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The Jamestown Foundation
Friday, November 12 -- Volume 1, Issue 126
EURASIA DAILY MONITOR
IN THIS ISSUE:
*Russia-EU summit rescheduled for late November
*Putin's economic aide says call the dogs off Yukos
*Gazprom turns up the heat on Tbilisi
*Cold War rhetoric infects Yanukovych statements
Friday, November 12, 2004 -- Volume 1, Issue 126
GAZPROM OR SHAH-DENIZ ? GEORGIA'S CHOICE OF STRATEGIC PARTNERS
by Vladimir Socor
Russia's Gazprom is counting on three factors to rush Georgia, despite U.S.
advice, into a political decision to sell the country's gas transportation
system to the Russian monopoly. Those factors are: the specter of winter,
the urgent need for capital injections into that system, and fortuitously
convergent support for such a sale by interested lobbyists and disinterested
exponents of economic ultra-liberalism in Tbilisi.
Gazprom's takeover of internal distribution pipelines could lock Georgia
permanently into dependence on Russian gas by blocking the access of
Azerbaijani gas from Shah-Deniz to the Georgian market. The
Azerbaijan-Georgia-Turkey gas transit pipeline would not necessarily be
affected; but Georgia would no longer be able to benefit from this safeguard
against the high political risks of dependence on Russian supplies.
At present, Georgia is almost totally dependent on Russian gas, consuming
approximately 1 billion cubic meters annually. Gazprom's export arm,
Gazeksport, currently sells it for $60 per 1,000 cubic meters; but it has
just decided to increase the price charged to South Caucasus countries to
$78 per 1,000 cubic meters, with partial pre-payment, effective from January
1, 2005. The price hike and its timing are adding to the pressure on Georgia
to turn its insolvent gas transport system over to Gazprom.
The state-owned Georgian Gas International Corporation (GGIC) operates
Georgia's trunk pipelines. Distribution systems are owned by as many as 40
local companies, among whom the municipally owned Tbilisi Gas (Tbilgazi) is
by far the largest, politically most sensitive, and most likely target for a
Gazprom takeover attempt.
Gazprom is also targeting the transit pipeline that runs via Georgia to
Armenia for possible takeover. Under existing arrangements, Russia pays the
transit fees in the form of gas. In 2003, Georgia transited 1.2 billion
cubic meters of Russian gas to Armenia and received 120 million cubic meters
in compensation.
The Russian company and some Georgian officials are considering several
possible modalities of a Gazprom takeover. The options include: equity
transfers, straight buyout, or a Gazprom-GGIC joint venture, for all or
major parts of Georgia's gas transportation system. Regarding the link to
Armenia via Georgia, Gazprom is considering the possibility of expanding its
capacity or rebuilding it entirely and using it in reverse as an outlet for
Iranian gas exports.
Former president Eduard Shevardnadze accepted a deal along those lines
during the twilight months of his rule. An agreement of intent envisaged
turning Georgia's gas transportation network over to Gazprom. Shevardnadze
ignored Washington's strong objections to that agreement in the final months
of 2003. The U.S. State Department's special envoy for Caspian energy
affairs, Steven Mann, made the case against that intention one year ago, and
is making the case again now to prevent an expediency-based deal with
Gazprom against Georgia's long-term national interests.
Gazprom holds out the incentive of stable gas supplies to Georgia and
overhauling the country's gas transportation and distribution systems. Some
Georgian officials feel that the proposed deal would tide Georgia over the
next two winters, until Azerbaijani gas starts flowing. However, Georgia
would probably lose the opportunity to use Shah-Deniz gas, if Gazprom
acquires Georgia's trunk pipelines. In that case, Gazprom could exercise
discretionary control over the access of Shah-Deniz gas to the Georgian
market. It would almost certainly block or manipulate that access and ensure
that Gazprom retains overwhelming market share in Georgia, not only for
commercial reasons (Georgia is a small market for Gazprom), but mainly for
political and strategic reasons.
The BP-led consortium, developing the Shah-Deniz gas project, will also own
and operate that gas transit pipeline, including the section in Georgia.
Deliveries are scheduled to begin in 2006 under a 20-year sale and purchase
agreement. Georgia is slated to receive guaranteed volumes starting at 200
million cubic meters in the first year, rising gradually to 500 million
cubic meters by the sixth year, and continuing for another 14 years. Georgia
will pay a preferential price, starting at $55 in the first year and rising
at a rate of 1.5% annually.
