off methane.

Shaw says he’s raising funds and looking for partners so Calysta can scale up as soon as possible. The company has funding through 2013 from DNA 2.0, which is Calysta’s largest shareholder at this point. But the parent company is happy to let others buy equity stakes to finance the growth of its spinoff, Shaw says.

The ideal partner would be a small or mid-sized gas field where Calysta could tap into the natural gas supply and demonstrate the value of its technology, Shaw says.

The new CEO says Calysta has to press its advantage as a first mover.

“We’re not going to be the only one in the sector,” Shaw says. “We’ve got to keep ahead of the game.”

Bernadette Tansey is Xconomy's San Francisco Editor. You can reach her at btansey@xconomy.com. Follow @Tansey_Xconomy

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