Doubling in five years

October 20, 2015

Published in corporate Gazprom Magazine Issue 9

Global NGV market rapidly growin

Recently China has become the driving force of the NGV sector development, which made it possible to double the global NGV fleet within five years. The Russian NGV industry can't show such high rates of growth that the NGV industry leaders have. Nevertheless, alongside with constructing filling stations and purchasing equipment, large-scale preparation activities are underway now: agreements are being concluded with the regions, the regulatory base is being improved, the industry is mastering the manufacture of NGV machinery and equipment for filling stations. Proper provisional arrangements will result in the explosive growth of the Russian NGV sector already by 2020. As it is known, the Russians are slow starters but they drive fast.

China's not its own master

The number of NGVs across the globe is growing at very promising rates. In 2010 there were 11.3 million NGVs around the world, and this year, according to the NGV Communications Group, their amount reached almost 22.5 million. Doubling in five years is an outstanding result!

In 2010 there were 11.3 million NGVs around the world, and this year, according to the NGV Communications Group, their amount reached 22.5 million.

Just like in many other sectors of the global economy, it was China which had its say. According to the National NGV Association, the number of NGVs there equaled 500 thousand in 2010, 1.58 million in mid-2013, and by now it has reached almost four million. During the same period the number of CNG filling stations in China has also increased – from 1.65 thousand to 6.5 thousand. Meanwhile, 2.9 more thousand CNG filling stations are presently under construction.

A comprehensive approach is largely applied in China, providing for a positive effect in several areas, for instance, economic (related to direct savings on petroleum, oil and lubricants and to loading and boosting production capacities) and environmental. For China the latter, in our opinion, is not the issue of self-promotion, like in the pampered Europe, but rather that of national health. Here we should quote the Xinhua News Agency, which writes that in the pictures of China taken from space “smog clouds floating over Central and Eastern China cast their shade on the hearts of the Chinese”.

If we set aside the oriental imagery and just take a look at the environmental situation in major Chinese cities, we'll see that as of the beginning of the last year only three cities met the existing air quality standards, while in 71 cities the air emissions exceeded the set limits. About 19 per cent of the country's area (1.81 million kilometers) is engulfed by smog. Only Lhasa (Tibet Autonomous Region), Haikou (major city in the southern Province of Hainan popular with tourists) and Zhoushan (Eastern China) were considered to be clean, while Beijing, Tianjin (Hebei Province) as well as the Zhu Jiang and Yangtze River Deltas turned out to be the most polluted. These regions account for only eight per cent of China's area, but their share in coal consumption comes up to 43 per cent, which is about 844 million tons in oil equivalent. This is more than the aggregate coal consumption in India and the USA. Such high rates of consumption are explained by the fact that 55 per cent of Chinese metallurgical output, 40 per cent of concrete, 52 per cent of gasoline and diesel fuel are produced in Beijing, Tianjin and the Hebei Province. According to Wu Xiaochun, China's Vice Minister for Environmental Protection, coal burning, industries, motor vehicles, road and construction dust are the main air pollutants. For the purpose of resolving the environmental problems, China can't follow the path of European countries, which simply transferred these issues abroad. In other words, China's not its own master. That's why the Heavenly Empire sees the way out of the existing situation in reducing coal consumption and switching to alternative vehicle fuels. But so far they've only managed to steady the coal consumption and they'll be able to cut it down only once gas supplies from Russia and other sources are launched on a full scale. It is expected that two billion cubic meters of gas will allow for reducing coal consumption by three million tons. At the same time, the progress in the area of alternative vehicle fuels is obvious and, we dare say, phenomenal.

Meanwhile, it is the car industry alone that we've touched upon. But the NGV industry is not limited to it. Thus, in early August the construction of world's first roll-on-roll-off ship (vessel for transporting cars, freight transport, railway cars, etc.) that will run both on liquefied natural gas (LNG) and conventional marine fuel, began in China. Presumably it will be used in the North and Baltic Seas.

Bipolar world

But China is not alone in developing the NGV sector. Asia and South America have become the main centers of the NGV industry growth. During the recent five years the list of major players has changed little, if at all: Pakistan (with 2.5 million NGVs in 2010 and 3.7 million in 2015), Argentina (1.9 million in 2010 and 2.5 million in 2015), Brazil (1.65 million in 2010 and 1.8 million in 2015). But special attention should be given to Iran and India.

