MILLINOCKET – Record oil prices will force Katahdin Paper Co. LLC to indefinitely close its Katahdin Avenue mill and lay off all 208 workers in 60 days unless an alternative energy source is found, company officials said Thursday.

“Curtailment” is also likely at the company’s East Millinocket mill, but company officials would not say whether layoffs or production cutbacks, or both, would occur. That mill employs about 350 workers. The two mills are the Katahdin region’s largest employers.

With the Millinocket mill consuming hundreds of barrels of oil daily to make heat and steam for its paper machine, and oil at $126.62 a barrel on Thursday – up from about $60 a barrel a year ago – company efforts to remain profitable have failed, said Glenn Saucier, the company’s spokesman.

“We have been looking at energy alternatives for quite some time and doing things internally to reduce energy costs,” Saucier said Thursday, “but with the price of oil going in the direction it’s going, we just can’t keep up.

“No matter what we try or what we save, oil beats us the next day,” he added.

Gov. John Baldacci has hopes that the mill will not shut down. He promised that the state would do everything to keep the mill going beyond July 28.

“We’ll know before that whether we have a viable energy and business plan that can be successful,” he said Thursday.

Baldacci met with Katahdin Paper officials on Thursday morning and his staff immediately began looking for alternative energy solutions.

“We’ve got some work to do, but I believe the company’s energy problem can be solved,” Baldacci said. “We’re going to throw everything at this. Millinocket is not going to be left on its own.”

The company, which is 100 percent reliant on oil to produce steam, used more than 400,000 barrels at its Millinocket mill in 2007. Rising gasoline, diesel fuel, pulp and wood prices also hurt the company, Saucier said.

The mill’s shutdown would hurt a Katahdin region economy still recovering from the devastation of the layoff of some 1,100 workers and subsequent massive drop in population caused by the late 2002 shutdown of Katahdin Paper’s predecessor, Great Northern Paper Co.

Brascan Corp. of Toronto, now called Brookfield Asset Management, bought the mills in 2003 and reopened them as Katahdin Paper. Fraser Papers Inc. was contracted to operate the mills.

When asked whether the shutdown forced by oil and diesel prices might also be a harbinger of other mill shutdowns statewide, Baldacci said he is hopeful that other mills, which are less dependent on oil than Millinocket’s, are better protected from skyrocketing energy prices.

“Our paper companies have a mixture of energy sources,” Baldacci said. “At the same time, they are looking over their shoulder at their energy costs rising.”

Eugene Conlogue, Millinocket’s town manager, described the reaction among residents on Thursday as “shocked … followed by real and immediate concern.” Conlogue said he had no indication that the mill was in trouble.

It is too early to tell how a shutdown would affect the town, Conlogue said. Katahdin Paper contributes about $2.5 million in tax revenue to Millinocket annually after subtracting $1.8 million in tax increment financing offered by the town.

“I’m cautiously optimistic that with the governor’s involvement, we are going to get the mill up and running,” Conlogue said. “But it’s too soon to tell when that might happen.”

The state’s federal delegation promised to help workers as much as it could. U.S. Sens. Olympia J. Snowe and Susan Collins pledged to urge the U.S. Department of Labor to promptly consider any aid it could deliver.

“The historic cost of oil is having a crippling effect on local economies,” the senators said in a joint statement.

U.S. Rep. Michael Michaud, who once worked at the East Millinocket mill, promised to work with state and federal officials to help revitalize the Katahdin region’s economy.

The shutdown announcement comes as a sudden reversal to what had been seen as at least cautiously optimistic signs from the Millinocket and East Millinocket mills.

The mills, which hadn’t had a significant layoff since 2003, in January began replacing as many as 300 older workers expected to retire over the next five years. The company also announced that it had booked its No. 11 machine in Millinocket with orders through 2008 and was running the machine 24 hours a day, seven days a week.

“It wasn’t an issue of quality or our workers or can we get the orders,” Saucier said of the proposed shutdown. “It’s strictly that we can’t afford to pay so much for oil.”

The Millinocket mill makes catalog, magazine and retail industry fliers. The East Millinocket mill, which has had booming sales, makes paper for telephone directories.

In April 2007, Fraser Papers Inc.’s failed attempt to buy Katahdin Paper Co. LLC from Brookfield Asset Management for $80 million stirred concerns about the company’s longevity, but it also revealed that the productivity of Millinocket’s relatively new No. 11 machine peaked at 93 percent – producing 482 tons – in 2006.

Katahdin Paper Co. workers also increased the amount of top-grade magazine and calender paper produced in Millinocket, expanding its profit potential.

Company officials also had studied for about a year whether to install a biomass boiler in Millinocket to offset energy costs, Saucier said, but found that it couldn’t hang on for the 18 months to two years it would take to get the boiler going – particularly with oil costs predicted to breach $200 a barrel in 2009.

“That’s two more years of losses, of trying to catch up with oil prices,” Saucier said.

Baldacci stressed that the mill’s success shows that the situation can be reversed.

“The important thing is you’ve got terrific people and a full book of business, so really it’s the cost of energy and the cost of oil that is making them struggle,” the governor said.

Baldacci said he has appointed his “top team” of economic people to help the mill. That team will be headed by Baldacci’s senior forest products adviser, Rosaire Pelletier, a 40-year veteran of the pulp and paper industry and former group controller and business manager for Fraser Pulp and Paper Group.

The Baldacci administration has accrued significant experience grappling with paper industry woes. The administration has intervened several times to keep mills afloat and help reopen shuttered facilities.

The administration did both in the case of the Georgia-Pacific plant in Old Town. When the mill finally closed in 2006, state officials worked with a new company, Red Shield Environmental, to reopen as a potential producer of cellulosic ethanol from the waste in the pulp process. The effort has garnered more than $40 million in grants.

The Baldacci administration also scored a notable success in luring two Connecticut investors, Keith Van Scotter and John Wissman, to the former Eastern Pulp and Paper Co. site in Lincoln. Van Scotter and Wissman completed their $23.7 million purchase of the site in May 2004. The plant now employs more than 350 people.

Baldacci declined to comment on specific plans for the Millinocket facility but said he is hopeful that the mill is better positioned to reopen than other reclamation projects were.

“You’ve got probably the most modern paper machine of any paper machine in the state of Maine. You’ve got a full book of business and terrific people,” Baldacci said. “So I would think we’re further ahead then we were” when other mills closed.