Calysta Energy, a recently unveiled startup based in Menlo Park, California, plans to make diesel fuel that costs half as much as conventional diesel. It says it has demonstrated, at a small scale, that microorganisms that naturally feed on natural gas can be engineered to make diesel and other chemicals, and it projects that the process will be far cheaper than conventional thermochemical methods for making liquid fuels from natural gas.

The company, like many others, is attempting to capitalize on cheap natural gas made possible by fracking (see “Natural Gas Changes the Energy Map” and “King Natural Gas”). Some, like Primus Green Energy, are developing variants of existing thermochemical approaches—it’s using a process from Exxon to produce gasoline. Coskata, a biofuels company that had originally intended to make ethanol from wood chips and other cellulosic sources, recently announced that its first commercial plant will use no biomass. Instead, it will use microorganisms to convert natural gas into ethanol, a process it’s demonstrated in a small pilot-scale plant for about five years. By making diesel, Calysta hopes to tap a much bigger potential market than the one for ethanol. And it says its biological approach will require less capital than thermochemical ones like Primus’s.

Calysta’s CEO, Alan Shaw, says many of the advances in biology that are being applied to producing biofuels from cellulosic sources such as wood chips can also be applied to converting methane, the primary component of natural gas. Calysta’s researchers have modified naturally occurring organisms that feed on methane (see “Coal-Eating Microbes Might Create Large Amounts of Natural Gas”). The organisms can convert the gas into lipids that can then be turned into a diesel-like fuel at conventional refineries. In addition to demonstrating the process at a small scale in the lab, the company has shown that the microorganisms can produce propylene oxide, a chemical used to make polyurethane plastics.

Advanced biofuels companies—including Codexis, where Shaw was CEO until earlier this year—have struggled to commercialize their technology. Under Shaw’s leadership Codexis received nearly $400 million from Shell to develop biofuels made from cellulosic sources. Shaw left Codexis under pressure from the board after the company’s stock price performed poorly. In August, a few months after he left, the company announced that Shell would stop funding its biofuels research.

Shaw, who led Codexis’s efforts to convert cellulosic materials into simple carbohydrates and then convert those into hydrocarbons and other liquid fuels, now says that he was wrong to think biofuels produced from biomass could replace fuels made from petroleum.

“Biomass doesn’t cut it,” he says. “Carbohydrates are not a substitute for oil. I was wrong in that, and I admit it. That will never replace oil because the economics don’t work. You can’t take carbohydrates and convert them into hydrocarbons economically.”

Shaw’s shift from biomass to natural gas, however, negates one of the key reasons for turning to biofuels in the first place. According to some analyses, making diesel from natural gas may create more greenhouse-gas emissions than making diesel from oil. But there’s a potentially large market for liquid fuel derived from natural gas, especially if Calysta can hit its cost targets. The company’s economic models suggest it can produce diesel for half as much as the conventional version—even if natural-gas prices rise to double today’s levels.

The problem with biomass, Shaw says, is basic chemistry. Making ethanol from sugar is economical, but he argues that ethanol can’t replace fuels from oil—it’s less energy dense and is more difficult to transport than hydrocarbons like diesel. Making such hydrocarbons from sugar is a nonstarter, he says, because in the process much of the carbon in sugar is also lost as carbon dioxide. “It’s a death blow that that maximum yield is about 30 percent,” he says. “That’s not a promising place to start producing commodity chemicals and fuels where 80 percent of the cost is feedstock.”

Converting natural gas into liquid fuels is already possible, but the conventional process requires huge, expensive thermochemical plants, such as a $20 billion gas-to-liquids facility Shell is building in Qatar. Shaw says Calysta’s plants could be far smaller. This would allow the company to go after “stranded” natural gas—resources that are individually too small or remote to justify the cost of the infrastructure needed to get the gas to market. In aggregate, stranded natural-gas sources are huge, accounting for as much as half of the world’s reserves, according to some estimates. Converting the gas to a liquid fuel at the site would make it far cheaper to ship to market.

Not everyone agrees that making biofuels from biomass is a doomed proposition. Tom Foust, a researcher at the National Renewable Energy Laboratory in Golden, Colorado, says that prices for both natural gas and sugar are volatile.  At current low gas prices, natural gas has an advantage, he says, “but it’s overly simplistic to say that natural gas is the preferred feedstock forever and ever.”