By Cynthia Johnston
CAIRO (Reuters) - With black smoke belching from battered vehicles on the congested streets of Cairo and the sickly smell of exhaust hanging in the air, Mohamed Daoud's taxi glides quietly along on cheap, clean fuel.
His black and white cab is part of a growing fleet of roughly 100,000 vehicles that have been converted to run on cheap natural gas after the Egyptian government pushed for more reliance on greener energy.
Compressed natural gas (CNG), which produces fewer harmful emissions than gasoline or diesel, is catching on in the smog-shrouded northern cities and demand may grow further as the fuel becomes more widely available across the country.
But it is the tough economy, not the environment, that is leading a growing number of drivers to make the switch as the cost of even heavily subsidized petrol rises beyond what many Egyptians can afford.
The most populous Arab country is one of the Middle East's least well-endowed in energy reserves. Egypt has 1.2 percent of the world's gas and 0.3 percent of its oil.
"I am interested in the environment. But it (CNG) is also cheaper," said Daoud, who switched his taxi to run on natural gas five years ago. "I can bring in more profit."
"In this atmosphere, we can't use petrol," he added as he waited for his taxi to be worked on at a bustling CNG service station, the first in Africa and the Arab world.
The Egyptian government, hit this year by inflation and a larger-than-ever bill for bread subsidies for the poor, slashed petrol subsidies in a lightning move in May to cover the cost of pay rises for civil servants.
Long accustomed to cheap petrol, Egyptian consumers woke to prices that had risen by up to 57 percent overnight for the highest grade of petrol. Popular 90-octane fuel surged 35 percent to 1.75 Egyptian pounds ($0.32) per liter, expensive by local standards but still well below free-market prices.
An equivalent amount of compressed natural gas sells for a quarter of the price.
ENERGY CRUNCH
Worried about an energy crunch in coming decades, Egypt wants to diversify its resources. That includes developing renewable energy like wind and nuclear power.
Lending urgency to the drive for alternative energy is Egypt's limited supply of fossil fuels, especially crude oil. Experts say Egypt's proven oil and gas reserves will last for roughly three more decades.
Egypt wants to generate 20 percent of electricity from renewable sources by 2020, according to the country's New and Renewable Energy Authority. It already gets significant hydroelectric power from the Aswan High Dam.
Cairo also wants to build several nuclear power stations and has secured U.S. backing for the project, for which it is seeking Russian expertise. But it is also encouraging other forms of greener energy.
Wind farms dot the country's Red Sea coast, and one of Egypt's largest industrial firms, El Sewedy Cables, launched a wind energy subsidiary in October to build turbines. It expects sales of 435 million euros by 2011.
Egypt has more gas than crude, with reserves of around 76 trillion cubic feet, making natural gas an attractive and somewhat greener alternative to petrol.
With the cost of energy subsidies eating up nearly a fifth of the budget, the government is expected to keep raising fuel prices on a regular basis, possibly annually, although recent falls in global oil have eased some pressure.
"I think they are logically going to wait until next year when inflation is down to single digits again ... possibly in the second half of 2009," said Reham el-Desoki, senior economist at investment bank Beltone Financial.
Cutting energy subsidies would free up government funds for public services or infrastructure and may also spur more vehicle conversions to natural gas.
EXPANSION PLANS
State-owned natural gas holding company Egas expects the number of natural gas vehicles in Egypt to rise sharply to 300,000 by mid-2012 as investors enter the market, although it calls that goal "ambitious."
The number of fuelling stations will more than treble in the same period to 390, and natural gas will be available up and down the populous Nile Valley and in the Sinai peninsula, Egas said in a written statement to Reuters.
Drivers rushed to natural gas after the cut in petrol subsidies, with the number of conversions per month surging to several thousand, according to Egypt's leading conversion and refueling firm, Cargas.
Around 70 percent of Egyptians who have converted their vehicles are taxi drivers, many of whom ply the streets in battered fuel-guzzling vehicles for cross-town fares ranging from 5 to 10 pounds. They operate on razor-thin margins.
Conversion costs around $1,000 and takes less than half a day, and drivers can pay in installments.
Private consumers are also making the switch, converting fuel-hungry sport utility vehicles and luxury sedans as well as older, less fuel-efficient vehicles. Private cars now account for more than 17 percent of CNG vehicles.
Cargas Managing Director Mahmoud Aly El Newehy said his firm was also planning to expand conversion of diesel vehicles, including minibuses, after a successful pilot program. Cargas would also offer know-how to other countries in the region seeking to follow Egypt's example.
"There is no country in the Middle East like Egypt. We are the pioneer," Newehy said. "We are not only ready to give the know-how ... We are ready to construct and build stations to operate in other countries."
($1 = 5.53 Egyptian pounds)
(Additional reporting by Simon Webb in Dubai; Editing by Peter Millership and Sara Ledwith)
