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UPDATE 2-In win for Big Oil, U.S. proposes biofuel mandate cut

Timothy Gardner
Friday, 15 Nov 2013 | 4:55 PM ET

* U.S. fuel supply hitting so-called "blend wall"

* EPA seeks about 16 pct cut in renewable fuels goal

(Adds reaction, action in biofuel share prices, other details)

WASHINGTON, Nov 15 (Reuters) - The Obama administration proposed on Friday slashing federal requirements for U.S. biofuel use in 2014, bowing to pressure from the petroleum industry and attempting to prevent a projected fuel crunch next year.

The move was seen as a clear win for oil refiners and a loss for biofuel producers. It followed a prolonged lobbying blitz on both sides of the issue.

The plan follows the Environmental Protection Agency's warnings that the country was approaching a point where the so-called renewable fuel standard (RFS) would require the use of more ethanol than can be blended into gasoline at the 10 percent level that dominates the U.S. fueling infrastructure.

Refiners have said this "blend wall," if left in place, would force them to export more fuel or produce less gasoline, leading to shortages and higher prices at the pump.

In response, the EPA proposed to cut overall use of renewable fuels, made mostly from U.S. corn and to a lesser extent from soybeans, grasses, crop waste and Brazilian sugar cane, to a range of 15 billion to 15.52 billion gallons.

Within that range, the agency proposed a specific goal of 15.21 billion gallons, which is more than 16 percent less than the previous 18.15 billion gallons contained in the law that governs the Renewable Fuel Standard (RFS), and below this year's 16.55 billion gallons.

The proposed goal matches the number contained in a draft that was leaked and circulated in October.

U.S. gasoline demand had been expected to rise every year when Congress passed the Renewable Fuels Standard in 2007, but it peaked in 2008 and has been anemic since, partly because fuel efficiency of U.S. cars and light trucks has risen.

"This unanticipated reduction in fuel consumption brings us to the point where the realities of the fuel market must be addressed to properly implement the program," a senior administration official told reporters in a teleconference about the proposal.

The EPA's proposal falls short of a request from two major oil and gas trade groups to lower the 2014 renewable fuel use target to 14.8 billion gallons.

The plan cuts the 2014 use of advanced biofuel, including biodiesel made from soybeans and Brazilian ethanol from sugarcane, to a range of 2.0 billion to 2.51 billion gallons.

The agency did not propose a specific 2014 volume for ethanol made from corn.

But the proposed change in advanced biofuels implies a corn ethanol mandate of 12.7 billion to 13.2 billion gallons, down from the previous 2014 mandate of 14.4 billion gallons.

"We are astounded by the proposal released by the Administration today. It reflects an 'all of the above, except biofuels' energy strategy," said Fuels America, a coalition of alternative energy producers.

The group termed the blend wall a fictional narrative, "created by the oil industry to stifle competition."

CORN FALLS TO NEW LOWS

Biofuels stocks were mixed following the announcement. The shares of ethanol maker Pacific Ethanol Inc, closed up 14.4 percent at $2.78, and isobutanol maker GEVO Inc, up 26 percent at $1.74, were among the gainers.

Biodiesel maker Renewable Energy Group Inc's stock was down 6 percent at $13.38, while ethanol producer Green Plains Renewable Energy closed down 1 percent at $15.81.

"The proposed numbers do not reflect the positive results the biodiesel industry has provided in terms of record production levels of advanced biofuels, job creation, rural economic development, energy and food security, and environmental benefits," Renewable Energy Group Chief Executive Dan Oh said in a release.

Chicago corn futures fell to new lows for the day, down 1.1 percent at $4.21-3/4 per bushel, although the impact was muted because Friday's announcement was similar to the leaked proposal from October. Prices this month hit their lowest point in more than three years.

Biofuels backers were livid at the announcement.

A representative for Archer Daniels Midland Co, one of the largest ethanol producers, said companies had invested in renewable fuel projects "on the basis of firm legislative commitments" and across two presidential administrations.

ADM shares fell on news of the mandate, ending down 3.4 percent on the New York Stock Exchange at $40.56.

A lower mandate to produce corn-based ethanol could cost grain growers at the farm gate. Livestock producers, by contrast, were jubilant at the prospect of lower feed prices, but called on lawmakers to do more.

"Congressional action to repeal the RFS remains the most viable pathway to allowing all users of corn to have equal standing in the marketplace," the National Chicken Council said in a statement.

The EPA expects to release a final rule next spring after a 60-day public comment period.

(Reporting by Timothy Gardner, Ayesha Rascoe, and Valerie Volcovici in Washington, Cezary Podkul in New York, Tom Polansek in Chicago and Nichola Groom in Los Angeles; Editing by Ros Krasny, Bernadette Baum, Bob Burgdorfer and Andre Grenon)