October 3, 2017

Published in corporate Gazprom Magazine Issue 9, interview conducted by Alexander Frolov

Mikhail Likhachev, Chairman of the Management Committee, Director General of Gazprom Gazomotornoye Toplivo, answers questions from Gazprom Magazine.

Mr. Likhachev, your company is focused on developing the Russian NGV market. What is the relevance of this work and is it needed at all?

This work is extremely relevant – we actually need to set up a new industry in the country. NGV market development is hampered by a number of factors, such as a completely outdated regulatory framework, a poorly developed infrastructure scattered across separate regions, and the underutilization of methane in transport. But the most vexing problem we faced was that both consumers and market players had absolutely no idea of the value of natural gas as a vehicle fuel.

What has been done within three years since the company’s inception? First of all, we have consolidated the Gazprom Group’s gas filling assets. At present, we own 162compressed natural gas (CNG) filling stations, two natural gas liquefaction facilities in Kaliningrad and Petergof, and the Moscow gas processing plant. Secondly, we assessed the existing infrastructure and built around 50 new gas filling facilities, having in mind the potential integration of local markets into a unified national CNG filling network under Gazprom’s brand name. Thirdly, we initiated measures to improve the existing regulatory system and technical standards, which led to the abolition of state control over CNG pricing, reduction of the hazard rating for CNG stations, etc.

But most importantly, we have established a new culture of the use of natural gas as a vehicle fuel and we continue to advance it. To this end, we have registered the EcoGas trademark, the design of which reflects the environmental and financial benefits of natural gas.

How is Gazprombank involved in the company’s business?

Status, a wholly-owned subsidiary of Gazprombank, holds a 50 per cent interest in Gazprom Gazomotornoye Toplivo.

What has changed in the Russian NGV market over the last three years?

In the last three years, natural gas sales have been growing at an annual rate of 8 to 11 per cent. In 2016, Gazprom marketed 480 million cubic meters of gas via its CNG filling network, including 94 million cubic meters sold by Gazprom Gazomotornoye Toplivo.

By law

What amendments have been made to the NGV-related regulation? What else needs to be amended or improved?

Together with the federal authorities, we have undertaken extensive efforts within the last three years to improve the regulatory system and lay the foundation for market development. For instance, the procedures of subsidizing NGV producers were designed; the Government approved the Comprehensive Action Plan on the wider use of natural gas as a vehicle fuel; the NGV market development targets were included in the state-run program ‘Energy Efficiency and Energy Development’ and the subprogram ‘Conversion of Highway, Railroad, Air, Marine and River Transport to Natural Gas’ under the state-run program ‘Transportation Infrastructure Development.’ Further actions include the drafting of a special state-run program for the conversion of transport to natural gas, the updating of the fire and industrial safety requirements and the sanitary requirements for facilities producing and consuming natural gas as a vehicle fuel, and the deregulation of CNG pricing pursuant to a Russian Government directive.

Also this year, Russian President approved the regulatory changes concerning industrial safety requirements for hazardous production facilities, according to which CNG stations would be assigned to Hazard Class 4 instead of Class 3, thus reducing the commissioning timelines and the operational costs of the existing CNG stations. In March, the President signed the Federal Law No. 36-FZ allowing energy service contracts for liquefied natural gas (LNG).

In the course of streamlining the NGV regulatory framework, it is essential to develop and adopt a national standard containing relevant, complete and compulsory NGV terminology and reflecting the concept of the NGV business throughout the whole lifecycle. The unified national standard of the Russian Federation GOST R 57433–2017 ‘Use of Natural Gas as a Vehicle Fuel. Terms and Definitions’ was adopted on March 31, 2017, and came into force on September 1, 2017.

The draft of the guidelines entitled ‘Small-Scale Facilities for LNG Production and Consumption. Fire Safety Requirements’ is currently under review and awaiting approval.

Adoption of the cornerstone program document – the state-run program ‘Introduction of Gas-Powered Equipment under Separate Programs for Highway, Railroad, Marine, River and Air Transport and Special-Purpose Equipment’ for 2018 through 2022 – is a milestone for the NGV industry. The draft program is being updated and adjusted.

Methane-powered fleet

What capacities does the company have today?

As of July 1, the annual capacity of the gas filling infrastructure owned by Gazprom Gazomotornoye Toplivo was 2 billion cubic meters of natural gas. However, only one quarter of this amount is currently in demand. The potential is immense!