Currently Iran leads the world by the number of NGVs, having boosted their quantity from two million in 2010 to over four million in 2015. For Iran the NGV fuel has become an excellent aid under the conditions of oil refining capacities shortage caused by sanctions and at the same time the gas reserves surplus. But most likely already by the end of this year Iran will yield the palm to China. As for India, it is notable that with only 700 thousand NGVs in 2010, by now it has boosted its fleet to 1.8 million NGVs. We believe India to be a promising market for Chinese car makers; besides, it would be a good thing to ease the pressure on India's environment. That's why in the near future the role of India as the center of the NGV industry development will grow.

At the same, the role of the USA in the global NGV industry is inversely proportional to the attention it is given in the media. We'd pointed it out a year ago, and nothing has changed since then. Talks on the federal and expert levels, large-scale government support, marketing and promotion – all this resulted in increasing the number of compressed natural gas (CNG) vehicles in the USA from 100 thousand to 150 thousand units during five years. It was expected that by supporting the NGV sector the US would expand its domestic gas market by rendering indirect support to shale production. But just as we'd predicted, no remarkable success followed. According to the US Department of Energy, only 0.12 per cent of gas consumed in the USA is used in transport. The spurt failed. Moreover, considering the new rhetoric of the American Government, which started putting gas on the back burner, promoting renewable energy as a promising business, the NGV fuel has not too much of a future in the North American market.

Italy stands apart

Looking at Europe, one can't but feel that this region is at the crossroads, which is due to an oil crisis posing new challenges to the European NGV industry. Many countries induced a switch to the NGV fuel and other types of alternative fuels by driving consumers to the wall with high import duties and taxes on conventional vehicles as well as excessive gasoline and diesel prices. But now under the conditions of dramatic oil price swings this well-knit system can come crashing down.

Italy stands apart. Here the number of NGVs grew from 677 thousand in 2010 to 885.3 thousand in 2015. As a comparison, in all other European countries (including the Baltic Tigers and leaving alone other post-Soviet countries) the number of NGVs barely reaches 269 thousand. We think that here the traditional interest of Italian manufacturers to NGVs weighed in on, which means the availability of necessary manufacturing capacities which also work for export. Apparently the lingering economic crisis in Italy has also come into play: consumers save on gasoline, because in Italy it costs about twice as much as CNG. By the way, it is interesting that Germany which owns 98 thousand NGVs only slightly lags behind Italy in terms of the number of CNG filling stations: Italy has 1,060, Germany – 921. Probably this is due to Germany being an important transit country.

In general it should be noted that subject to a drop in oil prices, the European countries feel tempted to put off the few NGV projects. However, apart from pleasant consequences (cheapening of vehicle fuels), low oil prices also carry a lot of negative ones (related to freezing of large-scale oil & gas projects), which result in cancelling orders to major manufacturers of equipment, fittings, etc. According to Wood Mackenzie, within the last year global oil & gas companies have put off projects worth a total of USD 200 billion. We think that this reduction also affected the European manufacturers. That's why if the European economic crisis lingers and worsens, an ordinary European driver will have to look to natural gas.

Meanwhile, European ship-owning companies are eagerly switching to natural gas, as new environmental standards for the Baltic and North Seas (sulfur content in liquid marine fuels can't exceed 0.1 per cent) have been introduced since January 1, 2015. It is worth mentioning that in early 2015 for the first time ever a gas-fired vessel made a sea passage covering 13 thousand nautical miles (24 thousand kilometers) from Zhangjiagang (China) to Bergen (Norway). It means that transoceanic passages are possible for LNG-powered vessels. Though eco-friendly transport companies still favor gas & diesel fuels.

Main driver

The Russian NGV industry hasn't undergone such dramatic changes as the Chinese or Iranian one yet. Although in comparison with Tanzania, Australia or Norway the advancement of the Russian NGV industry is phenomenal. There are 205 CNG filling stations of Gazprom in Russia today, and the total amount of gas sold in 2014 reached 404.8 million cubic meters (a 7.4 per cent growth).

There are 205 CNG filling stations of Gazprom in Russia today, and the total amount of gas sold in 2014 reached 404.8 million cubic meters (a 7.4 per cent growth). By the end of 2015 gas sales are expected to grow by another ten per cent.

Gazprom is the main driver of the Russian NGV market. The Company closely cooperates with regional authorities, entering into agreements with them, which include sections dedicated to regional NGV markets development. Presently Gazprom has signed such agreements with 38 regions. In addition, the Company signed the Roadmaps for the projects on wider use of hi-tech products for Gazprom's benefit with more than ten Russian constituents and the Republic of Belarus, particularly envisaging the application of domestically manufactured gas-fired engines and NGVs.

Last year Gazprom was engaged in pre-construction activities in Russia; design and survey operations were completed for 21 CNG filling stations in 13 Russian regions. NGV infrastructure is expanding towards Russia's East. Before the year end, a CNG filling station will be constructed in Yuzhno-Sakhalinsk. A program for converting motor vehicles and agricultural equipment to NGV fuel is underway in the Sakhalin Region.

