New York (Platts)--25Nov2009/532 am EST/1032 GMT

The US is nearing deadlines on two key government decisions that could significantly boost ethanol demand, but marketwatchers say delays are expected and that producers may not get approval to run as much ethanol in conventional vehicles as they are seeking.

The Environmental Protection Agency has a November 30 deadline to craft the final Renewable Fuel Standard (RFS2) targets starting next year. And it is supposed to decide by December 1 whether to approve a waiver that would raise ethanol-gasoline blends for conventional vehicles to 15% ethanol from the current 10% to help meet mandates while advanced biofuels strive to hit commercial production.

US renewables targets are set to rise yearly until they hit 36 billion gal/year in 2022. The current 2010 renewables target is set at 12.95 billion gal, with 12 billion made up of "renewable biofuel," which is ethanol. That is up from the 2009 ethanol mandate of 10.5 billion gal.

While EPA officials say both the E15 and RFS2 decisions are still on track, FBR Capital Markets analysts said in a recent report the agency is feeling "pressure" to delay the announcements. In particular, they think EPA may hold off on an E15 waiver until vehicle and infrastructure testing is complete.

The tests are being overseen by the Oak Ridge National Laboratory. On Tuesday, ORNL spokesman Bill Cabage said E15 "research is ongoing" and there is "no release date" yet for a full report. However, he did say the lab was constantly sending data to EPA and the agency could decide to act on what it now knows.

Deferral by EPA of the waiver for RFS2 "will likely be viewed as favorable to the oil refiners, which are required to blend the ethanol into the fuel supply," said FBR analysts. "Conversely, expansion of the RFS or granting of the Growth Energy [E15] waiver will be seen as favorable for ethanol producers and corn growers and as somewhat favorable for agricultural suppliers."

The analysts could not comment on exactly who is "pressuring" EPA, but oil industry groups have been very vocal that not enough testing has been done and that they will be held liable if something goes wrong.

For its part, EPA "remains committed to making an [E15 waiver] announcement by the deadline of December 1," said EPA spokeswoman Deb Berlin on Tuesday. "The agencies involved are collecting the relevant data as quickly as possible," said Berlin. She said EPA is "working hard to finalize" RFS2.

EPA CHIEF HINTS AT E15 DELAY

She did not comment on a recent interview in which EPA head Lisa Jackson was quoted as saying the agency might miss the E15 waiver deadline due to delays in vehicle test results. One source close to the testing said Tuesday that results may not be completed until the middle of next year.

Ethanol producers are hoping EPA will approve E15 for conventional vehicles so they can overcome the so-called blend wall. Since US renewables use is now made up of mostly ethanol, the blend wall is hit when all gasoline in the US is mixed with maximum amounts of ethanol (10%), making renewables unable to meet higher federal renewables targets.

Some think the blend wall will be hit in 2013, but others note it may happen even sooner since gasoline demand has fallen off and lowered the amount of ethanol being used.

"We're pretty much reaching the blend wall this year," said Chris Thorne, spokesman for renewables group Growth Energy that submitted the E15 waiver request. "[W]e have idle ethanol capacity, and stalled investment in second generation biofuels like cellulosic ethanol precisely because we don't have the market certainty we need to draw new capital investment."

Meanwhile, rumors are flying over what EPA may or may not do with the E15 waiver request. FBR's report cited "contacts" who said EPA "could approve an intermediate blend like 12% ethanol."

Concept Capital analysts said in a report Tuesday it is "likely that EPA will not grant an immediate increase to 15%, though it may punt the decision forward rather than deny the waiver request outright." They said a move to E12 was "not in the cards at present," but they "do believe a higher blend rate is likely to be approved down the road." If EPA grants the waiver, lawsuits could follow and delay its start, said the analysts.

Gasoline marketers, concerned over liability for engine or infrastructure issues stemming from sales of higher ethanol blends, are also keeping tabs on the decision. The Society of Gasoline Marketers of Americas said in a recent report that they hear EPA is considering "granting a partial waiver by approving a higher fuel blend for certain vehicles. Such vehicles would need to meet strict emissions standards and have been built between 2004-2009."

If that particular scenario pans out, retail sites would need "E15 police" to make sure drivers put the right fuel in their cars, said SIGMA President Carl Boyett in an interview Tuesday. "I don't think any of us cares what we sell," said Boyett, adding marketers do not want to get "stuck" with liability issues like some had when MTBE was the gasoline oxygenate of choice.

For its part, the ethanol industry is open to a partial waiver, said Matt Hartwig, spokesman for the Renewable Fuels Association. "Even an E12 blend would mean billions of new gallons of potential demand and would show some willingness to work with the industry," said Hartwig in an e-mail.

--Beth Evans, beth_evans@platts.com