Jahan Hoggarth in London -

To many people familiar with the South Caucasus region, Georgia is associated with food and wine. It is also known as a key transit country connecting Caspian oil and gas with European markets. Yet few think of Georgia as being a major oil and gas producer.

Stretched along the mountains of the South Caucasus, Georgia's extremely complex geological landscape played its role in keeping the country's oil industry underdeveloped. Traditional vertical drilling and technologies employed at the time were not suited for the type of geology that exists in Georgia. "Within the grand scheme of the Soviet Union, Georgia was a very small part. It had oil, but the main oil focus over the last 20-30 years of the USSR had been the Caspian region, across Russia and the other side of the Caucasian mountains," says Vincent McDonnell, CEO of Blake Oil & Gas.

However, McDonnell notes that Georgia is located in a very oil and gas prone area. "The South Caspian and Terek Caspian basins have a huge amount of production from the Caspian region."

Formed by cretaceous carbonate deposits nearly 100m years ago, the basins are part of the same system as that on the Russian side of the Caucasus, which has a successful oil production history. But Georgian deposits are buried deeper than the Russian deposits, and so have been inaccessible until recent advances in technology. "The Terek-Caspian basin is shallow at the Russian end, therefore we have the prolific production from the same cretaceous already. Our equipment allowed us to drill deeper to access the similar cretaceous deposits on the Georgian side and we've found oil in there. It's a whole new play that we're opening up on the southern side of the Caspian basin. It's deeper, more complex perhaps, than the north, but nevertheless contains oil," explains McDonnell.

Blake, a Guernsey-registered company, was set up in 2009 as a financial restructuring of US explorer CanArgo Energy Corporation. Operating in Georgia since 1997, CanArgo was declared bankrupt in 2008 after running into financial difficulties caused by the collapse of oil prices and the impact, albeit short-lived, of the 2008 war with Russia.

New, cutting-edge technologies are vital for oil and gas regions exploration in regions such as Georgia, where the landscape presents a number of challenges. In 1998, CanArgo drilled the first horizontal well in the Caucasus, reviving oil production from the Ninotsminda field. Georgia's biggest oil discovery, Ninotsminda produced 70,000 barrels of oil per day (b/d) at its peak production in 1970s. The combined Samgori-Ninotsminda structure has jointly produced 210m barrels of oil to date.

Relatively small oil production currently doesn't allow yet for Georgian crude to feed directly into the transiting pipelines. Instead, oil is exported through the Georgian rail network and the ports of the Black Sea to Batumi, where it is shipped out of Georgia into Southeast Europe and the Mediterranean. "We are already producing oil at the Ninotsminda field and are sure that with horizontal drilling we can significantly increase the oil production. Same applies to our Norio field, where cretaceous are in large quantities, as they haven't been used due to the lack of technologies. Compared to similar reservoirs of cretaceous in the North Caucasus, where a single vertical well can produce up to 16,000 b/d, the oil and gas potential in Georgia is significant," says McDonnell.

Nascent industry

The Georgian government is keen to see more investment in its oil and gas industry. Currently, Georgia imports nearly all of its gas and oil products. And Georgia's volatile relationship with Russia drives the government's priority of diversifying its energy suppliers, moving to purchase gas from Azerbaijan, while negotiating imports from Turkmenistan and Kazakhstan.

Despite its strategic crossroad location, there are no refineries in Georgia. And although historically there might not have been the need for a refining industry, McDonnell says there is so much oil transiting Georgia that it could put in place a refining infrastructure even without having any domestic crude. "Georgia could easily get enough oil supply from transit pipelines to feed a refinery," reckons McDonnell.

In April this year, the Georgian government said it plans to invest another $84m by the end of 2013 in the oil and gas exploration and production industry, which has already "started to generate a new interest from investors," said Georgia Minister of Energy and Natural Resources Kakha Kaladze.

New oil discoveries are bringing in the additional revenue. In April, India's Jindal Petroleum announced it would invest an additional $100m after oil had been discovered in one of its five licenced blocks.

With the initial investment of $200m, Blake is also looking to grow its investment portfolio after offering 50% of its highly prospective Kura basin assets to MND Group as part of a joint-venture agreement. In return, the Czech company will fund the development of Blake's assets in Ninotsminda, and potentially very large oil discoveries in the Manavi and Norio structures, which are jointly estimated to hold 339m barrels of oil and 8.8bn cubic metres of gas. "We have a good understanding of Georgian environment and as well as looking at general oil and gas opportunities, Blake will also be looking at other investment opportunities in Georgia, such as alternative energy projects," says McDonnell.

Most of the oil companies in Georgia operate under production sharing agreements (PSA), whereby the first 50% of oil produced is made available for the investor and the remainder is split between the state and the investor. "This is a hugely attractive option, because it makes it easy for the investor to forecast a potential return from the project. Here in Georgia we have stable and clear production sharing terms and it's fixed for the life of the contract," says McDonnell.

Georgia's investor-friendly and relatively corruption-free business environment also helps. The US think-tank The Heritage Foundation ranked Georgia's economy as the 21st freest out of 177 countries for its freedom from corruption and rule of law in its 2013 economic freedom index. "Georgia has made a lot of progress. There is a good fiscal structure in Georgia, good tax regime and property rights. This type of economic freedom makes Georgia an attractive environment for us to invest in," concludes McDonnell.