GEORGIA: BLUE FUEL AS A LEVER OF REGIONAL POLICY
Teimuraz Gochitashvili, D.Sc. (Technology), professor, Georgian Technical University (Tbilisi, Georgia)
Roman Gotsiridze, Ph.D. (Econ.), associate professor, Director, Parliamentary Budget Office (Tbilisi, Georgia)
1. The Myth About Cheap Russian Gas
Whenever political relations between Russia and Georgia take a turn for the worse, which seems to happen several times a year, the Russian authorities usually threaten to take “economic sanctions” against our republic. Recently these threats, promulgated by the mass media, have been assuming a note of hysteria due to the appearance of American military instructors in Georgia. The Russian authorities are being hypersensitive about the fact that U.S. specialists are training Georgian anti-terrorist units. They see the western alliance’s attempt to use our republic for conducting anti-terrorist operations as a pretext for extracting the country and the entire Southern Caucasus, as well as Central Asia, from under Russia’s monopoly control and influence.
The improvident comments by certain Russian politicians were crowned by a statement by the Russian State Duma (6 March, 2002) On the Situation in Georgia Regarding the U.S. Military Presence on its Territory. The Duma misunderstood Georgia’s intention to strengthen its own armed forces and make its contribution to the fight against international terrorism with America’s assistance.
The mentioned statement says that Russia will cooperate with the self-declared republics of Abkhazia and South Ossetia and “...deems it permissible for the Russian side to adopt unilateral measures to ensure the safety of the Russian Federation’s state border, including in cooperation with Abkhazia and South Ossetia.” In so doing, Moscow is essentially casting aspersions on Georgia’s territorial integrity and supporting the separatists, which contradicts the principles of good-neighborly relations between the states and the generally recognized norms of international law.
The Georgian parliament reacted to this statement as an unconcealed threat to the country’s territorial integrity, an attempt at gross interference in its internal affairs, and evidence of the fact that Russia sees Georgia as a zone of its influence.
In addition to supporting the separatist regimes in Abkhazia and South Ossetia, Moscow is resorting to economic sanctions as a tool for putting pressure on Tbilisi, in particular, energy levers. Almost 100% of the natural gas consumed in Georgia comes from Russia. In recent years, it has halted gas deliveries more than once supposedly for economic reasons, but in actual fact the motives were political.
Some Duma deputies, as well as Russian President Vladimir Putin, have stated on several occasions that Georgia receives gas at privileged prices, at a cheaper rate than in other CIS countries. These statements harbor an unconcealed threat to cancel such “privileges,” implying that Georgia will be delivered gas under “the same conditions” as everyone else.
What is the truth? Is the widespread opinion that blue fuel is delivered to Georgia at prices much lower than world prices a myth or reality, and is this an expression of goodwill on Russia’s part? The response is unequivocal: within the CIS, Belarus and Armenia receive Russian gas at the most privileged prices, whereas Georgia pays the highest rates. What is more, taking into account transit costs, the revenue from each thousand cubic meters of gas that Russia exports to European countries is less than the revenue obtained from gas deliveries to Georgia.
Prices for Russian Gas on the World Market
We will try to shed light on a few aspects of gas export and import in the Southern Caucasus, in other CIS states, and in some European countries. This will promote (to the extent possible) an objective evaluation of the current situation. This is not an easy task, since international export-import transactions are usually confidential, which hinders access to precise information.
Today, Russia essentially has a monopoly on natural gas deliveries to the Southern Caucasus and neighboring countries. Blue fuel is delivered from Russia (or via it) to Georgia, Armenia, Azerbaijan, Ukraine, Belarus, and the Black Sea and Balkan states (Turkey, Bulgaria, Serbia, and others). It is also one of the major gas suppliers to Central and Western Europe.
On the whole, gas is a specific product which requires special handling. In contrast to oil, it must have a particular infrastructure for its transportation, storage, and consumption, so it is not expedient to set fixed international prices on this commodity. It is more justified to talk about regional or local (within the country) prices. Correspondingly, the price of gas (again in contrast to oil) can significantly differ in countries or regions located next to each other, which is explained by the laws governing free market relations.