Today’s key goals are to install the company’s facilities in priority regions, work with consumers at all levels, and arrange for the provision of up-to-date and competitive services. Having adopted incentive programs and created enabling conditions for consumers, the company has shown impressive sales growth over the last three years.

Are you planning any renovations?

Yes, we are. A program for renovating the assets acquired by the Gazprom Group has been developed providing for various renovation options – from a partial upgrade to complete overhaul. Upgrading involves replacing obsolete equipment, while renovation provides for a complete revamping including equipment replacement and redesigning of a filling station in line with the corporate style of the Gazprom CNG network. The option is selected depending on the technical condition of a facility, operational safety, and the need for higher productivity.

At the same time, it is important to engage other market players – the Government, business entities, and, most importantly, the car making industry. The businesses are able to make predictions, the Government encourages consumers, but the car making industry is stalling badly today – the growth rates of the methane-powered fleet are slow, to put it mildly. To ensure the proper utilization of Gazprom’s gas filling network, no less than 25,000 to 30,000 units of gas-powered vehicles need to be produced annually within the next five years. So far, their output hardly reaches 3,000–5,000 units per year and another 5,000 cars are being converted to natural gas.

How have the updated standards of the Custom Union’s Technical Regulation ‘On Safety of Wheeled Vehicles’ influenced the cost and dynamics of renovations?

Of course, we are cooperating with car makers, but the progress is rather slow. The KAMAZ Group and the GAZ Group hold leadership positions in the segment of freight and lightweight commercial vehicles; AVTOVAZ announced the mass production of the first LADA Vesta CNG passenger car and is working to start the full-scale production of the methane-powered Granta and Largus cars.

A critical mass of vehicles, at least half a million units exclusive of decommissioning, should be created in the near term. The total count of the gas-powered vehicle fleet is about 150,000 units today.

The figures provided earlier were much lower – about 106,000 units. Has the number of vehicles grown so dramatically in the last couple of years?

Earlier, we had just had estimates. In 2016, the Russian Ministry of Internal Affairs, following the instructions from the Russian Ministry of Energy, calculated the number of registered vehicles equipped with natural gas kits.

Gas for commercial sector

You’ve mentioned that the business sees the convenience of transition to natural gas. Has it proven its benefits on the financial side?

The business community is motivated purely by economic reasons – it seeks to reduce its fuel costs, and natural gas can deliver a two- or threefold reduction. A massive transition to EcoGas is observed among taxi service companies. Eco-friendly taxi fleets have been created in Togliatti, Tomsk, and Saratov. With such long mileage, fuel savings not only exceed the cost of conversion to natural gas (even adjusted for extra registration costs necessitated by the adoption of new standards of the Technical Regulation), the cost of the whole car is offset in two to three years!

Moreover, we support businesses through marketing programs: we have generated a number of proposals that make transition to natural gas easier and more comfortable for legal entities and individuals. We can partially reimburse the conversion costs, lease a natural gas kit or grant fuel cards – we try our best to support those who opt for natural gas.

We help large state-owned companies with the conversion of vehicles to EcoGas. Russian Post starts the conversion this year. More than 1,000 units of their vehicles will run on natural gas before 2020. We also signed agreements on conversion with KAMAZ and other companies.

Considering the vast natural gas reserves within the country, the potential of the Russian market is huge. A lot depends on the infrastructure, but I repeat, the car making industry should act as the driver in this situation, which means that it should reinforce the market expectations and boost NGV sales. All activities should be synchronized: the gas filling network shall be expanded simultaneously with the expansion of the NGV fleet. Synchronization is a priority.

There are no technical restrictions in the car making industry that could hinder the transition. A modern engine runs perfectly on natural gas with an octane number exceeding 105. The energy efficiency of natural gas is quite obvious.

Increased adoption of natural gas in various segments of transport – highway, railroad, marine, river and air – will be encouraged through the state-run program ‘Wider Use of Natural Gas as a Vehicle Fuel.’ The program has passed the public debate and is currently being reviewed by the Ministry of Economic Development. Taking into account the funds of regional authorities and private companies, the NGV market development program will receive a total of RUB 769.6 billion of investments (including RUB 163 billion from the federal budget), a half of which will be used to subsidize NGV producers.

How are you developing the EcoGas brand?

Following the decision of the company’s Board of Directors, we are implementing a program to promote the EcoGas brand this year. As part of the program, we supported the largest international and national sports events: Confederations Cup 2017, as well as running marathons in Kazan and St. Petersburg – our key areas of operation.

