Gas Supply Balance Clarified

A tentative breakdown of Georgia’s gas import plan for 2007 has emerged, but the average price to be formulated by a combination of expensive Russian gas and relatively cheap gas from Azerbaijan still needs to be defined.

During the winter period, Georgia will receive most of its gas from Gazprom, while only one-eighth of its gas needs will come from Azerbaijan, Georgian Prime Minister Zurab Nogaideli told lawmakers on December 29 while presenting a draft 2007 state budget.

He said that an agreement has been reached with the Azerbaijani side over the delivery of 1 million cubic meters of gas per day during his visit to Baku on December 25.

The price of this gas will be USD 120 per 1000 cubic meters.

PM Nogaideli said that although 1 million cubic meters of gas is only one-eighth of Georgia’s entire gas consumption per day, “it is anyway a very important political and economic achievement” to have alternative gas supplies.

He also noted that this gas will not come from the Shah-Deniz field, saying that it “is from Azerbaijani’s other sources.”

Georgia has not yet received any gas from the Shah-Deniz field because of technical problems.  The date of the launch of Shah-Deniz gas to Turkey via Georgia is expected to be known by mid or late January, PM Nogaideli said.

He said that Georgia will “reduce and eventually stop” importing Russian gas as soon as technical problems are fixed at the drilling wells of the Shah-Deniz field. President Saakashvili made a similar statement on December 27.

But it is unclear how Georgia will stop importing Russian gas when Gazprom has already signed three one-year contracts and one three-month contract with companies in Georgia on the delivery of a total of 1,46 billion cubic meters of gas in 2007 for USD 235 per 1000 cubic meters. This amount is about 80% of Georgia’s projected gas consumption for next year.

The Georgian authorities have also not specified how Russian gas will be replaced, as there is not yet an agreement on the delivery of any additional gas from Shah-Deniz.

Opponents say that the Georgian authorities’ statements on the intention to stop Russian gas imports are for internal consumption and politically-motivated to allay the opposition’s criticism about the government’s failure to secure a timely gas-sharing agreement with Azerbaijan and Turkey over the allocation of additional Shah-Deniz gas.

Georgia, according to the original agreement signed in October 2003, will receive 250 million cubic meters from Azerbaijan’s Shah-Deniz field – 200 million of which is a fee for transit, and 50 million to be bought at the preferential price of USD 55 per 1000 cubic meters.

The Russian gas share of 1,46 billion cubic meters, along with the Shah-Deniz gas share of 250 million, plus 1 million cubic meters from Azerbaijani’s other sources per day during the winter period, already adds up to the total amount of gas – more than 1,71 billion cubic meters – needed for Georgia next year.

KazTransGaz-Tbilisi, a company distributing gas in the capital city, said it has a three-month long contract with Gazprom on the purchase of 200 million cubic meters of gas for USD 235 per 1000 cubic meters. KazTransGaz-Tbilisi will need 220 million more cubic meters of gas to cover Tbilisi’s projected entire gas consumption for 2007. This additional amount is expected to come from Georgia’s Shah-Deniz share after the field becomes operational.

It is not yet clear what the average gas price will be.

According to IMF estimates made in November 2006, an average price after combining gas from Russian and Shah-Deniz sources would amount about USD 191 per 1000 cubic meters. But this estimate was based on data available in November, when Gazprom’s plan was to charge Georgia with USD 230 per 1000 cubic meters in 2007. Since then Gazprom has increased the price by USD 5, so as a result the average price should be slightly more than USD 191 per 1000 cubic meters.

Gas distributor companies have already reportedly appealed to the Georgian National Energy Regulatory Commission (GNERC) to set new gas tariffs. GNERC is expected to announce the new tariffs in January.

GNERC chairman Giorgi Tavadze said on December 28 that the tariff will increase, but declined to specify details. Currently consumers in Tbilisi pay GEL 0,34 (approximately USD 0,19) per cubic meter of gas.
  
The revised draft of the 2007 state budget envisages additional funding of GEL 105,6 million over an earlier draft of the budget. Prime Minister Nogaideli told lawmakers on December 29 that additional funding for the Energy Ministry is the result of the government’s intention to allocate credit for gas distributing companies in Georgia to prevent a swift gas price hike for households starting from January 1, 2007.