Why “Gazprom” Comes to Georgia: Energy Geopolitics Case

A story of launching a mild cooperation between Russian energy merger “Gazprom” leadership in name of its President of Director Council, Alexey Miller and Georgian government in name of Fuel and Energy Affairs Minister, Vice-premier Kakha Kaladze since September 2015. In 2016 in Brussels two VIP persons met in Brussels to discuss matter of cooperation between the parties. More in detail – During the meeting, the sides discussed the cooperation in gas sphere. They were talking about the supply of Russian natural gas to Georgia, as well as its transit to third countries .The negotiation was hold in very secret manner however soon it was discovered by the mass-media means. Georgia, by and large, needs only 2 billion cubic meters of gas annually. As it is known “Gazprom” supplied to Georgia about 0.3 billion cubic meters in 2014, this is about 25% of the Georgia’s consumption of gas and the rest is being supplied by the Azerbaijani merger that is also state-run energy corporation “SOCAR”. Moreover, Georgia receives about 0.5 billion cubic meters of gas as tax fee from the transit from the South Caucasus Pipeline. However, the tax fee condition for the accessible gas supply to Georgia expires a year later in 2016 and it means that Azerbaijani side could reconsider and change the fee conditions for Georgia. For commercial purposes, the Georgian government purchases about 1.2 billion cubic meters of gas mainly from Azerbaijani SOCAR merger and the prices is determined by the merger itself. The price is also changed due to the realms of geopolitical configuration and economic crisis erupted in Azerbaijan and in Georgia. In addition to that SOCAR partially monopolize the Georgian energy market and seeks to expand its activities in the country. However, main directions of SOCAR Georgia Gas activity comprise import into the Georgian market and sale of natural gas, as well as construction and rehabilitation of gas pipelines. Main revenues for the SOCAR merger comes from Shah-Denis gas deposit and ACG oil filed. As for gas supply to Georgia itself, the gas volumes for social consumption has been contracted for a fixed term, mainly for short-term period three-six months, upon to which gas retail price has not changed steadily in favour in no consumer country interests. Far more, SOCAR Trading, headquartered in Geneva, markets SOCAR crude oil export volumes from Ceyhan, trades third party crude and oil products and assists SOCAR with international investments in logistics, downstream and sales.  The Gas Processing Plant produces processed gas, liquefied gas and natural gasoline. In 2010, the plant produced 4 billion cubic meters of processed gas, 24,800 tons of liquefied gas and 26,700 tons of natural gasoline. Alongside with its field of activity in marketing and sales, SOCAR Trading assists SOCAR in expanding SOCAR’s assets as well.

Hence, it is clear that SOCAR is seeking to be a monopolist and dovetail to the Georgian national energy market not only in upstream but also in downstream chain. The case that SOCAR tries to monopolize the country markets indicates an interesting fact, notable, in July 2015, SOCAR subsidiary SOCAR Georgia Petroleum was fined by the Georgian Competition Agency for alleged price-fixing. It is noteworthy to underpin that the first fuel station of the company under the brand name SOCAR was opened in neighboring Georgia in 2008, before any in its home country. The fuel stations in Georgia are operated by the subsidiary of the company SOCAR Georgia Petroleum. As of 2014 there were currently more than 110 filling stations in Georgia making it the largest retail fuel station network of SOCAR. The negotiation process has been keeping on and second round of negotiation was hold in beginning of October of 2015. The shares in holding in two mega energy projects: Baku-Tbilisi-Ceyhan (BTC) and Baku-Tbilisi-Erzurum gas pipeline or South Caucasus Pipeline (SCP) is properly 25% and 16.7% i.e. pretty high.