In addition, Georgia will receive transit fees either in cash (at $2.50 per
1,000 cubic meters transiting Georgia, and rising at a rate of 2% annually)
or in the form of gas amounting to 5% of the volume transiting Georgia (that
volume will rise to 6.6 billion cubic meters, heading for Turkey, in the
sixth year and thereafter). Depending on the form of transit fees, the gas
from Shah-Deniz will cover between 50% and 83% of Georgia's demand. On top
of that, Georgia will have an option to purchase Azerbaijani gas at market
prices.
This arrangement gives Georgia a unique set of advantages: first, the chance
to escape from dependence on Russian gas; second, lower prices (both
short-term and long-term); and, third, guaranteed deliveries from a
politically friendly, Western-managed supply source.
In Tbilisi, lobbying in favor of the sale to Gazprom is a non-transparent
process. Local observers trace it to a Shevardnadze-era gas trader who
became wealthy in the Russian gas import trade, and who aspires to regain
that niche for himself in the new conditions, trying to use a new contact
near the top, as he had in the old system. Entirely unrelated to that
effort, though coincident in the timing, Economics Minister Kakha Bendukidze
advocates the earliest possible state divestment of the gas transportation
system (and other state properties) by selling to whatever buyer, including
Gazprom -- currently the only buyer in sight -- if the price is right and
investment is forthcoming. Bendukidze, himself a businessman of unquestioned
integrity, is known to bring a fundamentalist liberal approach to the issue
of privatizing strategic state assets, with little regard for national
security implications.
Georgia's gas transport system is in urgent need of a costly overhaul.
Turning the system over to Gazprom is not the only financing option,
however. With a rapidly growing state budget, incipient economic recovery,
high level of foreign aid, and renewed access to international credit,
Georgia can devise a financing package for that system's rehabilitation
while retaining national control, so as to break out of the dangerous
dependence on Gazprom when Shah-Deniz gas comes on stream.
From: Emil Lazarian | Ararat NewsPress
Friday, November 12 -- Volume 1, Issue 126
EURASIA DAILY MONITOR
IN THIS ISSUE:
*Russia-EU summit rescheduled for late November
*Putin's economic aide says call the dogs off Yukos
*Gazprom turns up the heat on Tbilisi
*Cold War rhetoric infects Yanukovych statements
Friday, November 12, 2004 -- Volume 1, Issue 126
GAZPROM OR SHAH-DENIZ ? GEORGIA'S CHOICE OF STRATEGIC PARTNERS
by Vladimir Socor
Russia's Gazprom is counting on three factors to rush Georgia, despite U.S.
advice, into a political decision to sell the country's gas transportation
system to the Russian monopoly. Those factors are: the specter of winter,
the urgent need for capital injections into that system, and fortuitously
convergent support for such a sale by interested lobbyists and disinterested
exponents of economic ultra-liberalism in Tbilisi.
Gazprom's takeover of internal distribution pipelines could lock Georgia
permanently into dependence on Russian gas by blocking the access of
Azerbaijani gas from Shah-Deniz to the Georgian market. The
Azerbaijan-Georgia-Turkey gas transit pipeline would not necessarily be
affected; but Georgia would no longer be able to benefit from this safeguard
against the high political risks of dependence on Russian supplies.
At present, Georgia is almost totally dependent on Russian gas, consuming
approximately 1 billion cubic meters annually. Gazprom's export arm,
Gazeksport, currently sells it for $60 per 1,000 cubic meters; but it has
just decided to increase the price charged to South Caucasus countries to
$78 per 1,000 cubic meters, with partial pre-payment, effective from January
1, 2005. The price hike and its timing are adding to the pressure on Georgia
to turn its insolvent gas transport system over to Gazprom.
The state-owned Georgian Gas International Corporation (GGIC) operates
Georgia's trunk pipelines. Distribution systems are owned by as many as 40
local companies, among whom the municipally owned Tbilisi Gas (Tbilgazi) is
by far the largest, politically most sensitive, and most likely target for a
Gazprom takeover attempt.
