Wednesday’s closure of the Old Town Fuel and Fiber mill is a setback for the Maine pulp and paper industry’s efforts to break into biofuels production, industry representatives said.

The mill, owned by New York-based private equity firm Patriarch Partners, has ceased operations indefinitely and furloughed about 180 employees. While pulp remained the mill’s core business, it was the only facility in Maine experimenting with the production of biofuel on a commercial scale.

The company released a statement Wednesday evening announcing the closure: “Effective immediately, all Old Town mill operations will be indefinitely suspended. The impact of foreign competition and our competitive position due to high wood and energy costs have made it difficult to sustain operations at this time. All employees not needed for securing the facility will be furloughed. During this idled period, ownership will be pursuing options to secure the long-term viability of the facility.”

John Williams, president of the Maine Pulp and Paper Association in Augusta, said the news came as a surprise.

“Under the current ownership, I thought they were doing pretty well,” Williams said.

Old Town’s pilot project to produce butanol from the cellulose in wood fiber offered other mills “a lot of hope for the future,” and the shutdown is likely to delay Maine’s foray into the growing biofuels industry, he said.

The pulp and paper industry still employs 7,000 Mainers and is as productive as ever, Williams said, but there is an understanding that mills will have to diversify to remain viable.

“It’s an industry that is struggling,” he said.

In February, the Great Northern Paper Mill in East Millinocket shut down and laid off 212 workers. The mill’s owner said the closure was a temporary measure aimed at restructuring operations and lowering production costs, but it has yet to reopen.

The mill in Old Town primarily produced wood pulp for the paper manufacturing industry. It employed 195 people, of which 180 are being furloughed, said Everett Deschenes, the mill’s director of market pulp and fiber.

The Old Town mill had initiated a pilot program in 2008 to produce “biobutanol,” supported by a $30 million grant from the U.S. Department of Energy. The project was a collaboration with the University of Maine, which has done extensive research on how to distill fuels from wood. Butanol is a motor fuel that can be used in place of gasoline without any engine modifications.

Bill Mayo, Old Town’s city manager, released a statement Thursday morning thanking Lynn Tilton, founder and CEO of Patriarch Partners, which bought the former Georgia-Pacific mill in November 2008 for $19 million. The private-equity firm manages a portfolio worth more than $8 billion, which includes a paper mill in Gorham, New Hampshire.

Mayo also thanked the mill’s employees.

“The city has faced this situation before and we will keep moving forward,” Mayo said. “The city will work with the mill and state officials to try and find a new buyer and keep Old Town moving forward in a positive direction.”

In the meantime, the state Department of Labor said in a news release that it has scheduled a program to help workers affected by the mill closure.

“The department’s Rapid Response program assists workers facing job losses due to downsizing or closures,” Gov. Paul LePage said in the release. “The Rapid Response team is reaching out to help these workers.”

The session is scheduled for 2 p.m. Tuesday at USW Local 80, Union Hall, at 354 Main St. in Old Town.

Williams said every paper mill job creates another three to five jobs in related businesses. According to the Maine Forest Products Council, forest products such as pulp and paper contribute $8 billion a year to Maine’s economy – about $1 out of every $16 of the gross state product.

Additionally, Maine’s pulp and paper exports generate about $650 million in revenue each year, the council said.

Staff Writer Whit Richardson contributed to this report.