* Oil industry had petitioned EPA to lower mandate
* 2013 mandate was 6 mln gallons, only 1 mln produced (Adds ethanol industry response)
By Timothy Gardner
WASHINGTON, Jan 23 (Reuters) - The U.S. environmental regulator informed oil industry groups on Thursday that it will reconsider the 2013 target for advanced ethanol made from grasses, trees and crop waste as producers struggle to make enough of the fuel.
Oil industry groups had petitioned the Environmental Protection Agency, or EPA, last year to lower the target because oil refiners would be required to buy millions of dollars worth of credits if cellulosic was unavailable.
"Your petition demonstrates that the statutory criteria for granting a petition for reconsideration are satisfied," Gina McCarthy, the administrator of the EPA, said in a letter to the oil industry groups on Thursday.
Cellulosic producers were on track to make only about 1 million gallons (3.8 million liters) of cellulosic last year, well short of the federal mandate of 6 million gallons. In addition, oil refiners have to purchase credits on the open market if they do not find enough cellulosic ethanol to blend into gasoline.
The American Petroleum Institute, one of the groups that called for a lower target, estimated on Thursday that the mandate could cost refiners more than $2.2 million in fees for 2013.
The U.S. government had envisioned that cellulosic would be an alternative to ethanol made from corn, which has been blamed by some groups for higher grocery prices and damage to the environment.
But costs for the advanced enzymes and high-tech equipment to make cellulosic have led to production delays and forced the EPA to slash mandates for several years running. The agency cut the target in 2011 and in 2012 when cellulosic was supposed to make up 500 million gallons of the overall renewable fuel target.
KiOR, a producer of the advanced fuel, said in late 2013 it would produce less than 1 million gallons instead of 5 million to 6 million gallons that year and that operations would be limited in early 2014 as well.
Charles Drevna, the president of the American Fuel & Petrochemical Manufacturers, one of the two groups that had petitioned the EPA, said he was pleased by the decision.
"The agency's optimism for cellulosic biofuel appears to have been tempered by reality," Drevna said in a release.
The American Petroleum Institute also cheered the move. "It's refreshing that EPA has finally agreed to reconsider bad public policy, mandating biofuels that do not exist," said Bob Greco, who works on refining issues at the group. "We continue to ask that EPA base its cellulosic mandates on actual production rather than projections that - year after year - have fallen far short of reality."
A spokesman for the ethanol industry acknowledged that development of cellulosic has had some delays, but said the industry should be on track soon.
"Our industry is just reaching commercial scale," said Brooke Coleman, a spokesman for the Advanced Ethanol Council. "These blending targets are based on expected output from a very small number of companies. A short delay, not uncommon for any new refinery, can change the landscape with regard to compliance."
The EPA said in the letters on Thursday it would initiate a notice and comment rule making period to reconsider the cellulosic mandate. (Reporting by Timothy Gardner; Editing by Ros Krasny, Lisa Von Ahn and Marguerita Choy)