Publication: Eurasia Daily Monitor Volume: 1 Issue: 126

Russia’s Gazprom is counting on three factors to rush Georgia advice, into a political decision to sell the country’s gas transportation system to the Russian monopoly. Those factors are: the approaching winter, the urgent need for capital injections into that system, and fortuitously convergent support for such a sale by interested lobbyists and disinterested exponents of economic ultra-liberalism in Tbilisi.

Georgia is totally dependent on Russian gas, consuming approximately 1 billion cubic meters annually. Gazprom’s export arm, Gazeksport, currently sells it for $60 per 1,000 cubic meters; but it has just decided to increase the price charged to South Caucasus countries to $78 per 1,000 cubic meters, with partial pre-payment, effective January 1, 2005. The price hike and its timing are adding to the pressure on Georgia to turn its insolvent gas transport system over to Gazprom.

The state-owned Georgian Gas International Corporation (GGIC) operates Georgia’s trunk pipelines. Distribution systems are owned by as many as 40 local companies, among whom the municipally owned Tbilisi Gas (Tbilgazi) is by far the largest, politically most sensitive, and most likely target for a Gazprom takeover attempt.

Gazprom is also targeting the transit pipeline that runs via Georgia to Armenia for possible takeover. Under existing arrangements, Russia pays the transit fees in the form of gas. In 2003, Georgia transited 1.2 billion cubic meters of Russian gas to Armenia and received 120 million cubic meters in compensation.

The Russian company and some Georgian officials are currently exploring a range of options that includes equity transfers, outright takeover, or a Gazprom-GGIC joint venture, for all or major parts of Georgia’s gas transportation system. Regarding the link to Armenia via Georgia, Gazprom is considering the possibility of expanding its capacity or rebuilding it entirely and using it in reverse as an outlet for Iranian gas exports. Gazprom holds out the incentive of stable gas supplies to Georgia and overhauling the country’s gas transportation and distribution systems. This may tide Georgia over one or two winters, but it would also give Moscow long-term economic and political leverage.

Former president Eduard Shevardnadze accepted a deal along those lines during the twilight months of his rule. An agreement of intent envisaged turning Georgia’s gas transportation network over to Gazprom. Shevardnadze ignored Washington’s strong objections to that agreement in the final months of 2003. The U.S. State Department’s special envoy for Caspian energy affairs, Steven Mann, made the case against that intention one year ago, and is making the case again now to prevent an expediency-based deal with Gazprom against Georgia’s long-term national interests.

Gazprom’s takeover of the pipeline network could lock Georgia permanently into dependence on Russian gas by blocking the access of Azerbaijani gas from Shah-Deniz to the Georgian market. The Shah-Deniz project itself and the Azerbaijan-Georgia-Turkey gas transit pipeline would not necessarily be affected; but Georgia would no longer be able to benefit from it as an offset to politically risky dependence on Russian supplies.

The BP led Shah-Deniz consortium will own and operate that gas transit pipeline, including the section in Georgia. Deliveries are scheduled to begin in 2006 under a 20-year sale and purchase agreement. Georgia is slated to receive guaranteed volumes starting at 200 million cubic meters in first year, rising gradually to 500 million cubic meters in the sixth year, and continuing for another 15 years. Georgia will pay a preferential price, starting at $55 in the first year and rising at a rate of 1.5% annually.

In addition, Georgia will receive transit fees either in cash (at $2.50 per 1,000 cubic meters transiting Georgia, and rising at a rate of 2% annually) or in the form of gas amounting to 5% of the volume transiting Georgia (that volume will rise to 6.6 billion cubic meters, heading for Turkey, in the sixth year and thereafter). Depending on the form of transit fees, the gas from Shah-Deniz will cover between 50% and 83% of Georgia’s demand. On top of that, Georgia will have an option to purchase Azerbaijani gas at market prices.

This arrangement gives Georgia a unique set of advantages: the chance to escape from dependence on Russian gas and pay lower prices for long-term guaranteed deliveries from a politically friendly, Western-managed supply source.

However, Georgia would probably lose the opportunity to use Shah-Deniz gas, if Gazprom acquires Georgia’s trunk pipelines. In that case, Gazprom could exercise discretionary control over the access of Shah-Deniz gas to the Georgian market. It would almost certainly block or manipulate that access and ensure that Gazprom retains overwhelming market share in Georgia, not only for commercial reasons (Georgia is a small market for Gazprom) but also mainly for political and strategic ones.

In Tbilisi, lobbying for Gazprom-led privatization is a non-transparent process. Local observers trace it to a Shevardnadze-era gas trader who became wealthy in the Russian gas import trade, and who may aspire to regain the niche for himself in the new conditions, albeit trying to use new state connections as he had in the old system. Entirely unrelated to that effort, though coincident in the timing, Economics Minister Kakha Bendukidze advocates the earliest possible privatization of the gas transportation system (and other state properties) by any buyer, including Gazprom — currently the only buyer in sight — if the price is right and investment is forthcoming. Bendukidze, himself a businessman of unquestioned integrity, is known to bring a fundamentalist liberal approach to the issue of privatizing strategic state assets, with little regard for national security implications.

Georgia’s gas transport system is in urgent need of a costly overhaul. Turning the system over to Gazprom is not the only financing option, however. With a rapidly growing state budget, incipient economic recovery, high level of foreign aid, and renewed access to international credit, Georgia can devise a financing package for that system’s rehabilitation while retaining national control, so as to break out of the dangerous dependence on Gazprom when Shah-Deniz gas comes on stream.

(Civil Georgia, Prima News, Rustavi-2, October-November).