Georgia - Gazprom: A new page in relations?

The Georgian Ministry of Economy has published a balance sheet for natural gas in 2018 which stipulates that Georgia will no longer be buying gas from Russian gas in 2018.

The document notes that in 2018 Georgia will receive 2.689 billion cubic metres of gas, of which 99.5% will be imported from Azerbaijan (1.866 billion cubic meters from Socar and 813 million cubic meters from the Shah Deniz field). The remaining 9.41 million cubic meters of gas will be mined in Georgia itself.

Despite the fact that reducing and eliminating Georgia’s dependence on Gazprom is one of the country’s declared goals, this recent news has again given rise to widespread discussions about an agreement that Georgia signed with Gazprom last year.

At the beginning of 2017 Georgia reached an agreement with Gazprom that will last for two years. The main point of the agreement was that the payment scheme for transporting Russian gas through Georgian territory changed: Before, Georgia used to receive 10% of the gas that was transported through the country to its southern neighbor Armenia. Now, Georgia will receive payment in exchange for transit rights on its territory instead.

Experts and opponents of the authorities assessed the agreement in a negative light from the very beginning. One of the main arguments authorities had was that Georgia could not have done without Russian gas because Azerbaijan was unable to fully provide for Georgia’s needs. However, in the recently published balance sheet, we see a different picture: it turns out that Azerbaijan can, indeed, provide for Georgia’s gas needs.

A year has passed since the agreement was signed. However, its contents have been kept secret. It is unknown just how much Russia pays for gas transit through Georgia. A United National Movement opposition party member, economist Roman Gotsiridze, says that the country has lost at least 80 million lari (about 32 million dollars) as a result of the deal.

“Actually, Georgia just doesn’t have the money to buy Russian gas. The payment it receives for transporting Gazprom’s gas barely covers the cost of transporting the gas to the Armenian border,” says Gotsiridze.

Expert Gia Khukhashvili has also spoken on the subject of losses. “The reality is such that, because of the new deal with Gazprom, we have incurred serious losses. The 10% of the gas that was delivered to Armenia was in reality much more than the sum that we are currently receiving from Russia for transit,” he says.

“The statement made by the authorities that Georgia has stopped buying gas from Russia and is now politically independent is a lie,”said Khukhashvili.

“Georgia has not bought gas from Gazprom in over 10 years – since 2007. We received ten per cent of the gas that was shipped to Armenia,” he explains.

“The UNM has demanded in court that the contents of the document be made public. The Tbilisi Municipal Court is currently looking into the matter; it is possible that representatives of Gazprom will be called in to testify. We must receive an answer to the question of just what that agreement entails,” says Roman Gotsiridze.

Starting from 2007, Azerbaijan was practically Georgia’s only gas supplier. Georgia received only 10% of natural gas from Russia as a charge for the transit of the Russian gas to Armenia.

However, in January 2017, some contract terms with Gazprom were altered. From now on Georgia will be paid for the transit of Russian gas rather than receiving a portion of it. It was the Russian side who insisted on revising the contractual terms. After several years of negotiations, Georgia finally accepted Gazprom’s conditions.

Why? – people in Tbilisi wonder.

Georgia started its path towards energy independence in the cold winter of 2016.

Two explosions occurred simultaneously on two gas pipelines running in the mountains, 30 kilometers from the city of Vladikavkaz (North Ossetia) overnight on 22 November. Those were the pipelines through which Russian natural gas was supplied to Georgia.

A high-voltage power transmission line blew up in Karachay-Cherkessia on the same day, cutting Georgia off from the Russian power supply.

Part of Tbilisi was left without gas and electricity, amidst temperatures below zero.

Armenia, who received its supply of Russian gas through the territory of Georgia was now also facing problems.

The Georgian government termed the aforesaid incident as a ‘subversive act’ and ‘vandalism’. Officials in Tbilisi believed that Russia was trying to force Georgia to cede control over the country’s strategic gas pipeline and other infrastructure.

A few months after the aforesaid incident, Russian Gazprom raised the gas price for Georgia, setting it at USD 235 instead of USD 110 per 1 000 cubic metres, meaning Georgia had to pay the highest tariffs among the CIS countries (at that time Georgia was still a member of that organization).

Those developments were preceded by political tension between Tbilisi and Moscow that started with the so-called ‘spy scandal’ in autumn 2006.

Being indignant over exposure and the deportation of Russian spies by the Georgian authorities, the Kremlin started persecuting Georgian nationals residing in Russia parallel to Gazprom’s punitive measures. It continued later by imposing an embargo on imports of Georgian agricultural products for several years.

More than 10 years have passed since that time.

Today, Georgia consumes 2. 5 billion cubic metres of natural gas and 90% of this volume is supplied to Georgia from Azerbaijan.

Georgia is no longer dependent on the Russian Gazprom company. Russian gas accounts just for 10% of Georgia’s total energy supply. Georgia received that 10% by default, as a transit country through which Russia supplied gas to Armenia.

However, Georgia still remembers pretty well what it’s like to be dependent on Gazprom. Thus, it’s no surprise that any reports on talks with the Russian energy giant is taken with suspicion and mistrust.

Therefore, the reports that the Georgian government made concessions to Gazprom and agreed to be paid in cash instead of receiving a percentage stirred up public outcry and raised many questions.

Under the agreement reached between the Georgian Energy Minister and the Russian Gazprom company at the end of 2016, starting from 2017, Georgia will be paid for gas transit to Armenia in cash rather than in kind.