The Itera international group controlled by Russia essentially has a monopoly on gas deliveries to Georgia (local production has never exceeded 10% of the total volume of its consumption). Itera delivers blue fuel directly and via Sakgaz, a local affiliated company.
Until July 2001, its main consumer in the republic (which is very vulnerable from the social viewpoint) was the Tbilisi gas distribution system, which paid $50 per every 1,000 cubic meters of gas delivered to the country’s border. Payment was made in the calendar month following delivery, whereby previous debts were gradually paid off (during this time, the Tbilgaz Company owed Russian gas suppliers approximately $10 million). Beginning in April 2001, on Itera’s initiative, the Sakgaz Company joined the gas supply system, which raised the price of gas imported from Russia by $5-7. Beginning in October 2001, its cost increased to $56 per 1,000 cubic meters. In addition, all shares owned by local Sakgaz holders became the property of Itera. Of course, corresponding adjustments should also have been made to the tariffs (in the same way as in Bulgaria after the events of 1998). At that time, the Russian side became owner of 100% of the shares of the former Topenergo joint venture, which lost the rights and obligations of an intermediary company. But in our case, Itera did not make these adjustments. Moreover, on its demand, beginning in March 2002, Tbilgaz only received blue fuel on the condition it made a prepayment and at the price of … $60 per 1,000 cubic meters.
In recent years, this republic, which is considered Moscow’s military and political bastion in the Southern Caucasus, has been receiving gas only from Russia through Georgian territory. In 2001, it paid $53 per 1,000 cubic meters, and in 2002 (according to the information sources), $55. Despite the cheap rate (compared with Georgia), Armenia is looking for alternative sources of gas deliveries. In particular, it is looking at the possibility of obtaining gas from Iran, although its high cost ($84 per 1,000 cubic meters) is inclining it toward the possibility of buying gas in Turkmenistan at $40-42 per 1,000 cubic meters (by pumping it through Iran; according to experts’ estimates, transit costs will be no more than $10 per 1,000 cubic meters).
As we can see, Armenia pays less for its gas than Georgia. And this is keeping in mind that Georgia receives gas from Russia, 10% of the volume of gas delivered to Armenia, by way of transit payment. In other words, the cost of gas for Armenia should be at least 10% higher than for Georgia (approximately $66 per 1,000 cubic meters).
According to Energobiznes (No. 8, 26 February, 2002), in 2002-2004, Itera will deliver 4 billion cubic meters of gas annually to this republic at $52 per 1,000 cubic meters. According to some information sources, if the prepayment deadlines are not met, the price could increase to $56. According to experts, deliveries at this reduced price is due to the fact that exported Azeri oil will load the Baku-Novorossiisk pipeline to full capacity, which is of great political significance for Russia. It intends to use this factor to convince the international community that the northern route is now hazard-free.
In 2002, the country will receive 16.5 billion cubic meters of gas at $18.6 per 1,000 cubic meters (see: FSU Oil & Gas Monitor of 5 February, 2002), and in 2001, it paid $30 per 1,000 cubic meters. It should be noted that until 1999, Belarus received gas at $51 per 1,000 cubic meters, which was approximately equivalent to the price on the CIS market at that time. The republic was granted the current privileges after it essentially became Russia’s satellite.
Russia claims that it is guided only by economic considerations in the export of blue fuel. If we believe this, it is logical to conclude that gas prices should be higher than the suppliers’ outlays (in this case—Russian companies). Correspondingly, their revenue from selling gas on the border of importer states should, according to the most modest estimates, constitute the actual price minus $18.6 per 1,000 cubic meters. This is if we theoretically assume that Russia is delivering gas to Belarus at cost. But this is impossible, and it is obvious that despite this low tariff for Belarus, Russian companies are still gaining a certain amount of profit from delivering gas to this country. If we apply the same calculation method to Georgia, the difference would amount to $41.4 per 1,000 cubic meters ($60 minus $18.6). It is evident that in reality, when setting different prices on its borders with such countries as Belarus, Armenia, Azerbaijan, and Georgia for the gas delivered to them, Russia is primarily guided by political motives.
