FILE PHOTO: An ethanol plant with its giant corn silos next to a cornfield in Windsor, Colorado July 7, 2006./File Photo

By Jarrett Renshaw

(Reuters) -The White House is reviewing a high-stakes rule that could reshape the balance of interests between oil refiners and farmers by determining how - or even whether - to redistribute huge volumes of biofuel blending obligations that were recently exempted under the Renewable Fuel Standard.

The outcome, expected in the coming weeks, will determine the fate of billions of gallons of U.S. ethanol and biodiesel demand that is seen as vital to farmers who supply the corn and soybeans to produce biofuels, but costly to oil refiners that ensure the biofuels are mixed into the nation's fuel supplies.

Biofuel mandates were created to cut greenhouse gas emissions and reduce reliance on fossil fuels, but the Trump administration has largely sidelined that climate goal while prioritizing expanded oil and gas production.

Last month, the Environmental Protection Agency cleared a backlog of more than 170 applications from small refineries, dating back to 2016, for waivers exempting them from the obligation to blend biofuels under the RFS, the nation's biofuel law.

More than 140 were granted, either fully or in part.

That action opened the door to a new supplemental rule on whether and how to force larger refiners to make up for the exempted gallons, a step biofuel producers have long demanded to ensure the annual blending quotas remain whole.

The EPA delivered the draft rule to the White House last week, public records show.

The proposal addresses how to redistribute exempted volumes from 2023 and beyond, the EPA confirmed on Thursday, without providing further details.

It includes a preferred option as well as other options that will also be weighed during the review, according to two people briefed on the proposal, speaking on condition of anonymity because the discussions are not public.

Exploring other options signals the administration may not be fully committed to a complete reallocation of exempted volumes, even as it has publicly supported the idea.

The White House is expected to expedite the review, making the proposal public roughly two weeks ahead of a 30-day public comment period, the sources said.

The White House did not immediately respond to a request for comment.

CRITICAL MOMENT

Farm groups say forcing larger refiners to make up for exempted gallons is essential to keep crop markets from shrinking, but refiners warn it would shift the compliance burden onto larger plants and drive up costs.

The dispute has long tested presidents from both parties, who have sought to satisfy politically powerful agricultural states without alienating oil-producing regions.

"This is a critical moment and EPA's chance to uphold the president's promise to fight for U.S. farmers and expand domestic fuel production," said Devin Mogler, CEO of the National Oilseed Processors Association.

Chet Thompson, CEO of the American Fuel & Petrochemical Manufacturers trade group representing refiners including Marathon Petroleum and Phillips 66, said the administration has already proposed a massive increase in biofuel quotas for next year and "re-allocation would add billions onto Americans’ already massive RFS bill next year and the year after."

(Reporting By Jarrett RenshawEditing by Rod Nickel)