First, we start by making a free-hand selection of what is going to be the burnt-out part of the paper, with the lasso tool.
Next, we want to choose Quick Mask Mode on the toolbox (or press Q), and choose Filter > Pixelate > Crystalize. Depending on your image size, choose a value that will create some good uneven edges. We will use 4.
Exit out of Quick Mask Mode, by using the same button. Then what we want to do is create a new layer and fill the selection (Edit > Fill). We will fill with White, but you can use anything that will be underneath the paper, as this fill will be the hole that's burnt out.
Now we want to goto the Layer Styles of our new layer and choose Outer Glow. We can also give it a bit of depth with a slight Inner Shadow (opacity 20%). For Outer Glow, we change the color to black and the Blend Mode to Normal, we have Opacity at 75%, Spread 5 and Size 10. You may also find that the technique looks better set to Precise, as opposed to Softer.
Above is the outcome of this tutorial. There are many many variations of smoke you can achieve with this method of repetition. Once again, experimentation is the key and every situation is different in PhotoShop.
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