It is worth noting that according to Neftegaz.RU, Belarus is more than 12 months behind in its debt payments for Russian gas. By way of comparison, we will note that until recently, Georgia paid for its gas deliveries in full during the calendar month following receipt, and since March 2002, Itera, as we mentioned above, has been demanding prepayment.
In the recent past, Ukraine bought gas in Turkmenistan for $38 per 1,000 cubic meters, to which transportation costs were added on Russian territory (an average of $0.8-1.0 per 1,000 cubic meters for pumping a distance of 100 km), which was recorded as Kiev’s debt. By way of compensation, Ukraine allowed Russian gas being exported to Europe to pass through its territory. Beginning in 2002, Kiev plans to buy 40 billion cubic meters of Turkmen gas at $42 per 1,000 cubic meters every year, paying for only 50% of the deliveries in currency (the rest in goods).
Some of the country’s enterprises are receiving gas from Russia under direct contracts. For example, according to the data of February 2002 (see: Energobiznes, No. 8), the Ukrainian Novas Company receives gas from Itera at $56.5 per 1,000 cubic meters (under prepayment conditions) and from the Basco Company at $56—62 per 1,000 cubic meters (the payment term is set by negotiations), and the Mironovsky Khleboproduct Company receives gas from Turkmenistan (pumped through Russia) at $57 per 1,000 cubic meters with prepayment.
It should be noted that according to Neftegaz.RU, Ukraine’s debt on Russian gas amounted to $1.3 billion by 2001. What is more, Kiev makes its final payment (as does Minsk) 12 months (and more) after delivery.
Central Asian Countries
Some countries of the region (Kyrgyzstan and Tajikistan) do not have enough fuel resources, whereas others, due to the special features of their territorial location (Kazakhstan), prefer to receive gas from neighboring Central Asian republics. The average price for it is approximately $42 per 1,000 cubic meters. It should be noted that in 2001, Itera bought Turkmen gas at $40 per 1,000 cubic meters, paying for 50% in currency.
Ankara receives Russian gas via Ukraine, Rumania, and Bulgaria. According to the available information, the price for it fluctuates between $90—120 per 1,000 cubic meters. There are no precise data on transit costs, but some sources maintain that Ukraine kept approximately 29% of the gas pumped through its territory as payment for this transit (in 1999, it obtained 34.5 billion cubic meters for the transit of 119 billion cubic meters of Russian gas).
Rumania is paid $3 per 1,000 cubic meters per 100 km for the transit of gas to Bulgaria, and Bulgaria receives approximately $1.65 by way of transit payment (this is also a privileged price, along with other privileges, such as the price of gas delivered to Bulgaria). On this basis, it can be concluded that Russia’s percentage in the revenue received for gas delivered to Turkey (of the $90-120 per 1,000 cubic meters mentioned above) amounts to no less than $55-75.
According to Neftegaz.RU, Russia plans to supply Turkey with 370 billion cubic meters of gas via the Blue Stream Pipeline over a span of 25 years, for which it will receive $25.3 billion, that is $68.4 per 1,000 cubic meters.
In 2002, Gazprom will supply Serbia with 2.6 billion cubic meters of blue fuel at $105-110 per 1,000 cubic meters, although this country owes $300 million for previous deliveries. If we keep in mind that when pumping gas to Serbia, three transit countries must be crossed (Ukraine, Rumania, and Bulgaria), Russia’s share of this $110 amounts to no more than $60-70.
According to the International Energy Association, in 1996-2000, the average price of gas imported by Germany was $90 per 1,000 cubic meters with transit costs of $1.2 per 1,000 cubic meters per 100 km. In the same way as its deliveries to Turkey, it can be established that for this period (transit through Ukraine, Slovakia, and the Czech Republic—approximately 2,200 km), Russia’s clear profit fluctuated between $50-60 per 1,000 cubic meters.