Transportation services at the Confederations Cup were provided by EcoGas-powered buses, which carried football fans. We spoke about EcoGas to fans at the stadiums in Kazan, Sochi, Moscow, and St. Petersburg via Gazprom’s exhibition stands. Moreover, Gazprom Gazomotornoye Toplivo took part in the ten-kilometer marathon races in Kazan and St. Petersburg.

LNG

What about the LNG segment?

Our company was appointed to oversee, on behalf of Gazprom, the introduction of LNG in the transport sector. In late February, Gazprom and the Russian Highways State Company (Avtodor) signed an agreement of cooperation to jointly develop the roadside infrastructure, specifically by building a multi-fuel filling network with CNG and LNG stations. As part of the first stage, pilot projects will be carried out along the M-11 and Central Ring Road highways. This project launches the construction of the Europe – Western China international transit corridor.

The Board of Directors of Gazprom Gazomotornoye Toplivo also approved the layout of the gas filling infrastructure along the Moscow – St. Petersburg (M-10) federal highway. The document provides for building eight Gazprom cryogenic filling stations by 2020. The project is regulated by the agreement signed with the Federal Road Agency (Rosavtodor).

Together with domestic companies, we are adopting LNG in transport. For example, the Sverdlovsk Railways are operating a shunting locomotive TEM19 and two mainline gas-turbine locomotives GT1h. In July, Gazprom Gazomotornoye Toplivo started refueling locomotives of Russian Railways at a gas filling facility at the Egorshino station in the Sverdlovsk Region. Together with KAMAZ and the GAZ Group, the company was certified and obtained a VTA for the LNG-fueled KAMAZ and URAL vehicles. Currently, they are in trial operation at Gazprom subsidiaries. All these projects help strengthen the company’s competencies in the small-scale LNG market.

Foreign operations

How are the company’s foreign projects advancing?

The company is implementing its key projects in the Socialist Republic of Vietnam and the People’s Republic of China, as well as considering its potential projects in the Republic of Belarus, the Plurinational State of Bolivia, and several other countries. A representative office of the PVGAZPROM NGV joint company was opened last year in Ho Chi Minh City as part of the Vietnamese project. The company was assigned the status of a national NGV market operator. Market research has been completed for the purpose of updating the project’s feasibility study, and preparations are in progress for a pilot project – construction of a small-scale CNG and LNG production facility with an output of up to 20 million cubic meters.

The company entered into an agreement with Gazprom Transgaz Belarus on establishing a joint venture to implement a project for the construction of a small-scale LNG production facility in the Republic of Belarus. The project’s feasibility study is completed and FEED is underway for the construction of a CNG and LNG production facility in Kobrin.

Cooperation with China includes efforts within the joint working group of Gazprom and CNPC focused on using natural gas as a vehicle fuel on the Europe – China international transit route. The parties determined the market potential and the possible locations for the production and marketing infrastructure.

As part of cooperation with Bolivia, the company held negotiations with representatives of Bolivia’s YPFB in 2016 regarding the extension of the NGV production and marketing infrastructure in Bolivia. To determine the feasibility of moving further with the project, the Bolivian company is performing high-altitude testing of the KAMAZ-5490 towing truck powered by natural gas.

Further expansion

What are you planning for the future?

We continue to expand the gas filling network. The investment program allows for 25 projects to be undertaken in 2017, including the upgrade of the CNG and LNG production facility in Kaliningrad. Our main goal is to set up a gas filling network consisting of 500 units.

How does your development strategy correlate with NGV segment development in the parent company? Are you going to construct new CNG stations near Gazprom’s production facilities with large vehicle fleets?

In 2016, Gazprom approved the program for constructing gas filling infrastructure at the industrial sites of its subsidiaries for 2017–2019, providing for the installation of 100 gas compression units for auxiliary needs at 26 subsidiaries. Gazprom currently owns the largest fleet of corporate natural gas-powered vehicles representing 28 per cent of all vehicles suitable for conversion to the eco-friendly fuel.

At present, Gazprom is the key investor in the NGV market with the most extensive gas filling network in the country. Private companies also appreciate the potential of the NGV market and look into the business model of building CNG stations. The Ministry of Energy expects the use of natural gas as a vehicle fuel to grow to 1.26 billion cubic meters and the number of NGVs to reach 370,000 by 2020. I am confident that EcoGas will become a widespread vehicle fuel in two or three years!