Iran is aggressively tackling pollution, costly fuel import dependence and international political pressure by increasing its fleet of natural gas-fueled vehicles (NGVs). In less than two years, the number of cars able to run on compressed natural gas (CNG) has increased more than five-fold, a move that has allowed it to replace about 10% of its aging fuel-guzzling vehicle fleet.

But the government, which owns huge stakes in the country’s auto industry, is not stopping there. It has told manufacturers that at least 40 percent of the vehicles made every year must be NGVs. Service stations with natural gas refueling capability are spreading rapidly and mass transportation is being transformed at a record speed.

Over the next five years, Iran plans to have one-third of its vehicles running on natural gas. If the country achieves that goal, it will have about 3.5 million NGVs, which would make it the world’s leader both in overall numbers and as a percentage of the total fleet. The country hopes that the shift to NGVs will allow it to boost its energy exports.

In 2007, Iran had around 250,000 CNG vehicles, according to the International Association of Natural Gas Vehicles (IANGV). According to sources in Iran, that number is now about 1.3 million. The service station network is also growing rapidly. Last July, during the World Petroleum Congress in Madrid, Iranian officials said that at that time the country had about 400 stations capable of refueling NGVs. By next month, Iran plans to have 1,800 NGV-capable stations.

And while it is hard to estimate how NGVs will affect the Iranian market – the heavily subsidized motor fuel market makes reliable data difficult to obtain – the addition of 1 million NGVs should allow Iran to replace about 32,000 barrels per day of refined crude fuel demand with about 200 million cubic feet of gas per day.

Iran is one of the world’s biggest crude oil producers, but it is also one of the biggest importers of refined fuels, a fact that causes some consternation within the Islamic Republic. About 50% of its gasoline and 10% of its diesel fuel is imported. Over the last year, fuel imports have ranged from 95,000 bpd and 170,000 bpd. The fuel is bought at market prices and then resold, thanks to hefty government subsidies, for as little as $0.40 a gallon.

The government had earlier estimated the total import bill for the Iranian year ending March would be at least $8 billion. More importantly for the government though, is the looming threat of an embargo of fuel imports. 

Iran is now investing billions of dollars in its refining sector with the aim of doubling its refining capacity by 2012.

The second leg to address runaway subsidies and security of supply issues is using its huge gas reserves, second only to Russia’s. And while several factors could affect its success, including its ability to curb demand by increasing fuel prices and a growing demand for all type of vehicles, NGV plans are expected to be one of the main contributors to reducing fuel imports to eventually become a major exporter.

“For Iran this is critical. It costs the government a fortune to subsidize fuels. And they are definitely afraid of an embargo,” says Richard Kolodziej, president of the IANGV. “It’s not the market that is responding. The government is mandating.”

Iranian efforts are not only limited to new NGVs, which currently amount to about 600,000 of about 1.5 million vehicles produced annually. The country is also converting its existing fleet. About 20,000 vehicles per month are now being converted to NGVs and Kolodziej estimates that about half of the exiting NGVs in the country have been converted.

NGVs have a long history in Asia and Latin America as countries aim to to reduce oil consumption and pollution. Global annual growth since 2000 has averaged 30% and 53% in Asia, according to the IANGV. In contrast, European annual growth of CNG vehicles in the same period has averaged slightly more than 15%, while North America’s doesn’t even reach 1%.

In Iran, local demand for NGVS so high that the country exports very few of the vehicles it produces, despite its growing regional presence. “We have a huge demand for CNG cars in Iran. Automakers don’t have any interest to export these vehicles. Maybe in a few years it will be possible to neighboring countries, like Turkey and Pakistan, but for now we have enough demand,” says Alireza Rahnama, who until about a month ago was the head of planning and project control at the Iranian automaker Khodro, the country’s biggest producers of NGVs.

The Iranian government is also actively supporting NGV research. Khodro, which is also the biggest automaker in the Middle East, recently unveiled the Samand Soren ELX, which it claims is the world’s most powerful 4-door NGV sedan, with 150 horsepower. Most of the research was financed by the government, according to Rahnama, and the intellectual property was registered under the country’s name.

Another government incentive is cost. CNG prices were doubled late last year, but it still costs about 40% of the already heavily subsidized gasoline. “It’s a wonderful success story,” says IANGV Senior Vice President, Sean Blythe, who visited Tehran last year. “This is not a short-term initiative. It’s a long-term strategic approach. They are very close to self sufficiency,” Australia-based Blythe adds referring to CNG vehicle technology. “The Iranians have been very smart in how they have done it.”

The push for NGVs is helping reduce air pollution in Tehran, a city of about 12 million people. Natural gas burns much cleaner than gasoline or diesel and emits about a third less greenhouse gases. All buses in the city and most taxis are fueled with natural gas and about 50 new fueling stations have opened there in recent months.

Iran’s NGV push shouldn’t crimp the country’s overall gas output. If the country succeeds in replacing a third of its fleet in five years with NGVs, that fleet would still only consume about 10% of its current gas production. In a market of close to 4 trillion cubic feet a year “the net effect is not very significant, yet,” says Nikos Tsafos of PFC Energy. 

Of course, that will depend on Iran’s ability to curb internal gas demand, especially in its industrial sector while increasing gas production. One thing is certain though: the push for NGVs will accelerate Iran’s ability to cut its motor fuel imports.