As demand for ethanol is rising, two small companies are racing to fire up what would be North Carolina's first commercial plant producing the fuel.

New York-based Xethanol says it can start production in six months. Last week, the company bought a rusty, idle fiberboard plant about 40 miles east of Raleigh near Spring Hope for about $11.7 million.

And rival Agri-Ethanol of Raleigh plans to build a $150 million ethanol plant in Aurora, about 50 miles southeast of Greenville. The plant is projected to start production in late 2007.

Both companies are part of an up-and-coming industry betting billions that rising oil prices will push up demand for ethanol. So much money is at stake that the scramble to produce more ethanol has been compared to a gold rush.

The looming competition doesn't worry Terry Ruse, chief operating officer at Agri-Ethanol.

"The market is broad enough to absorb the production," Ruse said.

But before the first drop of fuel alcohol is distilled in eastern North Carolina, several challenges must be overcome.

Xethanol must upgrade a run-down facility that has been idle for eight years. Also, the company plans to use an experimental method of turning wood chips into fuel alcohol that's never been done on a commercial scale.

Converting an old plant or building a new plant from scratch will be expensive. Both companies say they have the money.

Xethanol has about $25 million in cash from merging with a publicly traded pottery company a year ago, filings with the Securities and Exchange Commission show. A company spokeswoman declined to comment beyond what has been publicly filed or released.

Agri-Ethanol announced last month it has attracted a substantial investor of "worldwide acclaim" to pay for up to 20 plants along the East Coast. But Ruse declined to say who it is or how much the investor is willing to risk.

"The ethanol industry is a nascent business, and there's lots of secrecy," said Ian Horowitz, an analyst with Soleil Securities who tracks publicly traded Xethanol. "Everybody is just figuring out the best way to do it."

Unlike Agri-Ethanol, which plans to turn corn kernels into fuel alcohol, Xethanol wants to use wood chips as feedstock at its Spring Hope BioFuels plant.

Governmental and university laboratories have been working on the technology, also known as biomass conversion, for more than 20 years. It works in the lab, and a Canadian company has successfully tested it in a demonstration plant. But biomass conversion has never been done on a commercial scale.

"Somebody's got to be the guinea pig to figure it out," said Kurt Creamer, an engineer and the biomass program manager with N.C. State University's Solar Center, who is familiar with Xethanol's plans in Spring Hope.

There's no doubt that rising gas prices have left an impression on automobile-dependent America.

Between 2000 and 2004, U.S. ethanol production doubled to about 3.4 billion gallons per year, according to the Renewable Fuels Association, an industry trade organization in Washington.

Demand for ethanol is expected to rise further, because a federal law mandates that the amount of ethanol that is added to gasoline double to 7.5 million gallons by 2012. About 30 plants with a potential capacity to make 1.7 billion gallons per year are under construction in other states.

Xethanol picked eastern North Carolina as a proving ground for what would be the first biomass conversion plant in the country because of its East Coast location and the mothballed equipment at the fiberboard plant.

"Spring Hope is a perfect place," said Doug McCullagh, the plant's general manager.

Small ethanol producers such as Xethanol are increasingly focused on the East and West coasts to increase production, Horowitz said. Established producers such as Archer Daniels Midland, the top U.S. ethanol producer with about 1 billion gallons per year, are clustered in the Midwest. That's where the corn is grown to make ethanol the conventional way. But that's not where the majority of the ethanol consumers live, Horowitz said.

Xethanol could create up to 60 jobs within a year at the Spring Hope plant, and the company said it is already considering converting a second idle plant near Rocky Mount into making ethanol.

The company is also planning to establish production plants in Georgia and New England, Horowitz said. "Put thumbtacks on the map and you can see what they're trying to do."

Also, the fiberboard plant in Spring Hope, which has been sitting idle since International Paper closed it and laid off about 200 in 1998, is equipped with machinery that can be used to produce ethanol, said Vic Kramer, co-founder of a company formerly affiliated with the plant. Kramer co-founded Agranol, a Raleigh company that was part of Xethanol's recent acquisition.

Initial steps to make fiberboard, pulp and paper are similar to biomass conversion, Kramer said. With some adjustments, the equipment in the fiberboard plant can chew up the wood chips, remove the glue that makes wood rigid and strong, and take out the cellulose, a type of carbohydrate.

Xethanol would use acid or enzymes to break down the cellulose into sugars, which are then fermented and distilled into fuel alcohol. Acid is cheaper but less efficient and less environmentally friendly than enzymes.

The company has yet to decide which to use, McCullagh said. "We may have to tweak it a little, but that's half the fun."

Xethanol has scientific agreements with the National Renewable Energy Laboratory in Boulder, Colo., the USDA's Forest Product Laboratory in Madison, Wis., Virginia Tech and the University of North Dakota. But Spring Hope will be where Xethanol must prove those agreements can be turned into a functioning plant.

"They claim that they can do it," Horowitz said. "I have no reason to doubt them, but I have no reason to believe them, either. It's a wait-and-see situation."

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