Azerbaijan Becomes Monopoly Supplier of Natural Gas to Georgia

In January, the Georgian Ministry of Economy and Sustainable Development approved its annual energy assessment (balance), which shows that Georgia will not purchase any natural gas from Russia this year. Instead, 99.65 percent of the 2.689 billion cubic meters (bcm) of gas Georgia will consume in 2018 will be provided by Azerbaijan. From this amount, 1.866 bcm will be produced by Azerbaijan’s State Oil Company (SOCAR) and 813 million cubic meters will come from the development of the offshore Shah Deniz field (Azernews.az, January 3).

This gas market news represents the continued shifts in Georgian energy politics, which began several years ago. Specifically, a little over a year ago, Georgia and Russia signed a new energy deal that followed months of political controversy and bilateral negotiations. According to the old energy agreement, Moscow paid Tbilisi an in-kind transit fee of 10 percent of all the natural gas that passed from Russia to Armenia via Georgia. Russia wanted to renegotiate this deal and switch from the commodity scheme to monetary payments. But such a change would potentially not be beneficial for Georgia, as monetary payments are vulnerable to price fluctuations and currency devaluations. Eventually, Moscow and Tbilisi finalized a new agreement in January 2017. According to this two-year agreement, Russia would continue paying according to the existing commodity scheme during 2017. As of 2018, however, it would switch to monetary payments. Moreover, if Georgia needed additional gas, Russia would sell it to Georgia at a discounted rate of $185 per thousand cubic meters, instead of the previous price of $215 (Panarmenian.net, January 14, 2017).

The Georgian government hailed the new agreement as highly favorable (and affordable) for Georgia. However, the government never revealed what percentage of natural gas Georgia would receive as a transit fee according to the commodity scheme in 2017 and how much Moscow would pay after switching to monetary payments in 2018 (see EDM, January 19, 2017).

The ongoing Russian-Georgian negotiations made Baku nervous, which feared that Gazprom’s possible return to the Georgian energy market, in any form or scale, would gradually squeeze out SOCAR. Officials in Tbilisi explained the talks with Moscow by repeatedly stating Georgia needed additional natural gas supplies to meet increased demand. But Azerbaijani officials adamantly reiterated that Baku had all the natural gas that Georgian needed to import. These negotiations also sparked domestic concerns in Georgia that Russia—which on multiple occasions proved to be an unreliable energy supplier (not to mention the fact that Russia currently occupies 20 percent of Georgian territory)—would somehow manage to expand its market share in Georgia and nullify the South Caucasus country’s hard-won energy independence from Moscow (see EDM, January 20, 2016, January 19, 2017).

Ultimately, the January 2017 deal did not really allow Gazprom to expand in Georgia; however, the agreement still proved a partial win for the Kremlin, as Russia was able to switch its transit fees from the commodity scheme to monetary payments—the arrangement it initially preferred. Azerbaijan ended up being the biggest winner, however, capturing almost 100 percent of Georgia’s natural gas market. Georgia, meanwhile, has arguably emerged as the deal’s biggest loser: its government negotiated another poor deal, largely continuing the trend of successive Georgian governments reaching unfavorable agreements with foreign governments. First, instead of the highly desirable commodity scheme, Georgia now will be paid in cash for transit fees of Russian gas. Second, it now finds itself nearly entirely dependent on Azerbaijani natural gas.

Needless to say, Azerbaijan proved to be a reliable energy supplier to Georgia for many years, as the two countries enjoy close political and economic ties. However, near 100 percent reliance on another country’s natural gas supplies is still a potential national security threat and cannot be considered a prudent political or economic arrangement. Moreover, the incomplete delimitation of the Georgian-Azerbaijani border remains a long neglected, yet possibly inflammable issue, which will need to be addressed and taken into account when reaching any vital future economic arrangements by the two neighbors, especially in the energy sector. For instance, in May 2012, during then-president Mikheil Saakashvili’s rule, Azerbaijani border guards took over part of the historic disputed David Gareja Monastery (specifically, Udabno Monastery) on the Georgian-Azerbaijani border and would not allow pilgrims on the territory (Dfwatch.net, May 18, 2012). Although, the government-controlled Georgian media tried its best to sugarcoat the incident, the news still spread and alarmed the Georgian public.

On the positive side, the new energy arrangements may finally push Georgia toward new opportunities. Specifically, its energy policy could now be directed toward developing renewable energy sources, which can gradually make traditional hydrocarbons obsolete in Georgia and cement the country’s full energy security and self-reliance for generations. Georgia has massive potential in this regard in wind, solar and hydropower. In fact, in October 2016, Georgia opened its first wind power plant called “Qartli” and introduced the first solar panels in the mountainous northeastern district of Dusheti (Georgianjournal.ge, October 7, 2016, July 15, 2016). The power these have generated has been vital for local businesses. If the Georgian government shows enough creativity to move the country further in this direction, Georgia’s energy dependence on foreign countries may become a distant memory in the foreseeable future. But whether Tbilisi actually manages to do so, remains an open question.