Georgia's dangerous liaison with Gazprom

Georgia's dangerous liaison with Gazprom
By Monica Ellena January 25, 2016

Talks between Georgia and Gazprom over increasing the supply of gas to the energy-thirsty but Russia-phobic Caucasus nation are raising fears that there is more than gas in the pipeline.

Since September Energy Minister Kakha Kaladze has met regularly with the Russian gas giant’s senior executives, including CEO Alexey Miller. On the table, according to officials, is Gazprom’s wish to switch to new contractual terms based on giving Georgia a cash payment as fee for transporting gas, rather than allowing to take 10 % of the gas it transports to Armenia. Also under discussion is Georgia’s desire to purchase more gas in winter, as the country’s energy consumption steadily increases.

However, the secrecy surrounding the meetings has fuelled speculation that any deal would increase Georgia’s energy dependence on Russia and damage key energy ties with neighbouring Azerbaijan. To critics, the talks are all part of what they see as the ruling Georgian Dream coalition’s attempt to cosy up to the country’s former imperial overlord.

At a concert organised on January 16 “No to Gazprom” slogans kept the beat as rock bands and activists from a dozen civil society groups demonstrated outside the government headquarters in downtown Tbilisi. The event was organised by Defend Liberty, a campaign group set up in late 2015 with the aim of countering “Russia’s aggressive propaganda against the West in Georgia”. Demonstrators labelled Gazprom “a political weapon of the Kremlin” and the Georgian government “collaborationist”.

“The Ministry of Energy needs a better communication strategy as meetings were not anticipated and explained and messages have been mixed and inconsistent,” maintains Murman Margvelashvili, energy expert and founder of World Experience for Georgia (WEG), a Tbilisi-based think-tank focussing on energy and environment. One of the mixed messages was a hint that Georgia could receive gas from Iran via Armenia, even though this is not currently possible and would require Russian approval, which is unlikely as the pipeline through Armenia would have to be filled to capacity, undermining Gazprom’s monopoly position in that country.

No hidden agenda

Gas flows to Georgia from Russia through the North-South pipeline and from Azerbaijan via the South-Caucasus pipeline. According to official data, Georgia’s gas consumption reached 2.49 bcm in 2015, up by 19% y/y. Baku supplied 87% of the total, while Gazprom pumped about 275 mcm, 200 mcm as transit fee and 75 mcm on top. But Russia’s share in Georgia’s annual gas supply could increase from the current 11% to 20% should Tbilisi strike a deal.

Tbilisi argues it is necessary to diversify the country’s gas supplies because Azerbaijan cannot increase its current supply. Socar, Azerbaijan’ state energy company, is currently busy working to upgrade the pipeline infrastructure as well as to complete the second phase of the Shah Deniz project in the Caspian Sea, scheduled for late 2018.

In an interview last October former premier Irakli Garibashvili told bne IntelliNews that there was not a hidden agenda behind the talks and insisted that the government’s policy is “crystal clear” as “the main provider of gas is and will be Azerbaijan, our main strategic partner”. Garibashvili resigned a few weeks ago but the appointment of Giorgi Kvirikashvili at the helm of the cabinet has not changed the approach.

But the talks have clearly alarmed neighbouring Azerbaijan, which is grappling with its own domestic problems as oil prices slump. Soon after the first meeting with Gazprom, Garibashvili unexpectedly flew to Baku, rumours had it to try to reassure President Ilham Aliyev. In an article published on January 11 the government-friendly Azerbaijan news outlet asked “why does [Georgia] seek to disrupt the already established relations with a reliable supplier that is Baku?” Socar’s chief, Rovnag Abdullayev, visited Tbilisi on January 13 to talk about “additional investments” required to increase the volume of gas supplied by Socar, including a gas compressor station.

A frosty history

Moreover, any negotiation with Gazprom is inseparable from Georgia’s relations with its huge northern neighbour. “Flirting with Gazprom is playing with the unknown. The consequences of Russia's soft power are unpredictable, it is simply uncomfortable to depend more on Moscow,” says Margvelashvili.

Georgia’s relations with the energy giant have mirrored Tbilisi’s icy links with Moscow. In January 2006 gas prices skyrocketed overnight from $63 to $110 per 1,000 cubic metres and an explosion at a key pipeline left the population at the mercy of the harsh Caucasus winter. Then president Mikheil Saakashvili, whose relations with Russia’s president Vladimir Putin has been white-hot at best, blamed Moscow for the blast and accused the Kremlin of blackmailing Tbilisi to change its Euro-Atlantic integration vision.

He attempted to safeguard Georgia’s energy supply from the new political mood – which rock-bottomed in August 2008 with a six-day conflict over the breakaway region of South Ossetia – by turning to Baku to secure much-needed gas. Azerbaijan has proved to be a dependable ally, although competition has suffered – as both a gas supplier and distributor, Socar enjoys a privileged position on the Georgian market.

Tbilisi argues that the negotiation with Gazprom is aimed at achieving the same end result as the country’s current transit fee arrangement. “Whether we call it an ultimatum or a demand, [Gazprom wants] to monetise the transit fee,” Kaladze said.

For Margvelashvili this is wishful thinking, as “switching from the current in-kind transit fee to a monetary transaction will cause a financial blow for Georgia as the cash will not be sufficient to purchase the gas we retain from the supply to Armenia”. Gazprom could potentially negotiate low prices to increase its presence in the Georgian market but “we should not allow it as we already depend on Russia for electricity distribution”, he argues.

In 2014, Georgia purchased 800mn kWh, about 7% of the total annual consumption, from Russia’s Inter Rao. The electricity group also holds 75.1% of shares in Telasi, an electricity distributor company in the capital city with about 524,500 customers.

Concerns about Russian energy companies increasing their interests in Georgia were also raised in early 2015 when state-owned producer Rosneft acquired a 49% stake in Cyprus-based Petrocas Energy, owned by Georgian-Swedish businessman David Iakobashvili. The company operates Georgia’s oil terminal in the Black Sea port of Poti, as well as Gulf, one of the country’s largest retail gas station chains.

“We indeed need more gas but we need it from a reliable partner without a political agenda,” adds Margvelashvili, who calls for a general reform of the energy market to use Gazprom’s influence to curb Socar’s monopoly power.