Transportation expenses, as was mentioned above, amount to $1-1.2 for pumping 1,000 cubic meters 100 km. For example, if it is 2,200 km from Russia’s border to Germany, the transit cost per 1,000 cubic meters of gas is $22-26. Thus, if gas costs $90 on the German border, its price on the Russian border would amount to only $64-68.
In 1996-2000, the cost of gas delivered to this country from Russia amounted to approximately $87 per 1,000 cubic meters, which, taking into account transit through at least four countries (approximately 3,000 km), brought Moscow less revenue than its sale on the border at $50-60 per 1,000 cubic meters.
Price of Gas Exported from Russia on the Border of the Recipient Country in 2002
(in USD per 1,000 cubic meters)
||Price of gas on the border of the recipient country
||Proposed price for gas without transit costs (or total revenue of the gas company after compensation of transit costs)*
|Russia (on the domestic market)
||57-60 (Turkmen gas)
||42 (Turkmen gas)
||56-62 (Russian gas)
||56-62 (Russian gas)
|Central Asian countries
* Prices without transit costs were calculated by the authors.
Prognosis for the Near Future
The project for delivering Caspian gas (mainly from the Shakh Deniz field located in the Azeri sector of the sea) via the Baku-Tbilisi-Erzurum pipeline system to the countries of the region, Turkey, and Europe is thought to be extremely promising for the Southern Caucasus. Implementation of this project will help to diversify gas supply of the regional markets and significantly raise their energy safety.
Georgia is seen not only as a transit country, but also as a consumer in this project. In this respect, the republic will be able to obtain the amount of gas it needs (at any of the four points on the Georgian section of the pipeline agreed upon in advance). By way of transit payment, it will receive 5% of the amount of Azeri gas transported through its territory, the price of which amounts to $50 per 1,000 cubic meters, with the right to either obtain this gas or request compensation of its cost (or part of it) in currency. In addition, Georgia will have the right to buy gas (0.5 billion cubic meters a year) at a special price ($55 per 1,000 cubic meters) with an annual increase of 1.5% for 20 years from the time the route goes into operation.
In just forty years of the pipeline’s operation, Georgia will obtain approximately 50 billion cubic meters of gas by way of transit payment, and a total of approximately 58.8 billion cubic meters of gas, including its purchases at the special price.
The gas to be produced at the Shakh Deniz field is calculated taking into account its heating value of 8,500 kcal per cubic meter, which is 6% higher than the heating value of Russian gas (8,000 kcal). And on the whole, the price of Azeri gas is also essentially 6% cheaper. Correspondingly, it is possible that beginning in 2005, blue fuel will start coming to Georgia which will provisionally cost $49—52 per 1,000 cubic meters, compared to Russian gas. This will also have a favorable effect on the level of local gas prices.
Georgia would prefer to receive transit payment in kind and not in currency (in the latter case, the tariff is set at $2.5 per 1,000 cubic meters with a 2% annual increase). It will be able to sell this gas on the domestic market and accumulate the revenue obtained in its state budget. In this respect, relevant changes must be made to the legislative base, the necessary monetization mechanisms created, and efficient administration and strict state control over the system for using the gas obtained as transit payment established.
The appearance of an alternative source of natural gas will make it possible to significantly balance out the current deficit of fuel and energy resources, regulate their prices on the domestic market, and supply power engineering and other branches of the economy and population with a relatively cheap and environmentally friendly fuel. This in turn could become a significant factor in the country’s stable development.
As the analysis shows, in the CIS economic space, the cost of gas imported from neighboring countries in 2000-2002 amounted to $18—60 per 1,000 cubic meters. When exporting it to neighboring countries, Russia was mainly guided by political factors, delivering blue fuel at more privileged prices to Belarus and Armenia and at higher prices to Georgia.
