Iran’s 3rd annual NGV Conference and Exhibition, held in Tehran last month, has demonstrated considerable change in circumstances since their 2nd conference in June of last year. Iran now has more than 2 million natural gas vehicles (NGVs) on their roads, serviced by 1474 CNG fuelling stations. This makes them the second largest users of NGVs in the world after their next door neighbour, Pakistan. While continued growth for the program is certain, what is less certain at the moment is at what pace it will continue.
Among other things, additional capacity to produce gasoline through local refineries is expected to come online sometime next year. This takes pressure off the country to continue their CNG program at the current pace. Though the country has substantial oil reserves, they have relied heavily on imported gasoline to date due to insufficient local refining capacity. The cost of these imports, along with the possibility of sanctions which could restrict them, was the original stimulus for the CNG program which puts the country’s vast natural gas reserves to use.
While the conference provided an opportunity to celebrate the success of the program so far, there was also some honest reflection and at times frank criticism of its implementation. There was no shortage of speakers and panellists with views on the subject, most from government agencies or government owned businesses but also a good selection from private enterprise as well.
Without wishing to dwell on the negative, some of the themes to emerge from the conference included:
- Over-regulation on the infrastructure side. Some operators claimed they had to deal with as many as 5 different authorities, excluding local municipalities, over a period of several months just to get approval to proceed with construction of their sites. (One speaker mentioned 12 permits being required to establish a station).
- Under-regulation on the vehicle operations side. There was general acknowledgment, almost acceptance, that the country has a thriving market for illegal vehicle conversions. Official numbers stand at 2,044,824 ‘legal’ NGVs but the consensus seems to be that there are close to 2.1 million or more if illegal conversions are included.
- Insufficient safety standards. While the country in principle adopts ISO or UN ECE standards adapted for local conditions, to date they have no official CNG cylinder inspection program in place. Estimates suggest there are 800,000 CNG cylinders currently overdue for periodic inspections.
- Insufficient refuelling infrastructure. While 1474 CNG stations seems like a lot by most standards, few stations operate at optimal capacity. The total number of refuelling nozzles installed is currently just over 8,300 but as many as 15-20% of these are not operational at the moment. Queues at CNG filling stations are thus a common sight, especially in the cities, meaning that many NGV owners are opting to operate on gasoline instead of CNG (all NGVs in Iran are currently bi-fuel). One speaker suggested that based on delivery capacity alone, there could be as many as 800,000 NGVs which are not being filled with CNG regularly and are instead using gasoline. 25 million litres of gasoline is currently displaced every day but increasing efficiency of existing infrastructure alone could thus increase this total by more than 50%. The completion of another 700 stations currently under construction would increase that further.
Cost and availability of land for fuelling stations. This problem is not just unique to CNG but to gasoline and diesel as well. Even in Tehran long queues for gasoline are a common sight.
- Minimal coordination amongst Government departments and frequent shifting of roles during the past 4 years. General oversight of the program has already shifted three times, from the Iranian Fuel Conservation Organisation (IFCO) to Iran Gas Khodro and now to National Iranian Oil Products Distribution Company (NIOPDC) in the ten years since the program originated. Regular senior personnel changes have also exacerbated the problem, along with the situation mentioned earlier where as many as five authorities are involved with establishing CNG infrastructure. A common message was for Government to create a ‘one stop shop’ for industry to deal with.
Industry members from other parts of the world will recognise many of these issues as being fairly common and not particularly unique to Iran. What is unique though is the scale of the problems and the need to address them soon, lest they get out of hand and cause the entire program to go backwards.
Fortunately, the Government seems to be receptive to industry concerns. Mohammad Rouyanian, who heads Iran’s Fuel and Transport Management Organization and reports directly to the President, responded to concerns raised by calling a meeting of stakeholders immediately after the conference. The outcomes of that meeting haven’t been made public but the willingness to meet is a step in the right direction.
The biggest shadow over Iran’s CNG program though is not mentioned above and in fact is common to all fuels in Iran. As with many nations, the Government has heavily subsidised transport fuels in an effort to spur the local economy.
Gasoline retails at only 1,000 Iranian Rials (IRR) per litre (USD 0.10 cents per litre) for the first 60 litres per month then 4,000 IRR/litre (USD 0.40/litre) thereafter. CNG is only 800 IRR/litre (USD 0.08/litre) but with no limit on quantity, making it an attractive alternative for private motorists. Diesel is even more attractive at only 160 IRR/litre (USD 0.015/litre) but is currently only used in commercial applications as there are no diesel passenger cars available in Iran.
The government has signalled intentions to reduce the subsidies but is apparently unsure how high they can raise prices without causing domestic unrest. Occasional media comment is apparently being used to ‘test the market’ as to what might or might not be palatable for Iranian citizens. While the price jump is unknown at this point, one commitment the government has apparently made is to maintain a ceiling on the price of CNG of between 40-60% of the price of gasoline. (See this IMF item for further comment on energy subsidies in Iran)
The government has also signalled a commitment to a ‘basket’ of fuels, with intentions to make diesel vehicles available for private motorists. Whether or not the price will be set relative to gasoline is currently unknown. OEM vehicle manufacturers have apparently been told to gear up for diesel vehicle production, pending the availability of ultra-low sulphur diesel (50 ppm) sometime in 2012.
Despite previous high targets for CNG vehicle penetration – OEM production mandates were as high as 70% back in 2007 – the government apparently now has more moderate targets in mind with 25% being mentioned more than once during the course of the conference. With 13 million vehicles on their roads, this equates to slightly more than 3 million vehicles, which industry insiders expect to reach by 2014 or 2015. Industry members are also pressuring government not to set a ceiling at all, suggesting instead that the market should decide which fuel it prefers.
In the commercial sector, natural gas vehicles currently remain non-existent, not surprising given that diesel is less than 20% of the price of CNG. There are however 5364 CNG buses operating in a number of cities – made possible by the fact that fuel for public buses is subsidised 100%.
Iran’s large cities have significant pollution issues which could be turned around dramatically with the replacement or conversion of older diesel vehicles to run on CNG or dual-fuel diesel/CNG. I sat in on a meeting with a representative of Iran’s Fuel and Transport Management Organization to discuss this sector specifically. There is definite interest from the office, but whether commercial CNG vehicles will take off in Iran or not will ultimately be determined by fuel price.
Which way next?
Meanwhile uncertainty prevails. Despite its problems, the Iranian CNG program is a winner in many respects. The problems noted earlier are not insurmountable and the current uncertainty has given government and the industry an opportunity to reflect on what needs fixing and what could be done better as they move forward.
Right now though, it’s difficult for private operators to make a business case for establishing a station. Subsidies are available for establishing stations but the Government is apparently selective about where they make this available (While many private operators are running government owned stations, only 11% of stations are currently privately owned). Fuel pricing will of course also be a key element to future station growth.
Where Iran’s CNG program goes from here thus depends on decisions taken in the next few months; the same could be said about the transport fuel market in general. The ingredients for an outstanding program are there – abundant fuel, high level of technical competence, OEM manufacturing capabilities, a passionate private sector and a market that has readily embraced natural gas as a vehicular fuel.
Pride is also a significant factor that is likely to lead the government to continuing a substantial NGV program. With the bad press the government gets overseas, there seems to be some pride on the part of the government for having demonstrated that sole reliance on gasoline or diesel is not that difficult to overcome. The rest of the world will watch with interest as the next few months unfold.
See also the NGV Global Executive Comment blog for additional comment on Iran’s CNG program.