Gazprom Makes the Georgian Government Pay

Tbilisi's gas-price feud with Moscow has ended as it began -- with the Russian energy giant Gazprom serving as Georgia's chief supplier. But while Georgian government officials have presented the deal as a temporary expedient until gas supplies from Azerbaijan's Shah Deniz field start to flow, a long-term solution to Tbilisi's energy problems remains elusive.

Despite earlier pronouncements that it would refuse to purchase Russian gas in 2007, the Georgian government decided December 22 to meet what President Mikheil Saakashvili termed Gazprom's "political price" of $235 per 1,000 cubic meters (tcm). Experts in Tbilisi saw the move as needed to ensure adequate heating supplies during the winter season. According to agreements signed between Georgian gas distributing companies and Gazprom, the latter will supply Georgia with 1.46 billion cubic meters of gas, or approximately 80 percent of Georgia's expected gas needs in 2007. In 2006, Georgia paid Gazprom $110/tcm.

The situation is a near repeat of the choice Georgia faced in early 2006: to either pay a higher price for Gazprom gas, or to suffer a cut-off of gas supplies. [For background see the Eurasia Insight archive]. This time around, local gas distributors have stated that fees for residential and business consumers will be increased in early 2007, but have not provided an exact pricing structure. Presently, residents of Tbilisi pay 34 tetri (about 20 cents) per cubic meter of gas; increased tariffs will be announced later in January, according to the Georgian National Energy Regulatory Commission, which sets energy tariffs. Energy experts estimate that the new tariff could mean Tbilisi residents will have to pay approximately 55 - 70 tetri (about 32 – 41 cents) per cubic meter of gas.

While one Tbilisi insurance company has introduced a policy to help existing customers handle the price hike, no coordinated measures have yet been taken to assist hard-pressed residential consumers pay the higher prices. Finance Minister Aleksi Aleksishvili stated on December 27 that the government will allocate 120 million lari (about $70 million) to local gas distribution companies to help them pay the increased tariffs. The energy ministry's budget will be increased to handle the subsidies, the minister told a news briefing.

Nonetheless, unlike during the 2006 gas crisis, government officials say that they now have an energy fallback. In a December 22 news briefing, Prime Minister Zurab Noghaideli announced that the decision to buy Russian gas came as the result of "technical problems" at Azerbaijan's Shah Deniz field, the Caspian Sea gas source that Noghaideli had earlier proclaimed would slash Georgia's reliance on Russian gas to "20 percent or maybe 0 percent."

Reality has so far fallen far short of these projections. Initial plans to start pumping Shah Deniz gas to Georgia on December 15 were at first postponed until December 20, and later until January 10.
Alexander Medvedyev -- deputy chairman of Gazprom's board of directors and director general of Gazprom Export Company -- said at a Moscow news conference that three contracts had been signed between the Russian energy giant and Georgian gas distributing companies. Gazprom spokesperson Sergei Kuprianov later stated that the deal came together suddenly. "We had no information regarding the volumes of gas for Georgia on Friday [December 22] afternoon, but within several hours we learned that three Georgian [gas distributing] companies signed contracts for gas supply," Kuprianov said in remarks televised by the Russian ORT TV channel December 25.

One independent economic expert, however, maintains that Kuprianov's remark emphasizes that Georgian gas distributors, in effect, conducted no real negotiations with the Russian energy giant. The apparent lack of talks with Gazprom, if true, should be viewed as a major policy blunder by the Georgian government, commented economic analyst Giorgi Khukhashvili.

"Authorities should have held real negotiations with Gazprom, and should've not made any radical public statements refusing Russian gas," Khukhashvili said. Putting heavy emphasis on the Shah Deniz project was also an error, Khukhashvili added. "[The authorities acted] as if Shah Deniz was constructed with the purpose to provide Georgia with gas and to satisfy Georgia's gas needs. The authorities seem not to understand that the pipeline's purpose is to supply gas to Europe."

Other local analysts share this view. By not setting up its own gas talks with Gazprom, the government effectively passed the buck for any price hike, Giorgi Mchedlishvili, head of the Georgian Transition non-governmental organization, commented in an earlier interview with EurasiaNet. [For background see the Eurasia Insight archive]. Energy Minister Nika Gilauri has not addressed this accusation, but both Gilauri and State Minister for Coordination of Reforms Kakha Bendukidze have emphasized that price talks with Gazprom are the responsibility of private companies alone.

Once Shah Deniz gas starts to flow, the government's plan appears to be to shut off the Gazprom supplies. However, it is not clear whether this will be possible. The Georgian International Energy Corporation and Mtkvari Energy signed contracts with Gazprom for one year; KazTransGas-Tbilisi, the Georgian capital's gas distributor, signed a three-month contract. Khukhashvili, the economic analyst, believes that the Russian company is unlikely to let Georgia switch to other suppliers during the contract term.

After a series of meetings with Azerbaijani officials, Georgia reached an agreement to receive 1 million cubic meters of non-Shah-Deniz gas from Azerbaijan daily for a total of 90 million cubic meters over three months. The deliveries would stop as soon as Shah Deniz is put into operation. Officials believe that the Shah Deniz supplies will become technically feasible by the end of January 2007.

In his December 29 statement, Prime Minister Noghaideli acknowledged that the expected volume makes up only one-eighth of Georgia's total daily consumption, but described the deal as "a very important economic and political achievement."

Noghaideli said that the gas will be extracted "from other sources" apart from Shah Deniz in Azerbaijan, but did not specify what the sources were. Georgia will pay Azerbaijan $120/tcm for the gas.

Azerbaijan is now engaged in its own gas dispute with Russia. Supplies of Gazprom gas to the Caspian Sea state stopped on January 1, when Azerbaijan rejected Gazprom's proposed price of $230/tcm. In response, Azerbaijan shut off oil exports via the Russian-run Baku-Novorossisk pipeline, saying that it now needed the shipments to produce fuel oil to run power stations formerly powered with Russian gas.

Turkey, Azerbaijan's and Georgia's partner in the South Caucasus gas pipeline, is also expected to play a role in resolving Georgia's gas woes, though some confusion surrounds the specifics. According to Georgian officials, President Saakashvili and Turkish Prime Minister Recep Tayyip Erdogan reportedly reached a deal in mid-December under which Turkey would give Georgia 800 million cubic meters of gas in 2007 from its own take in the South Caucasus gas pipeline, which runs from the Shah Deniz field in Azerbaijan. Turkish Energy Minister Hilmi Guler, however, later denied the report, saying that talks between Turkey, Azerbaijan and Georgia about Shah Deniz were ongoing.

A greater emphasis on diplomacy could have helped in this situation, continued Khukhashvili. "Georgian officials created many awkward situations for their partners, Azerbaijan and Turkey," Khukhashvili said. "Russia has many mechanisms to use against these countries, and Georgia should've understood it properly."

President Mikheil Saakashvili, for his part, prefers to emphasize the positive. Speaking at the Georgian cabinet's final session for 2006 on December 30, Saakashvili hailed the work of the Energy Ministry, terming the reported agreements with Turkey and Azerbaijan "historic." Azerbaijan's decision to supply gas to Georgia "[d]espite threats voiced by the Russian side," is "heroic," he told students at Tbilisi State University on December 26.