GEORGIA FACES A HAGGLE FOR GAS
By Stephen Mulvey

BBC News, UK
Nov 2 2006

Russia’s proposal to double the price of gas to Georgia is in line
with its declared policy of putting a halt to energy subsidies for
former Soviet states.

But the policy is applied inconsistently.

Georgia cannot easily afford to pay market prices for gas The importing
countries can, and do, haggle to get a price below the supposed market
price of between $200 and $250 per 1,000 cubic metres.

Armenia and Ukraine are two recent examples.

In April, Armenia signed a three-year contract to buy gas for $110
per 1,000 cubic metres, after agreeing to sell part of a gas-fired
energy plant and part of a new pipeline to Armenia from Iran.

A fortnight ago, Ukraine negotiated a price of $130 per 1,000 cubic
metres, but in this case the payback is less clear.

Subsidies

Gazprom is always keen to buy up energy infrastructure, but Ukraine
is equally keen to hang on to its export pipeline – the one that
carries most of Gazprom’s exports to Europe.

Comments made by the Russian prime minister after the deal was struck
signalled that Ukraine may have paid a political price – an agreement
to co-ordinate with Russia the timing of its entry into the World
Trade Organization.

So what are the prospects for Georgia?

The lessons from Armenia and Ukraine would appear to be that if
Georgia wants cheap gas it either has to give up part of its energy
infrastructure, or to make some political concessions.

What such concessions might be is unclear, though there has been
speculation that the recent deterioration of relations between Georgia
and Russia may in some way be linked to its increasingly close ties
with Nato.

‘Blackmail’

At any rate, Gazprom’s announcement will certainly have given Georgian
foreign minister Gela Bezhuashvili food for thought as he visits
Moscow for talks aimed at defusing recent tensions.

No legitimate interest is served when oil and gas become tools of
intimidation

US Vice-President Dick Cheney The timing of Gazprom’s announcement
is probably no coincidence, though negotiations on a new gas contract
have been on the agenda for some time.

This way of doing business alarms the US and the EU.

In May, US Vice-President Dick Cheney made a speech in the Lithuanian
capital Vilnius, attacking Russian foreign policy.

"No legitimate interest is served when oil and gas become tools of
intimidation or blackmail, either by supply manipulation or attempts
to monopolise transportation," he said.

US Defense Secretary Donald Rumsfeld, meanwhile, told the French paper
Le Figaro that Russia had "used its energy resources as political
weapon".

The EU’s position is that Russia and its energy partners would be
best served by a genuine open market for energy, and a transparent
pricing policy.

It has put huge efforts into getting Russia to sign the Energy Charter
Treaty – which would, among other things, have allowed foreign energy
companies in Russia to export gas and oil via Russian pipelines –
but has now more or less accepted defeat.

The current EU strategy is to negotiate a framework for energy sector
co-operation in a new strategic partnership agreement.

Iranian option

At a summit in Finland last month, President Vladimir Putin said
Russia was prepared to have this discussion, though he did not promise
any concessions.

Talks are due to start soon but they will take months, and unlike the
Energy Charter Treaty, the EU-Russia agreement is unlikely to be much
help to a non-EU country like Georgia.

Georgia is short of money and cannot easily afford to pay $200 or
more for 1,000 cubic metres of gas.

In the long run it will be able to buy more gas from Azerbaijan.

It may still have a chance to get competitively priced gas from Iran
via the Armenian pipeline, though Russia’s increased stake makes that
look less likely.

So in the short term, it has a problem.