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Georgia’s extricating from Gazprom’s bear hug

Eurasia Daily Monitor
March 23 2006

GEORGIA EXTRICATING FROM GAZPROM’S BEAR HUG

By Vladimir Socor

Thursday, March 23, 2006

The winter now ending was almost certainly the last one during which
Georgia had to face Gazprom’s commercial blackmail and supply
cutoffs. Within the coming months, Georgia will begin receiving
Azerbaijani gas through the Shah Deniz-Baku-Tbilisi-Erzurum (Turkey)
transit pipeline and will also have an opportunity to receive small
volumes of Iranian gas. This new situation should finally end
Georgia’s dependence on Gazprom and constant risk of losing the
country’s gas transport and distribution systems to the Russian state
monopoly.

Deliveries from Azerbaijan’s offshore Shah Deniz gas field are
scheduled to begin in September 2006, reaching 20 billion cubic
meters annually to several consumer countries by the end of the
decade. That figure, almost double the initial projection, rests on
revised estimates of the field’s recoverable reserves, which turned
out to be far richer than initially estimated. The consortium for
extraction and transport consists of: British Petroleum as technical
operator and Norway’s Statoil as commercial operator, with stakes of
25.5% each; Azerbaijan’s State Oil Company, Total of France, and the
National Iranian Oil Company (NIOC), with 10% each; a partnership of
Russia’s Lukoil and Italy’s Agip with 10% between them, and Turkish
Petroleum with 9%.

Georgia is to receive 300 million cubic meters of gas annually in
compensation for the transit service and to purchase another 500
million cubic meters annually for a deeply discounted price fixed at
$55 per one thousand cubic meters. The aggregate volume of 800
million cubic meters represents 60% of Georgia’s current annual
requirement of gas. Significantly and properly, the arrangement
whereby the consortium pays Georgia with gas, in lieu of cash, for
the transit service is deemed entirely compatible with market
economics. Gazprom and the Kremlin denounced a similar arrangement,
whereby Ukraine was receiving under priced Russian gas in lieu of
cash for the transit service until January 1, as “anti-market” and
provided an excuse for their predatory move against Ukraine.

The Georgian government now seeks to increase Georgia’s guaranteed
annual intake of Shah Deniz gas, so as to cover at least part of the
remaining 40% of the country’s current requirement. The requirement
will increase as Georgia’s economic growth accelerates. With Gazprom
a risky option for meeting that requirement, Georgia is looking at
the possibility of importing small volumes of gas from Iran. Georgia
began such imports in late January, following the never-explained
bomb blasts in Russia’s North Caucasus that sabotaged two Russian gas
pipelines, interrupting the supply to Georgia and Armenia. The
national gas companies of Georgia and Iran signed an agreement at
that point whereby Georgia would receive 2 million cubic meters of
gas per day from Iran, priced at $120 per one thousand cubic meters.
That gas reached Georgia via Azerbaijan, through the reconstructed
small-capacity pipeline Astara-Gazi Mahomed-Gazakh. That emergency
arrangement opened the way to exploratory discussions with Iran
toward a more stable agreement to help meet Georgia’s annual
requirements. Meanwhile, 10% of the Shah Deniz gas to reach Georgia
will count as “Iranian” (NIOC’s share in that project).

On March 20, Georgia’s Ambassador to Armenia, Revaz Gachechiladze,
declared Georgia’s interest in receiving Iranian gas via Armenia.
Both Armenia and Georgia could benefit by enlarging the diameter of
the Iran-Armenia pipeline currently under construction, Gachechiladze
remarked (Armenian Radio, March 20). The pipeline’s diameter of 700
millimeters barely meets Armenia’s own needs. It was initially
projected at 1,420 millimeters with an eye to markets beyond Armenia,
primarily Georgia; but Moscow prevailed on Yerevan to reduce the
scope of the project so as to maintain Gazprom’s dominance. Under a
2005 bilateral agreement, Iran will supply Armenia with 36 billion
cubic meters of gas over a 20-year period, with an option to extend
the contract period to 25 years and the volume of supplies to 47
billion cubic meters.

Any gas reaching Armenia and Georgia from Iran is almost certainly
not “Iranian,” but rather originating in Turkmenistan and re-exported
via northern Iran. Turkmenistan is supplying northern Iran’s market
as well. Under an agreement signed last month, Iran will import 14
billion cubic meters of Turkmen gas in 2006, up from 9 billion cubic
meters in 2005. The deliveries in 2006 will for the first time fill
the Korpeje-Kurt Kui pipeline — the sole non-Russian line out of
Turkmenistan — to full capacity. Part of the additional volume is
almost certainly intended for re-export by Iran to Armenia,
Azerbaijan, and possibly Georgia. This year, Turkmen gas costs $65
per one thousand cubic meters at Iran’s border, up from $44
previously.

Gazprom may well retain some market share in Georgia beyond 2007, but
without the leverage to force Georgia to hand over its worn out trunk
pipeline or distribution systems. At the moment, Gazprom persists
with the offer to supply Georgia with gas at a still “favorable” rate
of $110 per one thousand cubic meters (up from $60), if Georgia locks
itself into permanent dependence by selling the trunk pipeline to
Gazprom for a deceptively tempting $250 million and throws the main
gas distribution systems into the deal. Some Georgian government
officials seriously considered such a possibility, but three factors
have recently doomed it: Gazprom’s unreliability as demonstrated by
the January-February supply crisis, Georgia’s receipt of U.S.
Millennium Challenge Account funds (partly earmarked for the trunk
pipeline’s rehabilitation), and the Shah Deniz-Erzurum pipeline about
to come on stream.

Gazprom was also unsuccessful in targeting Georgia’s largest gas
distribution company, Tbilgazi, for takeover. Insolvent and heavily
indebted, the municipally owned Tbilgazi is being restructured under
the just-appointed General Director Bidzina Chkonia, hitherto the
Millennium Challenge Account’s Georgia coordinator for energy.
Tbilisi is negotiating with Kazakhstan’s gas transport company,
KazTransGaz, to privatize and overhaul Tbilgazi.

(Rustavi-2 Television, March 16, 20; Kavkas-Press, March 15;
Interfax, March 14 – 17, 20; Imedi TV, March 6; see EDM, January 23,
25)

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