Georgia: Is Natural Gas the New Weapon in the Conflict Between Tbilisi and Moscow?

Not just territorial disputes divide Georgia and Russia. With winter fast approaching, how the two countries will negotiate their natural gas contracts for 2009 is emerging as a pressing issue.

While the Georgian government has increased its reliance on alternative gas sources over the past few years, Russian gas in 2007 still accounted for roughly 60 percent of Georgia's total needs. Officials claim that that figure changed in 2008 to favor Azerbaijani gas, but exact figures have not yet been released.

In an interview with EurasiaNet, Georgian Energy Minister Alexander Khetaguri explained that the government "deregulated" Georgia's gas market in 2007 to diversify the options for gas contracts. "We do not care whether or not it will be Azerbaijani or Russian gas. The cheaper they get the gas the better," Khetaguri said.

Until last autumn, the state-owned Georgian Oil and Gas Corporation held the exclusive right to import natural gas into Georgia. The onus for securing gas contracts now rests on an additional four companies (International Energy Corporation of Georgia, Itera Georgia, SOCAR Georgia Gas, a branch of the Azerbaijani state oil company, and KazTransGas). Representatives of all five companies told EurasiaNet that, despite the August war, preparations are ongoing for supply contracts with Russia as well as with Azerbaijan. Negotiations are expected to start in mid-December, they said.

"I do not think that Gazprom really will set a price of $400-500 per thousand cubic meters as Russian politicians threaten," commented Natia Turnava, general director of the International Energy Corporation of Georgia (IECG), one of the five enterprises handling Georgian gas contracts. IECG handles corporate contracts for more than 40 large enterprises whose products are gas-dependent.

"If Gazprom sets that price, it will indeed mean that Gazprom will lose the Georgian market completely, and we will move to Azerbaijani supply alone," Turnava continued. "I do not think it makes sense for Gazprom from a commercial point of view, but I cannot guess what they will do under political pressure."

The company is currently waiting for responses to its price proposals from both Gazprom and the Azerbaijani state oil company SOCAR, Turnava said.

Itera-Georgia, which controls about 15-17 percent of the Georgian market, is putting the Russian price for gas in 2009 at no higher than $350 per thousand cubic meters (tcm). Russian gas currently makes up 20 percent of the company's supplies, according to Itera Georgia General Director David Beradze. Itera, owned by the Russian firm Itera Holding, has access to its parent company's pipeline via the Gazprom-controlled line, and expects a lower price than other Georgian companies can expect. Anticipated supply volumes, however, remain confidential.

Cheaper alternative supplies from Kazakhstan -- once heavily touted -- have yet to materialize. The Kazakhstan-owned company KazTransGas Tbilisi, which handles both gas supply and distribution for the Georgian capital, instead relies on Azerbaijani gas. Gazprom refused to allow gas from KazTransGas's parent company, KazMunaiGas, to enter its trunk pipeline to Georgia.

One energy analyst, however, doubts that Georgia's tensions with Russia will affect gas supply negotiations. The drop in the price of oil to roughly $58 per barrel (as of November 14) from over $147 in July means that Gazprom will have difficulty demanding higher prices, said Liana Jervalidze, an independent expert. Gas prices have historically been linked to the price of oil.

"Now, the contract negotiations depend on Georgian companies' skills rather than on political tensions," Jervalidze said.

That puts the focus back on Azerbaijan. Under the terms of the Shah-Deniz project with Azerbaijan, Georgia will receive 200 million cubic meters of the gas transported to Turkey in 2009 as a transit fee, and has the option to purchase 300 million cubic meters at the preferential, inflation-adjusted price of $62/tcm.

Georgia also receives roughly 200-220 million cubic meters of gas as a transit fee for Gazprom gas exported to Armenia from Russia via Georgia, Energy Minister Khetaguri said.

The 700 million cubic meters of cheap or transit-fee gas is sufficient to cover demand from Georgian residential customers, leaving 800 million cubic meters outstanding. Whether Azerbaijan can meet Georgia's supply and price expectations for this amount remains unclear.

Energy Minister Khetaguri told EurasiaNet that Azerbaijani President Ilham Aliyev and Georgian President Mikheil Saakashvili signed a "political agreement" during Aliyev's October 24 inauguration that obliges Azerbaijani companies to sell gas to Georgia for the next five years, but did not disclose whether price or volume was specified.

In spring 2008, Azerbaijani Energy Minister Natiq Alyev announced that Azerbaijan could provide Georgia with only half a billion cubic meters of gas annually. At the same time, since 2008, Azerbaijan has been requesting the market price for gas; prices for 2008 currently stand at $200-$260/tcm.