The revenue Russia received for gas delivered to France and Germany during the past five years (including transit costs) was less than it received for blue fuel exported to Georgia. The revenue received from other countries, such as Serbia and Turkey, fluctuated between $55-75 per 1,000 cubic meters. In this way, the assertion that Russia supplies Georgia with gas under supposedly exclusively privileged conditions does not correspond to the truth. In addition, Russian companies are setting tougher delivery conditions for Georgian consumers than for other countries. For example, Itera demands prepayment, while other countries can delay delivery payments for up to a year (Belarus, Ukraine). In addition, Itera has introduced its own resident company (Sakgaz) into the delivery chain, which raises the cost of gas for our republic by at least 10%. At the same time, in other countries (Bulgaria), the resident company lost the privileges of supplier under an official contract.
At the moment, Russia is the only exporter of gas to Georgia, and Tbilisi should take this factor into account in its relations with this country. In time, when Moscow is likely to lose its monopoly position on the Georgian market, the wholesale price of gas will be established under very advantageous conditions for our republic.
2. Prospects for Delivering Caspian Hydrocarbon Resources to the International Market
After the terrorist acts of 11 September, complications may arise in delivering hydrocarbons from the Middle East and other traditional sources. Taking into account the U.S.-led anti-terrorist operation of the international coalition, it is expedient for the West to reduce the world market’s dependence on the resources of the Arab countries and Iran as much as possible, and thus prevent a new energy crisis.
Under such conditions, Russia, which is one of the three largest world oil exporters and the top natural gas supplier to Europe, intends to gain a firmer foothold on this market. Its goal is to make itself the main administrator of the raw hydrocarbon export potential in all the republics of the former U.S.S.R., including those of the Caspian Basin.
According to this scenario, Russia will be able to restore economic and political control over the Southern Caucasus, which would be extremely detrimental to the West’s strategic interests. Moscow will be able to slow down investments and the assimilation of new oil and gas fields in the countries of the region and prevent them from creating an export-transit infrastructure without Russia’s involvement. In the very near future, this could undermine the reliability of supplying Europe with energy resources.
In this situation, the Caspian-Black Sea region is acquiring immense significance for the entire international community as an additional source of energy resources. Due to the specifics of their territorial location (the distance of the fields from the main offshore zones and from major consumers), Caspian energy resources have been unable to compete properly with the oil supplied by the Persian Gulf and the Middle East as a whole. Taking into account the current global military-political situation, providing alternative supplies of hydrocarbons from the Caspian-Black Sea Basin to Europe and the entire western world is becoming a task of strategic importance. Successful handling of this task could provide significant guarantee of international economic and political stability.
Under these conditions it is expedient to deliver hydrocarbons to the world market from the Caspian fields using the land and sea routes at the disposal of the Black Sea countries instead of using the widespread system of oil and gas export to the Middle East and other OPEC countries or accepting Russia’s proposal to replace these deliveries with its own energy resources. In this way, relying on its special geopolitical location and coalition with the countries of the Caspian-Black Sea region, Georgia has the unique opportunity to use the major oil and gas pipelines, sea terminals and storehouses which already exist, are being built, or are being planned for the future. With corresponding political and financial support from the West, the country will be able to provide guaranteed deliveries of Caspian hydrocarbons to the international market. In addition, this will significantly promote its successful integration into the world economy.
The technological and economic prerequisites and means for implementing this idea can be briefly formulated as follows: in the next two decades, Europe’s demand for oil imports will probably increase by 120-130 million tons (from 718 million tons in 2000 to 840-850 million tons in 2020). What is more, 80% of its total consumption will be covered by deliveries from other regions.
The proposed increase in natural gas consumption during this period in Europe (including Turkey) is even more impressive, from 470 billion cubic meters in 2000 to 800 billion cubic meters in 2020, with 62-65% of this volume (430-450 billion cubic meters) being imported from other regions (see Table 2).
Projected Demand of Natural Gas
The Caspian fields will also be able to satisfy the predicted demand as the energy resource supplies in the North Sea are exhausted, which, taking into account the factors noted above, is extremely rational both from the economic and the political point of view. The total export potential of the region’s oil fields (Azerbaijan’s Azeri-Chirag-Gunashli, Kazakhstan’s Tengiz, Karachaganak, and Kashagan, Russia’s Severnoe, and so on) amounts to 185-200 million tons a year, and in terms of natural gas, to 120-150 cubic meters a year (see Fig. 1).