Gazprom is also targeting the transit pipeline that runs via Georgia to
Armenia for possible takeover. Under existing arrangements, Russia pays the
transit fees in the form of gas. In 2003, Georgia transited 1.2 billion
cubic meters of Russian gas to Armenia and received 120 million cubic meters
in compensation.
The Russian company and some Georgian officials are considering several
possible modalities of a Gazprom takeover. The options include: equity
transfers, straight buyout, or a Gazprom-GGIC joint venture, for all or
major parts of Georgia's gas transportation system. Regarding the link to
Armenia via Georgia, Gazprom is considering the possibility of expanding its
capacity or rebuilding it entirely and using it in reverse as an outlet for
Iranian gas exports.
Former president Eduard Shevardnadze accepted a deal along those lines
during the twilight months of his rule. An agreement of intent envisaged
turning Georgia's gas transportation network over to Gazprom. Shevardnadze
ignored Washington's strong objections to that agreement in the final months
of 2003. The U.S. State Department's special envoy for Caspian energy
affairs, Steven Mann, made the case against that intention one year ago, and
is making the case again now to prevent an expediency-based deal with
Gazprom against Georgia's long-term national interests.
Gazprom holds out the incentive of stable gas supplies to Georgia and
overhauling the country's gas transportation and distribution systems. Some
Georgian officials feel that the proposed deal would tide Georgia over the
next two winters, until Azerbaijani gas starts flowing. However, Georgia
would probably lose the opportunity to use Shah-Deniz gas, if Gazprom
acquires Georgia's trunk pipelines. In that case, Gazprom could exercise
discretionary control over the access of Shah-Deniz gas to the Georgian
market. It would almost certainly block or manipulate that access and ensure
that Gazprom retains overwhelming market share in Georgia, not only for
commercial reasons (Georgia is a small market for Gazprom), but mainly for
political and strategic reasons.
The BP-led consortium, developing the Shah-Deniz gas project, will also own
and operate that gas transit pipeline, including the section in Georgia.
Deliveries are scheduled to begin in 2006 under a 20-year sale and purchase
agreement. Georgia is slated to receive guaranteed volumes starting at 200
million cubic meters in the first year, rising gradually to 500 million
cubic meters by the sixth year, and continuing for another 14 years. Georgia
will pay a preferential price, starting at $55 in the first year and rising
at a rate of 1.5% annually.
In addition, Georgia will receive transit fees either in cash (at $2.50 per
1,000 cubic meters transiting Georgia, and rising at a rate of 2% annually)
or in the form of gas amounting to 5% of the volume transiting Georgia (that
volume will rise to 6.6 billion cubic meters, heading for Turkey, in the
sixth year and thereafter). Depending on the form of transit fees, the gas
from Shah-Deniz will cover between 50% and 83% of Georgia's demand. On top
of that, Georgia will have an option to purchase Azerbaijani gas at market
prices.
This arrangement gives Georgia a unique set of advantages: first, the chance
to escape from dependence on Russian gas; second, lower prices (both
short-term and long-term); and, third, guaranteed deliveries from a
politically friendly, Western-managed supply source.
In Tbilisi, lobbying in favor of the sale to Gazprom is a non-transparent
process. Local observers trace it to a Shevardnadze-era gas trader who
became wealthy in the Russian gas import trade, and who aspires to regain
that niche for himself in the new conditions, trying to use a new contact
near the top, as he had in the old system. Entirely unrelated to that
effort, though coincident in the timing, Economics Minister Kakha Bendukidze
advocates the earliest possible state divestment of the gas transportation
system (and other state properties) by selling to whatever buyer, including
Gazprom -- currently the only buyer in sight -- if the price is right and
investment is forthcoming. Bendukidze, himself a businessman of unquestioned
integrity, is known to bring a fundamentalist liberal approach to the issue
of privatizing strategic state assets, with little regard for national
security implications.
Georgia's gas transport system is in urgent need of a costly overhaul.
Turning the system over to Gazprom is not the only financing option,
however. With a rapidly growing state budget, incipient economic recovery,
high level of foreign aid, and renewed access to international credit,
Georgia can devise a financing package for that system's rehabilitation
while retaining national control, so as to break out of the dangerous
dependence on Gazprom when Shah-Deniz gas comes on stream.
From: Emil Lazarian | Ararat NewsPress