Publication: Eurasia Daily Monitor Volume: 4 Issue: 12

BP Shah-Deniz platform

At 10 pm local time on January 14, commercial production and the delivery flow of gas started at the first well of Azerbaijan’s giant offshore field Shah-Deniz, a BP-led project. In the afternoon of the following day, the first volumes of gas reached Georgia through the South Caucasus Gas Pipeline, Baku-Tbilisi-Erzurum. The event is deemed historic in Georgia and Azerbaijan, decisively buttressing — in conjunction with last year’s opening of the Baku-Tbilisi-Ceyhan oil pipeline — the two countries’ development and independence from Russia.

The first Shah-Deniz well is currently producing 3.4 million cubic meters of gas and 1,300 tons of gas condensate per day, soon to grow to 5.6 billion cubic meters and 2,500 tons per day, respectively. Three more wells are expected to raise the output to 6 or 7 billion cubic meters for the year 2007.

The availability of Shah-Deniz gas finally extricates Georgia from Gazprom’s bear hug — a development originally projected for the first half of 2006 (see EDM, March 23, 2006). In late December 2006, an agreement signed by Azerbaijan, Georgia, and Turkey redistributed the quotas of gas from Shah-Deniz for 2007 among the three countries. Turkey lent its quota of 800 million cubic meters to Georgia. The unit price for this volume is a commercial secret, but it has been reported unofficially at $120 per 1,000 cubic meters.

In addition, Georgia is scheduled to receive 250 million cubic meters of gas from Shah-Deniz this year under the original supply contract. Of this volume, Georgia is entitled to 200 million cubic meters as in-kind payment for transit service on its territory and another 50 million cubic meters at the preferential price of $62 per 1,000 cubic meters. Furthermore, Georgia is buying 3 million cubic meters of gas per day from Azerbaijan under an emergency arrangement this winter. In all, these scheduled deliveries amount to some 1.1 billion cubic meters for 2007, covering some two-thirds of Georgia’s estimated annual requirements.

Azerbaijan stands to receive 3.8 billion cubic meters of gas from Shah-Deniz in 2007. The country’s State Oil Company is a shareholder in the project and also extracts some 4.5 billion cubic meters annually in the interior of the country. Itself short of gas in 2007 after turning down Gazprom’s extortionate price, Azerbaijan nevertheless is providing Georgia with daily volumes of gas this winter at an undisclosed price, which is believed to be lower than Gazprom’s price of $235 per 1,000 cubic meters. Azerbaijan delivers that gas to Georgia through the Astara-Gazi Mahomed-Gazakh pipeline, which it rehabilitated in 2005 and used for the small but critical volumes of gas that enabled Georgia to survive the Russian energy blockade in January-February 2006. Georgian President Mikheil Saakashvili credited his Azeri counterpart Ilham Aliyev with “political heroism” on December 29, 2006, when Aliyev agreed to again deliver emergency supplies this winter to Georgia.

The slight delay of commercial production at Shah-Deniz left Georgia with no choice but to accept Gazprom’s extortionate $235 price for a limited volume of gas. In the closing days of 2006, Georgia’s energy regulatory agencies authorized four private companies to sign supply contracts with Gazprom for January through March 2007. The four companies include local gas supplier Itera Georgia, two electricity-generating companies also with Russian capital, and — the largest of the four — the gas distributor KazTransGaz Tbilisi, recently acquired by Kazakhstan’s state company KazMunayGaz as part of its ambitious investment program in Georgia.

With these contracts limited to three months, Georgia will almost certainly have the option to cut back on the imports from Gazprom during the remainder of 2007. This is the first year during which Georgia’s gas market is being de-monopolized. Gazprom lost Azerbaijan’s market entirely at the end of 2006 and might lose most of the Georgian market by the end of 2007 unless if offers competitive prices.

Although Russia will remain an important supplier of energy to Georgia for an open-ended period of time, Georgia has finally overcome its dependence on Russian energy sources. “What is actually occurring,” Economic Development Minister Giorgi Arveladze commented on arrival of Shah-Deniz gas — “is that Georgia is becoming a genuinely independent country” (Rustavi-2 Television, January 15).

The sentiment in Baku is similar. “’We want to put an end to this [vulnerability to Russia],” Azerbaijan’s State Oil Company vice-president Khoshbakht Yusifzadeh told journalists while “slamming his fist on his desk,” under a poster of the Shah-Deniz project that reads, “Azerbaijan’s independence is here” (Time Magazine, January 12-18).

(Civil Georgia, Black Sea Press, Kavkaz-Press, Turan, ANS TV, Interfax, January 14-16; see EDM, December 8, 2006, January 5, 2007)