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Turning wood chips into gasoline? NJ firm hopes to

View from the north side of the demonstration plant.
Source: Primus Green Energy
View from the north side of the demonstration plant.

A New Jersey company has opened an energy facility that converts cheap natural gas into gasoline, and the firm hopes to eventually convert biomass—wood chips or switchgrass, for instance—and even to make jet fuel.

The process being carried out by Primus Green Energy at its synthetic gas-to-gasoline, or "STG+," facility, which launched Wednesday, is not new, but the size and efficiency of this particular plant are. Primus hopes to create about 100,000 gallons of gas a year—a small amount compared with modern oil refineries, but still making it the largest facility of its kind anywhere in the world, Primus said.

Primus is using the new plant as a testing facility, a scaled-down version of how it hopes its future plants will operate. The company hopes the operation will be enough to show investors that the technology is both economically feasible and possible to build on a larger scale.

Pavel Molchanov, an energy analyst with Raymond James, said Primus has to prove it can raise capital before it can be successful.

"This is an early stage company. They've yet to produce gasoline commercially. It's going to take some time to scale up," Molchanov said. "With any scale up comes the need for a large amount of capital. Raising capital is never easy, particularly for an early stage business."

To date, Primus has raised about $60 million, all of it through an investment from IC Green Energy, the renewable energy arm of Israel Corp. Primus is working with Credit Suisse to raise additional capital by the end of the year.

(Read more: Six myths about renewable energy)

A larger facility that will produce 28 million gallons a year, which the company hopes have built by 2016, will cost roughly $280 million. That's cheaper than what it would cost to build an oil refinery of the same size.

Natgas price worries? Not really, says CEO

Primus Green Energy CEO Robert Johnsen
Source: Primus Green Energy
Primus Green Energy CEO Robert Johnsen

Molchanov said he sees the cost of natural gas as another potential headwind.

"If natural gas prices go up, it would not be helpful for their margins," he said. "I'd like to see what would happen if prices doubled."

Primus CEO Robert Johnsen said that's not a scenario that keeps him up at night. The natural gas industry just released its winter forecast, and both supply and demand look as if they'll remain steady, with prices hovering at around $3.47.

Johnsen estimates that at current natural gas prices, it costs him about $1.65 to create one gallon of gasoline, far cheaper than the big oil refiners. And with those kinds of margins, prices would need to move significantly higher before the process was no longer profitable.

"Natural gas would have to be in the double digits for us to be uneconomic, given the current forecast for gasoline prices," Johnsen said.

—By CNBC's Brad Quick. Follow him on Twitter at @ bquick83.

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