Paper Analyzes Decision to Merge State Energy Companies

The Georgian daily Rezonansi (Resonance) reported on April 10 that Economy Minister Irakli Chogovadze issued a decree on March 21 on the establishment of the Georgian Oil and Gas Corporation Ltd. which will bring together three state-owned energy companies: the Georgian International Gas Corporation (GIGC – which controls the country’s trunk gas pipeline), the Georgian International Oil Corporation (GIOC) and the state oil company SakNavtobi.

According to the Economy Minister’s decree, Prime Minister Zurab Nogaideli, Energy Minister Nika Gilauri and Chogovadze himself are members of the newly set up corporation’s 7-member board. The paper writes that the process of merging the three state-run companies is expected to be finished this May.

In three separate articles, Rezonansi’s April 10 issue overviews legal and political aspects of the decision.

The paper suspects that “the extremely hasty and absolutely uncontrolled process of merger [of three state-run energy companies]” triggers doubts that the Georgian authorities are planning to privatize the country’s trunk gas pipeline, which receives gas at Georgia’s northern border with Russia, transports it to Georgia’s wholesale consumers and transits it to Armenia.

Rezonansi says that Russia may gain control over the pipeline through the “traditional way” – “shares [in energy facilities] in exchange for writing off debt.” The paper notes that the Russian energy giant Gazprom can shoulder the USD 104 million debt fellow Russian company Itera contends that Georgia owes it, as well as the USD 350 million the U.S.-based Tramex company claims it is owed by the Georgian authorities.

“As a result, Georgia will share Armenia’s experience, in particular, Gazprom will demand repayment of about USD 500 million in cash, or will take over the newly established Georgian Oil and Gas Corporation, which is much more attractive for Gazprom,” the Rezonansi says.

The paper notes that the decision to merge the three state-run energy companies may not be in legal compliance with the U.S. aid program Millennium Challenge Account (MCA), which has allocated USD 49.5 million for the rehabilitation of the trunk pipeline. The MCA compact signed between Georgia and the United States in September, 2005 forbids the Georgian authorities not only from privatizing the pipeline system, but also transferring, or selling controlling interest in the GGIC, which runs the trunk pipeline.

The newspaper says that after the new corporation is founded, the latter will officially be in charge of the trunk pipeline instead of the GGIC. But according to the Millennium Challenge Georgia Fund, what is most important in this regard is the fact that the trunk pipeline remains under state ownership, even after the new corporation takes it over.

Rezonansi also argues that the economy minister’s decree and decision to appoint himself, the prime minister and energy minister as the new corporation’s board members might also contradict the Georgian Constitution, which says that a cabinet member may hold no other position, except in a political party, and may not be involved in commercial activities.

But Deputy Economy Minister Kakha Damenia, who is in charge of overseeing the merger, told Rezonansi that there are no legal flaws in the decision. The law on entrepreneurship “allows public officials” to be a member of a company’s board. But legal expert Vakhtang Khmaladze says the law on entrepreneurship only refers to lower level public officials and not to high-ranking executive officials.