NEW YORK (Reuters) - U.S. President Donald Trump's administration has asked oil and biofuels producers to hash out a deal on the next phase of the nation's biofuels policy to avoid the kind of political clashes that marked his first term, according to four people familiar with the matter.

Big Oil and the Farm Belt's biofuels makers are traditional competitors for share in the multibillion-dollar U.S. gasoline market. They have repeatedly fought over details of the U.S. Renewable Fuel Standard, a program that requires billions of gallons of corn-based ethanol and other biofuels to be blended into the country's fuel supply.

The White House directive has already yielded at least two bilateral meetings, including one hosted last week by the American Petroleum Institute, said the sources, who include Will Hupman, API's vice president of downstream policy, and three others who asked not to be named.

At that meeting, representatives discussed issues like the size of future mandated biofuel blending volumes, exemptions for small refiners, and biofuel tax policy, Hupman and the other sources said.

Any agreement reached between the two powerful industries could be adopted by the Trump administration.

"It makes it easier for (the Trump administration) to arrive at whatever number they arrive at if they are hearing from groups that have historically been at the opposite sides of this," said Hupman.

BLENDING VOLUMES AND WAIVERS

Among the most important issues discussed, the U.S. Environmental Protection Agency is preparing new blending mandates under the RFS that will govern volumes for the next two to three years, along with the program's multibillion-dollar compliance credit market.

Three of the sources said the group has already agreed in principle to ask that the EPA significantly raise the mandate for renewable diesel and biodiesel from its current level of 3.35 billion gallons, which the biofuel industry says is far below production capacity.

The range discussed was between 4.75 billion and 5.5 billion gallons, with some wanting higher volumes in 2026 and others pushing for a more gradual rise, the three sources said.

Blending mandates for ethanol, meanwhile, have capped out at 15 billion gallons, and the parties saw little growth prospect due to plateauing demand for gasoline, the sources said.

The groups were also split over small refinery exemptions to the RFS, one of the most controversial and divisive issues, the sources said.

In Trump's first administration, the EPA approved a record number of such exemptions, letting small refiners sidestep their blending obligations, and triggering political backlash from his Republican allies in the Farm Belt who said it punished farmers.

Former President Joe Biden sought to do away with the exemptions, triggering legal challenges that reached the U.S. Supreme Court earlier this month. Several exemption requests are pending before the EPA.

The groups were split over whether the administration should force other refiners to make up for any exempted blending volumes, a position opposed by the U.S. refining industry, the sources said.

Another crucial issue discussed at last week's meeting was the fate of a new tax credit created for biomass-based diesel under the Biden administration but was not finalized. The program, known as 45Z, replaced a flat $1 per gallon blenders credit and instead rewards producers based on the carbon intensity of their fuels.

Trump and Republicans have not said whether they would move forward with 45Z.

Some at the meeting, including the National Association of Truck Stop Operators, or NATSO, backed a return to the blenders credit while others wanted to support the new 45Z tax credit, according to the sources.

"There was no consensus other than a consensus to keep talking," said one attendee.

The discussions marked a new phase of cooperation between the Farm Belt and Big Oil, according to Hupman.

He said the divide between the industries has softened in recent years as major refiners like Marathon Petroleum ( MPC ) and Valero have invested in biofuels production.

"Our companies have evolved as the fuels landscape has evolved," said Hupman. "We have a realization that the RFS is here to stay and we want to make sure it functions as efficiently as intended."