EurasiaNet Business & Economics - Georgia: No Gas Pipeline Sale

BUSINESS & ECONOMICS

GEORGIA: NO GAS PIPELINE SALE – FOR NOW
Diana Petriashvili 3/09/05

Government talks to sell Georgia’s main gas pipeline to Russian energy giant Gazprom appear to have been put on hold, with both the energy ministry and economy ministry now denying that discussions are underway. The announcements, a complete reversal from earlier statements by Georgian President Mikheil Saakashvili and State Minister for Economic Reforms Kakha Bendukidze, come as the latest twist in the government’s highly controversial – and, according to some critics, highly convoluted – privatization campaign.

At a March 4 news conference, Energy Minister Nika Gilauri told reporters that the government will not sell state-owned energy-sector assets to Russian companies, citing the need to preserve the security of the country’s energy network. The statement came almost two weeks after President Saakashvili had confirmed to the Italian newspaper La Stampa that the government was conducting talks with Gazprom about privatizing the pipeline, which supplies gas to both Armenia and Georgia’s regions.

"This position is based not on some specific attitude towards Russia, but on the principle of preventing a monopoly," Gilauri stated. A similar policy would apply to any other foreign-owned company that held a significant chunk of the energy sector, he stressed. "If the American company AES [former owner of Tbilisi electricity distribution company Telasi] had stayed in Georgia, we would not sell energy units to that or any other US company. We are working at establishing a competitive environment in the country’s energy market."

But the official definition of a competitive environment seems to vary. At a March 2 government session, State Minister for Economic Reforms Kakha Bendukidze, the country’s de facto privatization tsar and the most outspoken proponent for pipeline privatization, proposed that ownership of Georgia’s energy assets be transferred to a state-owned company and sold in a single lot. High-voltage power transmission lines and two hydropower stations, Enguri, along the border with Abkhazia, and Vardini, would be excluded from the sale.

The government has said that further consultations are necessary before such a property transfer could occur, but news of Bendukidze’s plans came as a surprise for one US firm, PA Consulting, which manages United Distribution Company, one of the regional properties slotted for sale. In November 2004, the company signed a contract with the Georgian government to continue its management of UDC for another two years, Project Director Dean White told a March 2 press conference in Tbilisi.

So far, however, Gilauri’s March 4 announcement has proven the last comment from the government on pipeline privatization. On March 1, a representative of the Economy Ministry, which has largely echoed Bendukidze’s views on the desirability of privatizing state-held energy assets, confirmed that the government is not considering the issue of a pipeline sale to Gazprom.

Nonetheless, said Deputy Economy Minister Kakha Damenia, the pipeline’s privatization should not be viewed in isolation. "The possible sale of the pipeline is related to the interests of certain serious energy projects, and the government has to consider these interests," he said. Private ownership of the country’s energy assets is the best guarantee that they remain in working order, Damenia told EurasiaNet.

As the operator of Georgia’s state energy assets, the Economy Ministry would appear to have the upper hand in any tug-of-war over energy privatization, but in a February 28 interview with EurasiaNet, Deputy Energy Minister Alexander Khetaguri stated that the ministry has "its own views" on the desirability of privatizing Georgia’s energy assets.

Privatization of the pipeline in its current state, he said, would only bring in minimal income. Instead, Khetaguri went on to say, the ministry is looking elsewhere for the estimated $30 million needed to make basic repairs to the line. "Right now, we have only two choices: either to lose this gas source forever, or to find the financing," Khetaguri said.

The 2005 state budget will allocate 1.5-2 million lari (about $820,300 - $1 million) for pipeline repairs, an amount that will go to patching up the line’s most damaged sections, the deputy minister said. To make up the difference, the ministry is turning to international donors and commercial credits. The government may also consider selling 20 or 40 percent ownership stakes in the pipeline, Khetaguri said, but sale of controlling stakes would only occur if the $30 million needed to repair the pipeline cannot be secured. Without the repairs, he added, the pipeline has about a two-year lifespan "at the longest."

Gazprom has made no secret of its interest in gaining control of the pipeline or in expanding its presence in Georgia’s energy market. In July 2003, the energy giant signed a 25-year cooperation agreement with the Georgian government that, at the time, was strongly opposed by members of the opposition, including Saakashvili, who feared that it could undermine the US-backed Baku-Tbilisi-Erzurum project.

In a February 25 interview with the daily newspaper 24 Hours, Steven Mann, the US State Department’s senior adviser on Caspian Basin energy issues, echoed that view, stating that a sale of Georgia’s gas pipeline "would mean that our chance to assure independent and alternative energy resources would be lost." While stressing that "[w]e are not against Gazprom," Mann went on to say that privatization of the pipeline "would impede gas development for the Shah Deniz [Baku-Tbilisi-Erzurum] project."

Though for now the pipeline appears to have moved off the auction block, economy experts’ debate over the implications of its sale – and, by extension, that of other energy assets -- lingers on. "Gazprom is a state company, and, therefore, if it purchases the pipeline, that would mean that a foreign state company has bought Georgia’s strategic property," Vladimir Papava, deputy chairman of parliament’s budget and finance committee and a former economy minister, said in a March 7 interview with EurasiaNet. "This has nothing to do with privatization."

But independent analyst Sandro Tvaltchrelidze termed Gazprom’s interest in the line "a positive step forward." Differences of opinion between the energy and economic development ministries over the desirability of the sale, he said, are only "normal."

Editor’s Note: Diana Petriashvili is a freelance political and business reporter in Tbilisi.

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