August 5, 2009

Source: Brett Jarman - IANGV Executive Director

Despite political uncertainties in Iran, one good news story to come out of the Islamic Republic is the continued success of the country’s extensive natural gas vehicle (NGV) program. Attending last week’s 2nd Conference and Exhibition on CNG and Related Industries provided a valuable opportunity to gain insight into the world’s fastest growing NGV market. As could be expected, the massive growth does present some problems for the industry but, while the scale of the issues might be larger, the problems themselves are not unique to Iran and are not insurmountable. In fact, the national NGV industry is setting new benchmarks that put others on notice. A quick look at some numbers might help set the scene…

• Natural gas vehicle numbers have increased from 315,000 at the end of 2007 to 1,000,000 at the end of 2008.
• The latest official numbers, as at May 11 2009 indicate 1,411,324 NGVs on the road. Government officials at the conference confidently agreed that figure is now well in excess of 1.5 million.
• That represents a current growth rate of some 100,000 NGVs per month – a rate which is likely to be maintained at least for the remainder of this year.
• Iranian OEM vehicle sales totalled almost 1,000,000 units for the last Iranian calendar year (March 21 2008 -March 20 2009). Of those, 332,000 were ex-factory bi-fuel natural gas vehicles and an additional 133,000 were converted at or soon after purchase.
• The republic had 500 CNG fueling stations operational at the end of 2008, increasing to 900 currently with another 180 ready to connect to the natural gas grid.
• Dispenser numbers have increased even faster – rising from 1250 just 7 months ago to 3250 now.
• Estimated fuel replacement by CNG is currently around 7% of Iran’s total transport fuel consumption, up from 0% just 5 years ago.
• CNG retails at 540 Iranian Rials per kilogram, approximately $US0.04 per m3 (roughly equivalent to a litre of petrol) – yes that says 4 cents per litre equivalent.
• Petrol retails at approximately $US0.14 cents per litre and diesel at $US0.01 cent per litre. (Yes – 14 cents and 1 cent respectively – more on that later)
• Due to Government subsidies an aftermarket conversion of a petrol vehicle to natural gas costs around only $US50 (approx.), while an OEM bi-fuel natural gas vehicle only costs $US1,000 more than the petrol version

Government Policy

Though the Iranians have their own unique twist on the issues, key policy drivers are much the same as elsewhere in the world – economic savings and energy security with environmental gains providing an additional fringe benefit. What makes the Iranian situation different to most other nations is that although they are an oil rich nation – in fact the country’s economy is built on oil exports – they do not have many refineries thus have to import petrol and diesel for their transport fleet. This is a major problem; as well as costing billions in foreign currency, it also puts the country at risk, primarily due to the possibility of international trade sanctions. If trade sanctions escalated to the point that imports of petrol or diesel were cut off, the country’s vehicle fleet would be crippled.

Compounding the problem is the fact that, like many developing nations, the Government heavily subsidises the retail price of fuel so as to stimulate economic activity (hence the low fuel prices mentioned earlier).

As well as fuel replacement, the Government also has an effective petrol rationing scheme in place using a Smart Card system fitted to all petrol dispensers. Motorists are limited to 100 litres of petrol per month at the lowest rate, (14 c/litre) – after that the price quadruples to discourage further use. This measure alone has reduced daily consumption around 25% from 90 million litres per day to 67 million. That’s an impressive result for a pretty simple solution.

Being home to the world’s second largest reserves of natural gas (after Russia) it makes sense therefore to make use of it for the transport fleet, especially as there is no ‘refining’ required. Government funding addresses all areas required to make the program successful – fueling infrastructure, conversion equipment and the fuel itself. Though the Minister of Petroleum, HE Gholamhossein Nozari, claims an overall ‘investment’ of 18 trillion Rials ($US1.8 billion) just what that figure includes is unclear. The investment is however returning dividends, saving an estimated 34 billion Rials ($US3.4 million) per day on imports.

Although specific targets have not been set, generally accepted figures seem to be 30% fuel replacement and 3 million NGVs on Iran’s roads by 2014. Fuel replacement is already at 7% so both targets are likely to be achieved well in advance.

It should also be noted that pricing for all fuels is expected to be revised upwards some time this year. Though the timing and scope of the revision is uncertain, the general expectation is that the subsidy levels of all fuels will be dramatically reduced.

(NB – Light duty diesel passenger vehicles are not permitted in Iran, ensuring that the ‘giveaway’ diesel is used for commercial purposes only. Also – diesel and natural gas for public bus operations is subsidised 100% by the government

On the Road

Working in Iran’s favour is their vibrant motor vehicle manufacturing trade, the largest in the Middle East. Their R&D program is rapid to say the least, bringing their first turbo-charged sedan, a Euro 4 Samand Soren, to market within 3 years of commencing OEM NGV production. Engines used to date for OEM production have been modified petrol engines but indications are that purpose built natural gas engines are not too far off.

What is noticeably absent though is a presence of NGVs in the heavy vehicle sector. The country boasts around 5,000 CNG buses, built locally using Mercedes and Scania engines, but no trucks. This is unlikely to change as long as diesel remains available at 1/4 the price of CNG but the aforementioned fuel price review by the government might produce a shift.

Safety First

Minister Nozari also stressed the importance of maintaining high safety standards for the industry. He pointed to the local natural gas production industry as a benchmark, producing 100 billion m3 per day with minimal accidents, due primarily to tight inspection regimes in place.

Duplicating that success in the NGV sector may prove more of a challenge though, with evidence of some illegal conversions and installations taking place already. Nozari urged Iranians to report such activity to the authorities saying, “Non-standard and illegal workshops produce short term profits that are trivial and unimportant, but create problems that are irreversible.”

The warning was timely with unconfirmed reports circulating at the conference indicating a possible cylinder incident during the week prior, caused by the apparent use of a second hand Type 2 cylinder, imported illegally and used without the fibreglass ‘wrap’ necessary to maintain the integrity of the cylinder.

Other Issues

Other issues not unique to Iran but having an impact are matters such as land acquisition, strategic location of stations, ensuring station specs meet demand and the labyrinth of approvals required to build and operate fueling stations. These matters are proving especially problematic for private operators who are playing an increasing role in setting up public fueling stations.

Summary and Outcomes

Overall, the Iranian NGV industry presents itself as lively and spirited with some lessons to be learned but also many that could be taught. Interest in the event was high, attracting 1400 conference and workshop delegates and an additional 2,000 visitors to the exhibition, which comprised more than 100 exhibitors.

Most of the issues identified over the course of the two day conference weren’t resolved on the day, but elements of them were included in a 17 article resolution presented at the closing session of the conference. The articles are to be presented to a parliamentary subcommittee on CNG, and followed up prior to next year’s conference and exhibition.

Among the resolutions was a call for a central body to coordinate and ‘manage’ overall policy, a move that would be particularly welcomed by the increasing number of private players entering the industry.

Perhaps the biggest lesson for NGV stakeholders is just what can be achieved when policy is in place to support industry growth. Lack of infrastructure is often touted as a ‘reason’ not to pursue natural gas as a transport fuel yet Iran is proving that this is merely an excuse, that lack of infrastructure is solved simply by putting mechanisms in place that allow it to be created.