BACK TO THE FUTURE

Diversification of gas supplies is a matter of utmost importance for any country forced to import natural gas. However, each state solves the issue in different ways based on not only economic but also political interests.

It is difficult to judge the factors that made neighbouring Georgia to attract the Russian Gazprom in its gas market as an alternative to Azerbaijani SOCAR. In any case, this decision will not affect the dominant position of Azerbaijani gas.

Difficult negotiations

“The agreement with Gazprom is ready, and we will buy small quantities of natural gas from Russia,” Georgian Minister of Economy and Sustainable Development, George Kobulia, announced in April. The minister did not specify however what volume of gas is involved and how much Georgia is going to pay for it.

Kobulia announced the intention of his government to purchase Russian gas in the parliament in February 2019. He explained this by the desire to diversify the supply of this fuel, which is now almost entirely supplied by Azerbaijan.

“Diversification and optimisation of gas purchases is an important initiative. We want to create an opportunity for more than one supplier. We hold talks with Russia, and, probably, we will purchase some gas from the Russian Federation, which will give us an opportunity to preserve energy security and independence,” Kobulia noted.

According to the minister, the diversification of supply will create competition in the market, which will help reduce gas tariffs. “A monopoly is inadmissible, and Azerbaijan should not be the only supplier of gas to Georgia,” the minister said in his interview.

The annual gas demand of Georgia is estimated at 2.5 billion cubic meters, which are covered by 90% due to imports from Azerbaijan. According to SOCAR, in 2018 Azerbaijani gas exports to Georgia reached 2.2 billion cubic meters, which is 22.8% more than in 2017.

Today, Georgia receives from Gazprom only 10% of the total volume of Russian gas transit to Armenia. Since 2017, Russia has paid Georgia for the transit in cash and partly in raw materials, and in 2018, in cash only. Under the terms of the two-year agreement (2017-2018), Gazprom Export guaranteed payment for the transportation of gas through the territory of Georgia to Armenia (2-2.2 billion cubic meters per year), as well as a flexible supply of gas to Georgia during this period at a price of $30 less than in 2016, that is, at $185 per 1,000 cubic meters. The term of the agreement expired on December 31, 2018. In March 2019, Georgia signed a new two-year contract with Gazprom Export on the transit of Russian gas to Armenia, which will be backdated (from February 1, 2019 to the end of 2020).

"Despite rather complex and long talks, we were guided by two basic principles, both of which were successfully protected," Natia Turnava, Deputy Minister of Economy and Sustainable Development of Georgia said. According to Turnava, one of these principles is energy independence and security of Georgia. "I can say that the two most important strategic segments of our market, the population and the power grid, are fully supplied and will continue to be supplied with Azerbaijani gas," N.Turnava said.

She also called the improvement of positions in relations with Gazprom the second important moment of negotiations. “The new agreement is better than the previous one. We have improved commercial terms in both positions: the transit fee has been increased, and the price of Russian gas has been reduced if a private company is interested in Russian gas,” N. Turnava said. However, she did not give specific numbers, noting that the details of the contract remain confidential.

History teaches nothing...

Given that the details of the new deal were not disclosed, it seems that the payment for the transit of Russian gas has not changed, which is not in the interests of the country. According to Georgian experts, monetisation of the previous contract concluded in 2017 brought Georgia more than $30 million in losses. After all, the price of gas, taking into account its direct relation to oil prices, may vary. Therefore, it would be much more profitable for the country to receive 10% of transit as raw materials.

This year, the Ministry of Economic Development of Georgia forecasts an increase in natural gas consumption by 5.8% compared to 2018 - up to 2.6 billion cubic meters. According to the balance of natural gas approved by the Ministry for 2019, own natural gas production in Georgia this year is projected at 7.2 million cubic meters, the import of gas is planned at 2.6 billion cubic meters, which is 7% more, than in 2018. Moreover, SOCAR’s gas supply will increase by 8.8% to 1.8 billion cubic meters, and as part of the Shah Deniz project, Tbilisi plans to receive 828 million cubic meters of gas this year (an increase of 3.3%).

