POLITICS AND ECONOMICS OF AZERBAIJAN-GEORGIA GAS TRANSIT PROJECT.

Publication: Monitor Volume: 7 Issue: 160

The World Bank wants Tbilisi to get tough with Baku in the negotiations on the transit of Azerbaijani gas from the Shah-Deniz field to Turkey via Georgia. Some of that gas is earmarked for Georgia’s own use.

A World Bank confidential letter, the contents of which has been leaked to the New York Times and subsequently to other media, chides the Georgian government for not heeding World Bank advice to demand far higher transit fees than those already, if tentatively, agreed upon between Tbilisi and Baku. The letter demands that Tbilisi reopen the negotiations and warns that “failure to heed this advice will call into question the justification for future support to Georgia from institutions such as the World Bank.”

Attributed to the World Bank’s chief representative in Tbilisi, the letter has been confirmed and its message reinforced by the bank’s spokesman in Washington. Because the World Bank is a major donor to Georgia, President Eduard Shevardnadze has now been forced to reopen the negotiations with Baku. The advice, cited in the letter, had already compelled Shevardnadze in July to postpone the scheduled signing of the agreement with Azerbaijan. The Georgian president had, however, hoped to finesse the issue without scuttling the agreement already reached with his Azerbaijani counterpart Haidar Aliev.

According to Georgia’s International Oil Corporation (GIOC) chief Giorgi Chanturia, the World Bank recommends a transit fee in the range of US$5 to US$10 per thousand cubic meters of gas transited through Georgia. Shevardnadze and Aliev had, however, agreed in principle on a fee of only US$2 per thousand cubic meters. The negotiations had been conducted by GIOC with Azerbaijan’s State Oil Company (SOCAR), which in turn acted on behalf of the consortium led by British Petroleum Amoco, operator of the Shah-Deniz project. Ultimately, however, the transit fees are a matter of political decision by the Georgian and Azerbaijani presidents.

It may be presumed–though it has not been publicly stated–that the World Bank’s action is meant to help increase the revenue side of Georgia’s state budget, which chronically suffers from inadequate collection of tax and customs revenues. It ignores, however, a host of more compelling economic, political and strategic considerations, as well as running counter to U.S. policy priorities in the South Caucasus.

The planned gas pipeline from Azerbaijan should enable Georgia to escape dependency on Russia for gas. Every winter exposes Georgia to Russian political pressures through manipulation of gas deliveries. Last winter, Russian President Vladimir Putin authorized temporary supply cuts, triggering social unrest in Tbilisi and elsewhere. The Bush administration responded by criticizing the Kremlin’s tactics. Tbilisi’s and Washington’s shared priority is to close that window of vulnerability as soon as possible by starting the flow of Azerbaijani gas.

In a radio broadcast to the country, Shevardnadze has taken the position that Georgia’s use of the Azerbaijani gas is a higher priority than the transit revenue for it. Georgia’s ambassador in Baku, Zurab Gumberidze, declared almost apologetically that “the World Bank have projects worth more than US$100 million in Georgia, therefore they can give Georgia recommendations.”

The pipeline construction schedule is tightly correlated with the field development and extraction schedule at Shah-Deniz. Any delay in signing the transit contract will delay the start of production there and poses the risk of cost overruns. Furthermore, delaying the flow of Azerbaijani gas to Turkey would increase that country’s excessive dependence on Russian gas, about which the Turks themselves are developing second thoughts after allowing that situation to arise.

Azerbaijan, for its part, has recently witnessed a series of disappointing results from appraisal drilling in some of its Caspian oilfields, as well as the suspension of the highly promising Alov-Araz-Sharg project because of Iranian military threats. Thus forced to reckon with a reduction of anticipated oil revenues, Baku can ill afford economically and politically to forego some of the planned net revenue from the Shah-Deniz gas project.

Politically, the World Bank’s demand risks upsetting a delicate balance of mutual concessions between Georgia and Azerbaijan. Last year, at Georgia’s insistence, Aliev gave up Azerbaijan’s share of the transit charges on the Azerbaijani and Georgian sections of the planned oil pipeline Baku-Tbilisi-Ceyhan. By agreeing to transfer his country’s share to Georgia, Aliev not only averted cost overruns on the project, but broke a six-month logjam on the negotiations and allowed the project to move forward. That in turn led to an understanding among him and Shevardnadze that Georgia would return the favor. Shevardnadze has shown that he is willing reciprocate on the gas pipeline in consideration of the two countries’ overall partnership.

Aliev’s statesmanlike gesture last year was denounced as treason by the principal opposition parties, which are inspired by nationalism both politically and economically. This time around, the Musavat Party–the opposition’s largest–has lost no time urging that Aliev “must take a tough stand” vis-a-vis Georgia. Should Aliev do so, however, he risks delaying the start of gas extraction and export. Should he yield to Tbilisi for the second time, he would risk an even more furious reaction from opposition parties.

SOCAR’s first vice president and son of the head of state, Ilham Aliev, takes the position that “the World Bank has not improved, but worsened the situation in what were already difficult negotiations,” delayed the start of the project and “intruded into the relations between two friendly countries.” While conceding that it is “natural for a transit country to seek more revenue from the transit,” Ilham Aliev vowed to uphold Azerbaijan’ s own interests as the exporting country.

In Tbilisi, U.S. Assistant Secretary of State Elizabeth Jones–the first senior official of the Bush administration to visit Georgia–has sharply taken issue with the World Bank’s recommendation on the gas transit fees. Citing the contention that Georgia ought to “correct” its stance and apply “internationally standard fees” and “world experience” to this transit project, Jones commented: “Georgia is pursuing a very correct policy. The Shah-Deniz pipeline will guarantee Georgia’s energy security and energy independence. Those are priceless. The tariff is, in a certain sense, a side issue, and it is unfortunate that the World Bank completely missed that point in its letter. Georgia is a critical element in the energy transportation route from the Caspian Sea/Azerbaijan to Turkey and Europe. The strategic position of Georgia is also priceless. The World Bank can not compare Georgia to just any other country in terms of the tariff. It is a completely different situation” (New York Times, August 26; AFP, August 30; Tbilisi Radio, August 27; Caspian Business Report, August 31; Turan, August 28, 30, September 1; U.S. State Department release, August 27; see the Monitor, March 15, Fortnight in Review, March 15).

The Monitor is a publication of the Jamestown Foundation. It is researched and written under the direction of senior analysts Jonas Bernstein, Vladimir Socor, Stephen Foye, and analysts Ilya Malyakin, Oleg Varfolomeyev and Ilias Bogatyrev. If you have any questions regarding the content of the Monitor, please contact the foundation. If you would like information on subscribing to the Monitor, or have any comments, suggestions or questions, please contact us by e-mail at [email protected], by fax at 301-562-8021, or by postal mail at The Jamestown Foundation, 4516 43rd Street NW, Washington DC 20016. Unauthorized reproduction or redistribution of the Monitor is strictly prohibited by law. Copyright (c) 1983-2002 The Jamestown Foundation Site Maintenance by Johnny Flash Productions