Georgia was engaged in talks with Gazprom for two years, but the agreement was finally reached only in January 2017.

What do we know about the deal with Gazprom:

Not much. The main concern is how much Georgia will receive in exchange for gas transit, which is unknown.

What we have in this regard is just a general statement made by the Minister of Energy, Kakha Kaladze: “It will be the highest price among the European countries,” and “From a financial point of view we will get the same outcome as in the case when we were paid in kind.”

According to Kaladze it’s a two year contract. For 2017 Georgia will be paid for the gas transit partly in cash and partly in kind. However, for 2018 Georgia will only receive payment for the gas transit.

In Kaladze’s words, under the contract with Gazprom, if necessary, Georgia will be able to buy additional volumes of Russian gas at a preferential price. He reported that Gazprom-Export agrees to sell additional volumes of national gas to Georgia at USD 185 instead of USD 215 per 1 000 cubic metres.

Government’s arguments

The Georgian government says it consented to Gazprom’s conditions as it had no other way out for several reasons:

International commitment: Under the European Energy Charter, Georgia is committed to receive cash instead of in-kind payment from Gazprom. In-kind payment for transit is no longer applied in any countries worldwide. At the international level, countries pay each other for the transit of natural gas. Georgia would have had to shift to monetization sooner or later – Georgian government officials claim.

An image of a transit country: In case of Georgia’s refusal to accept Gazprom’s proposed contract, Russia would have posed gas supply problems to Armenia and thus mar Georgia’s image as a transit country.

Iran instead of Georgia: Another argument is that Russia may possibly give up on Georgia as a transit country and start supplying gas to Armenia via Iran. “Gazprom has openly hinted that it will supply gas to Armenia directly via Iran. Actually there is such a risk and its consequences will be deplorable for Georgia,” the Georgian Energy Minister stated back in January last year.

No threat to energy independence: “This agreement in no way increases Georgia’s dependence on Russian energy carriers. The only thing that is going to change is the form of payment. So there is nothing to worry about,” said Kaladze.

Azerbaijan is a good neighbor, but diversification of our energy supply is still important: Bidzina Ivanishvili, Georgia’s ex-Premier and founder of the ruling Georgian Dream party, who still has an influence on the government’s decisions, told journalists back in 2015 that he supported the diversification of the energy supply. “The whole of Europe is being supplied with Russian gas nowadays and there is no crime if Georgia buys Russian gas too,” he said. “I do not see anything bad in the fact that the Georgian market may possibly be diversified and businessmen may be given the possibility to buy gas wherever they want.”

What are the claims laid by the Gazprom deal opponents:

A vague deal and a non-transparent process: Georgian citizens became familiar with the first report about the Georgian government holding talks with Gazprom from their official website instead of from their own government. Throughout the subsequent period, government officials were making mutually exclusive statements with regard to the context of the aforesaid talks, which raised many questions and suspicions. The very fact that the amount that Georgia is going to get in exchange is still unknown makes this process far more vague and incomprehensible.

Unprofitable and political price: Natural gas prices are fluctuating and largely depend on oil prices. If there is a drop in oil prices, Georgia will consequently receive less and will sustain losses. The opposition also reminded the government that it should take into account its past and international experiences, which clearly shows that Russia sets prices on the basis of political expediency rather than based on sound commercial logic.

Manipulating the European Energy Charter: Russia, who constantly violated the terms of the Energy Charter, was suspended from its participation in the Charter in 2009. Instead of talking about Russia violating its commitments, the government is seeking arguments to justify Russia’s position.

Blackmailing on part of Russia: Experts regard Russia’s ultimatum that in the event of Georgia’s refusal to accept payment for gas transit it would supply gas to Armenia through Iran rather than through Georgia as unrealistic. Many experts believe that it is pure blackmail, since such a plan couldn’t be put into effect in the near future.

A dialogue without mediation: Some experts and opposition consider it unacceptable that the Georgian government has engaged in talks with Gazprom without the international community’s mediation.

Offending Azerbaijan: Negotiations with the risk-bearing Gazprom has the potential of spoiling a stable relationship with Azerbaijan. “For over a decade Azerbaijan has been providing Georgia with an uninterrupted gas supply on advantageous terms. The times when electricity was supplied according to a schedule and when there were power cutoffs and cold winters are gone. Apart from the fact that Azerbaijan is a reliable and profitable gas supplier, cooperation with this neighboring country is of strategic importance for Georgia,” believes Elene Khoshtaria, a parliamentary minority group member.

• Azerbaijan is currently the main supplier of natural gas to Georgia. Georgia received 87.1% of the total volume of gas it consumes from Azerbaijan last year and buys Azerbaijani gas at preferential prices: for population supply – at USD 120 per 1 000 cubic metres of natural gas; for TPPs – at USD 143 per 1 000 cubic metres, which is considerably lower than the price offered by Gazprom to its strategic partner Armenia. Armenia currently pays USD 165 per 1 000 cubic metres of Russian gas.
• Apart from Azerbaijani gas, Georgia is also supplied with Russian gas, though in relatively smaller volumes. In 2014 Georgia received 267 773 000 cubic metres of Russian gas, including 206 166 000 cubic metres as payment for transit. Georgia receives 10% of the total volume of Russian natural gas transported to Armenia through the 221-km North-South gas pipeline.
• About 2.1 billion cubic metres of natural gas was transported to Armenia through the territory of Georgia via the main gas pipeline last year. Georgia received 0.3 billion cubic metres of the total volume of transported gas.