Thus, all gas imports in 2019 would be supplied by Azerbaijan, but taking into account the new agreements with Gazprom, certain changes were later made to the balance. By the way, the updated balance does not assume commercial deliveries of Russian gas to Georgia until the end of 2019.

Georgia has not bought gas from Russia since 2007 due to significant deterioration in political relations between the two countries and the explosions in November 2006 on two gas pipelines that deliver gas from Russia to Georgia and Armenia. However, deliveries were stopped immediately after Gazprom announced an increase in gas prices for Georgia from $110 to $235 per 1,000 cubic meters from January 1, 2007 and offered to give it a part of Georgian gas pipelines in exchange for lowering gas prices by half. The then Georgian government viewed this as blackmailing to force Tbilisi to transfer its gas transmission system under the control of Moscow. “We were ready for such surprises, but this is a political blackmail, to which we will not succumb,” said the then-Prime Minister of Georgia Zurab Noghaideli.

By the way, both in 2006 and after the August 2008 war, when Gazprom stopped gas supplies to Georgia, the country managed to ensure its energy security thanks to the friendly support of Azerbaijan. Baku has always been a stable and reliable energy partner and has never used Tbilisi’s gas dependence for political pressure. In this context, the concern of the Minister of Economy and Sustainable Development of Georgia, Georgy Kobulia, regarding the Azerbaijani monopoly in the gas market of his country is groundless. Especially, considering the rather complicated political relations between Moscow and Tbilisi, Russian gas for Georgia cannot be considered as an alternative to Azerbaijani gas. Another issue is that the energy security of any country dictates the need to diversify sources, no matter how reliable the current supplier is.

A drop in the sea

According to the agreement of December 26, 2008, signed with the Georgian government, SOCAR received 23 regional gas distribution companies, as well as a number of gas farms and networks, on the terms of investing in the gas infrastructure of the country.

In October 2012, SOCAR became the owner of Itera-Georgia, a 100% subsidiary of ITERA International Energy LLC, and practically the only supplier and distributor of natural gas in Georgia.

A subsidiary of SOCAR, Georgia Gas Ltd., was created in 2007 to develop the natural gas market (both wholesale and retail) in Georgia. The company has been supplying and distributing natural gas throughout the country for many years. To date, SGG has invested more than $300 million in the development of gasification and gas infrastructure in Georgia ensuring that hundreds of thousands more families and commercial facilities have been able to use natural gas. Over the years, more than 250 thousand new subscribers have been connected to the gas network, and about 600 thousand gas subscribers in the country are currently serviced. At the same time, the company managed to reduce the level of gas losses in the Georgian gas distribution network by almost ten-fold (up to 3%).

Over the years of work in Georgia, SOCAR has invested more than $1.5 billion in various projects in the republic, and also delivered gas to all religious churches operating in Georgia for free.

Thus, SOCAR has firmly placed itself in the Georgian gas market and is clearly not going to give up its positions. A further increase in gas production from the Shah Deniz field and the upcoming commissioning of new gas fields in the Azerbaijani sector of the Caspian will make it possible for SOCAR to increase its own gas reserves and, accordingly, increase export volumes.

According to forecasts, announced by the Minister of Energy of Azerbaijan Parviz Shahbazov, in 2019 gas production in Azerbaijan will increase by 19% compared to last year, and its export - by 25%. “In 2021, the volume of gas production in Azerbaijan will reach 45 billion cubic meters per year. Growth in subsequent years will be due to the intensification of work on the development of Absheron, Umid, Garabagh gas fields, as well as Shafag-Asiman and Babek prospective structures in 2019-2020," the Energy Minister claims.

According to the estimates of the Ministry of Energy of Georgia made public in 2016, with the start of gas transit from Shah Deniz Stage 2, Georgia will receive an additional 5% of supplies, which will amount to 1.5 billion cubic meters of gas annually and can completely solve the problems with gas deficit in the country.

In this situation, it would be interesting to know how exactly Russian gas supplies can reduce Georgia’s energy dependence on Azerbaijan. The volume of Russian gas will be a drop in the sea compared with supplies from Azerbaijan, and the price for it is unlikely to be able to compete with Azerbaijan. By the way, Russian Gazprom is making concessions rather reluctantly and always with benefits for itself.