The throughput capacity of the export oil terminals on the eastern and northeastern coasts of the Black Sea (Batumi, Supsa, Kulevi, Tuapse, Novorossiisk, Novoozerovka, Odessa, and Pivden), which are intended for Caspian oil, amounts to approximately 120-140 million tons a year, which means that land routes must also be activated. In addition, in some ports, there may be much more oil than the throughput capacity of their terminals can handle. The terminals on the eastern and northeastern coast of the North Sea, which are connected to the Baku-Tbilisi-Ceyhan oil pipeline by land routes, as well as the connection via the trans-Caspian pipeline between the North Caspian fields and Baku, will make it possible to rationally redistribute the flow and fully realize the fields’ potential. The total throughput capacity of the terminals on the western coast of the Black Sea-Constanţa, Burgas, Odessa—is equal to approximately 40-50 million tons a year. By connecting their land routes to ports in the Mediterranean and the Baltic (Alexandroúpolis, Vlorë, Trieste, and Brody-Gdansk), to the Turkish oil refining complexes which are only loaded to 50% of their capacity, and to the complexes of Southeast European countries, it will be possible to create the most economic and reliable delivery route of Caspian oil. It should also be kept in mind that the maximum throughput capacity of the Straits is approximately 150 million tons a year (Caspian oil will account for 50 million tons a year of this amount), thus developing the capacity of the deep-water Ceyhan terminal (50 million tons) will give the new routes additional advantages.
Fig. 2. Gas Consumption in Georgia (historical and forecasted), mil. cub. m
In contrast to oil, the delivery and storage of natural gas (due to inevitable seasonal fluctuations in its consumption) require a special infrastructure. This calls for extremely high initial investments. Therefore, to deliver Caspian gas to the markets of Europe and Turkey, new routes will have to be built, old ones reconstructed and rejuvenated, and regional integrated systems for reversing and mutually substituting gas flows activated, as well as storehouses built. Thus, in order to take maximum advantage of the export potential of these fields, construction of the pipeline system (Baku-Tbilisi-Erzurum) must be completed; the Azeri Shakh Deniz field assimilated within the planned deadline; deliveries of Turkmen gas to Turkey and on to Europe via the trans-Caspian routes and the South Caucasian pipeline system organized, taking into account their further development; the Dzhubga compressor station on the Blue Stream route in the Russian Black Sea region must be connected up with the main Georgian gas pipeline in Sukhumi, and Georgia’s main pipeline connected via the Batumi-Khopa-Samsun section with Turkey. In addition, the Karadag (Azerbaijan)-Tbilisi route will have to be restored; the Transcaucasian gas pipeline to Erzurum extended (sub-alternative—through Armenia); and gas storage tanks in the transit and consumer countries assimilated as much as possible to avoid the negative effects caused by the imbalance between production and seasonal consumption of blue fuel. What is more, the network in Central Asian countries will have to be reconstructed, and the existing gas pipelines Turkmenistan-Iran and Iran-Azerbaijan activated, in addition to the Iran-Armenia route under construction.
If these projects are implemented, they will provide prerequisites for diversifying and mutually substituting the Caspian, Russian, and Iranian production sources and hydrocarbon resource delivery routes. This will ensure reliable supply of the international energy resource market, prevent any state from gaining a hegemonic position and the negative economic and political consequences associated with it in supplying Europe with strategic energy resources, and promote the settlement of local conflicts. And most important, it will help to coordinate the interests of Russia, Turkey, Kazakhstan, Turkmenistan, Armenia, the Balkan countries, and the GUUAM states (Georgia, Ukraine, Uzbekistan, Azerbaijan, and Moldova), as well as promote their integration into the global economic space. This is one of the main conditions for the stable sociopolitical and economic development of these regions.