However the second meeting fact between the parties, mean “Gazprom” and the Georgian government, was not confirmed by the government of Georgia. The parties have had absolutely different interests, missions and goals. Before trying to identify what are the parties true missions and goals and why the gas producer merger which holds all cycle of gas production: geological exploration, exploitation, production-processing, transit and selling i.e. commercial marketing with definition of price. The same rests for the ‘Gazprom” that is more non-transparent and corruptive corporations targeted with economic sanctions from the EU community and USA. It means that both “Gazprom” and SOCAR both are state-run mergers and monopolists of the energy markets not only at national but also at regional levels. The mergers could make their own deal and by doing so become oligopoly players at the energy market. At time being, not only Georgia is seeking to make a deal with the monopolist merger in aegis of the so-called “horizontal integral accord” style, like consumer-producer but also at the regional scope another type so-called “vertical integral accord” has been emerged between two monopolist mergers. Here is concrete evidence of the fact – based on Caspian Energy International Media Group information: “According to the official release by Gazprom, the parties discussed the issues of mutually beneficial bilateral cooperation in the energy sector. In particular, they negotiated resumption of natural gas supplies by Gazprom to Azerbaijan. It is noted that gas export will meet the growing needs of the republic in the energy carrier. Earlier in 2009, Gazprom and SOCAR signed the gas purchase-sale contract, under which supplies started in 2010. The addendum to the contract was signed in 2012. In 2013, the volume of natural gas supplies from Azerbaijan to Russia amounted to 1.4 billion cubic meters. In 2014, the volume of shipments fell to 0.21 billion cubic metres. No supplies were carried out in 2015”.  In addition to that Russian “Gazprom” and Azerbaijani SOCAR mergers could arrange so-called “SWAP” transaction deal and more tight control over energy market at the regional level as well as Azerbaijan and Russia geopolitical re-approachment strategy is in force and is underway. Certainly in 2015 the supplies not been carried out but this mean that it depends what Georgia and “Gazprom” make a deal on gas supply provision. From the Georgian perspective, the government is pending that country is in need of diversification of the energy deliveries and more enlarge the market segment. How Kakha Kaladze underpinned: “We should not depend on a single supplier. But larger gas supplies from the Russian Federation at competitive prices are not ruled out. Georgia would like to buy more Russian gas”. But this is very dangerous illusion as no one pays attention on next so-called “vertical integral accord” provisions agreed by two monopolist mergers. It seems that SOCAR is waiting for Georgia-Gazprom deal provisions and is aware of the deal ones. The deal was realized in real life when Georgian government in February of 2017 decided to refuse of free gas import from Russia and to pay cash for rest 10% of transit gas delivered by the ‘Gazprom” piped out to Armenia via Georgian territory. In addition to that Georgian government has signed up a distinct bilateral agreement with “Gazprom” on moving on full monetization in delivering Russian gas to Georgia. It is strange that the agreement has been put under Top Secret classification amid of its pure commercial characters. The monetization policy would be in force till 2019 when new agreement has to be arranged by the parties.

Moreover, Russian merger has its own interest to Georgia stemming from having availability to transit via Georgian territory gas produced and purchased in Iran, mainly from South Pars gas field where the “Gazprom” has its own commercial interests. Russian natural gas merger “Gazprom” announced at the end of 2016 that it was exploring ways to cooperate more closely with Iran in the energy sector. Gazprom chief Alexei Miller welcomed Iranian Deputy Vice President for Economic Affairs Ali Agha Mohammadi to Moscow to discuss bilateral energy issues. ‘The parties discussed the opportunities for Russia and Iran to develop cooperation in the oil and gas industry,’ the Russian company said in a statement. ‘Special attention was paid to the global energy market trends and the issues of strategic partnership within the Gas Exporting Countries Forum activities.’ The Russian merger “Gazprom” has played a role in the giant South Pars gas field off the coast of Iran since 1997. “Gazprom” has already invested in exploitation of the gas field more than $2 billion. The Pars Gas project could more profound strategic cooperation between Iran and Russia in energy security. Gas “South Pars” quite enough of it, especially if Russia compensates for its supply needs of northern Iran in power capacities.  Thus, along with the project of Russian-Iranian southern corridor cooperation between our two countries. For consideration: “South Pars” a northern (Iran) part of the gas field, which is located in the Persian Gulf to the northeast of Qatar. “South Pars” was opened in 1990. “South Pars” relatively easily accessible field, because it is at a shallow depth and close to the shore. As a consequence – the lowest cost of production. Operator of the development is the National Iranian Oil Company (NIOS). Actors in the development are Gazprom, ENI and Total. Gas from the “South Pars” sent through pipelines in Asaluye. “South Pars” covers an area of 3700 sq. m. km, it contains 8% of world gas reserves and 50% of the total gas reserves of Iran. The government of Iran has divided “South Pars” in 28 locations (phases). Natural gas production in 2012 amounted to 100 billion cubic meters. m. Oil production is over 5.5 million tons per year. Inventories “South Pars” are estimated at 14.2 trillion. cubic meters of gas and 2.7 billion tons (18 billion barrels).

Hence, “Gazprom’s” approach toward Georgia is determined with realms of energy geopolitics and is sought to be more focusing on global dimension rather than simply provide competitive energy supply to Georgia.

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