Between 2012 and 2014 the sales volumes of NGV equipment in Russia almost quadrupled – from 559 units (including 536 domestically manufactured units) to 2,170 units (2,045 manufactured domestically). This was achieved through the joint efforts of Gazprom and major car manufacturers – the Company agreed with the car manufacturers on including NGVs into the range of manufactured products.

The total volume of Gazprom's investments into constructing CNG filling complexes in 2015 exceeds RUB 10 billion. 25 CNG filling complexes will be launched this year and 40 more – in 2016. By the end of 2015 gas sales are expected to grow by another ten per cent.

Top three

The conversion of equipment to natural gas is supported by state subsidies. At the end of the summer the Government decided on the scope of financial support to 23 regions for purchasing gas-fired buses and municipal vehicles – RUB 3 billion. The funds are distributed under the state-run program for Developing Industry and Increasing its Competitiveness. The highest subsidies are provisioned for Tatarstan – RUB 554 million, Crimea – RUB 365 million and Bashkortostan – RUB 322.4 million.

Priority given to Tatarstan is quite explainable: this region is the leader in terms of NGV infrastructure development rates (an appropriate regional NGV program is in effect in the Republic until 2023). There are 11 CNG filling stations of Gazprom here, three more are under construction. The companies of the Republic are intensely building up the NGV fleet: in 2013 – by 262 units, in 2014 – by 319, and in 2015 it is planned to purchase 320 gas-fired buses and equipment units. Gazprom Gazomotornoye Toplivo, a specialized subsidiary of Gazprom, entered into cooperation agreements with the Government of the Republic of Tatarstan as well as with KAMAZ. This cooperation is expected to result in creating Russia's first comprehensive CNG and LNG filling infrastructure.

Bashkortostan is among top-ten priority regions of Gazprom for developing the NGV market. Right now 11 Gazprom's CNG filling stations operate here. By 2023 their number will be increased to 13; in addition, Gazprom will equip 17 existing filling stations with CNG modules.

Crimea owns a network of 21 CNG filling stations (one is currently idle, one is under construction) rather developed for such a territory. Most of them were commissioned back in the 2000s. In 2014 the aggregate yield of these filling stations totaled some 14.9 million cubic meters of gas (18.4 per cent of design capacity) – a 4.4 per cent growth compared to 2013. In addition, the Republic produces enough gas for meeting its own demand. As for gasoline and diesel fuel, they have to be imported from mainland Russia (that's why vehicle fuel in the Republic costs about two rubles more than on average across Russia). This April the local government adopted a program for the NGV market development between 2015 and 2017, envisaging large-scale gasification. Gasoline and diesel fuel consumption in the Republic is expected to fall by 60 thousand tons (total consumption in 2014 equaled 500 thousand tons) due to substituting it with CNG by 2017. In addition, before 2017 Crimea is planning to purchase 902 plant-manufactured NGVs and expand the filling stations network (including mobile fuelling complexes) more than twice.

Cure for fever

The motor vehicle market is running a fever. Under such conditions car manufacturers should be interested in mastering the production of new types of equipment (by the way, more expensive ones than their conventional counterparts) and getting a guaranteed market for it under federal programs. For example, in April 2015 KAMAZ launched in Naberezhnye Chelny a production line for manufacturing NGV equipment with the output of up to 8 thousand units of 50 different vehicle models.

Gazprom is converting its own vehicle fleet to CNG. Thus, last year the Gazprom Group companies purchased 1,674 units of NGV equipment, and their total number reached 6,522. Perhaps, the Company's contribution to the development of the NGV sector may be illustrated by the following fact: in 2014 KAMAZ supplied Gazprom with 626 NGV units, and 16 Russian constituents – with only 228 gas-fired motor vehicles (buses, municipal equipment).

KAMAZ (RariTEK) and GAZ Group remain the main manufacturers of commercial gas-fired equipment; the Minsk Automobile Plant should also be mentioned as a company from a EEU country. As for AVTOVAZ, so far it has only confined itself to another presentation last summer – LADA Largus CNG.

But it is not only the motor vehicle segment, which is transiting to NGV fuel. In the near future the United Shipbuilding Corporation is going to enter into an agreement with Sovcomflot on constructing gas-fired carriers. Meanwhile, Russian Railways finally got the long-awaited LNG-powered shunting locomotive built by the Bryansk Engineering Plant. We believe that by 2020 the Russian industry will be able to satisfy all the basic needs of the NGV sector – both in terms of NGV equipment and equipment for CNG filling stations.

Alexander Frolov