Global Insight Perspective | |
Significance | Gazprom stated it had signed three contracts with Georgian officials for a total of 1.1 Bcm of gas at a price of US$235 per 1,000 cm—more than double the price of US$110 per 1,000 cm that Gazprom charged Georgia in 2006. |
Implications | Georgia had called the steep price increase an attempt at "political blackmail", although the country appears to have relented to buy at least some Russian gas at the higher price, while diversifying suppliers to receive gas from Azerbaijan in 2007 as well. |
Outlook | Despite the chilly political relations between Russia and Georgia, the two countries are still dependent on each other, resulting in an apparent compromise deal that provides Georgia with some higher-priced gas while ensuring Russian gas exports to Armenia via Georgia. |
A Necessary U-Turn
Considering the frosty relations between the Georgian and Russian governments, a compromise deal on gas prices and supplies in 2007 was somewhat unexpected. However, that is apparently just what the two sides reached on Friday (22 December), heading off a potential cutoff in Russian gas to Georgia (and, perhaps more importantly for Gazprom, to Armenia via Georgia) from 1 January. Gazprom export chief Alexander Medvedev said that the two sides had signed three deals, covering a total of 1.1 Bcm of gas at a price of US$235 per 1,000 cm—more than double the US$110 per 1,000 cm that the gas giant is charging Georgia this year.
Georgian officials balked at the steep price increase when it was first announced in early-November, accusing the Russians of "political blackmail", through punishing Georgia for its independent foreign policy with higher-priced gas imports. Over the past seven weeks, however, Georgia's attempts to diversify its gas suppliers in 2007 have run into a series of problems, partly as a result of neighbouring Azerbaijan's decision to forego higher-priced Russian gas as well. With Georgia counting on more Azeri gas supplies to meet its import gap, Azerbaijan's decision to keep more gas at home for its domestic market seems to have pushed Georgia into accepting Gazprom's price demand—at least for a portion of Georgia's gas needs next year.
Still, Georgian prime minister Zurab Nogaideli said that Azerbaijan will be Georgia's main gas supplier next year, with Georgia taking some gas from Azerbaijan via the recently launched Baku-Tbilisi-Erzurum (BTE) pipeline. A deal with Turkey to buy a portion of its quota of Azeri Shah Deniz gas could also reduce Georgia's need for Russian gas. Georgia says it needs 1.7 Bcm of gas in 2007, but the 1.1 Bcm of gas covered by the Gazprom deal may not all be for Georgia. Although details are somewhat sketchy, some of this gas may be actually slated for delivery via Georgia to Armenia, meaning that Georgia will not be taking as much gas from Gazprom as it seems.
Outlook and Implications
Medvedev said that the gas deal with Georgia only runs to the end of the first quarter, suggesting that Georgia is still keen to avoid paying Gazprom's price once the winter heating season ends. With the Shah Deniz field temporarily halting gas production on Friday for technical checks—Georgian television reported that the pipeline from Azerbaijan was hit by a terrorist attack, with gas supplies expected to be disrupted for several weeks as a result—the gas deal with Gazprom appears to be a backstop for Georgia, to make sure it has sufficient gas in the first three months of the year, even if it has to pay a price that it had previously been unwilling to pay; indeed, Gazprom announced earlier on Friday that Georgia was silent on the proposed price offer, with the gas giant adding that it assumed Georgia wanted no gas from 1 January.
For Gazprom, the deal with Georgia, even if temporary, avoids another showdown with a neighbour over gas prices and supplies, thereby allowing the gas giant to avert another potential black mark on its reputation as a reliable supplier. The agreement with Georgia should also ensure a steady flow of Russian gas via Georgia to Armenia—at least for the time being. With Russia already having signed a gas supply deal with Ukraine for 2007, and Gazprom slated to sign a final price and supply deal with Moldova on 28 December, the Georgia deal eliminates a potential New Year's headache for the Russian giant. However, a recurring dispute with Belarus over plans for a gas transportation joint venture, and Gazprom's efforts to impose a major price increase on Belarus, could yet leave Gazprom with a major hangover on 1 January if no compromise deal is found before the end of the year.
Related Articles
- CIS: 22 December 2006: Russian Gas Supplies to Armenia Via Georgia Resumed
- CIS: 20 December 2006: Azerbaijan, Georgia Stand Firm in Battle of Wills with Russia over Gas Prices and Supplies
- Azerbaijan: 19 December 2006: Negotiations Continue in Share-Out of Shah Deniz Gas from Azerbaijan
- Azerbaijan: 18 December 2006: Shah Deniz Starts Commercial Production, Turkey-Greece Pipeline Onstream in May 2007
- Azerbaijan: 13 December 2006: Azerbaijan Says it Will Forego Russian Gas Supplies from January
- Turkey: 11 December 2006: Ministers Meet to Redistribute Turkish Quota of Shah Deniz Gas Between Azerbaijan and Georgia
- Georgia: 30 November 2006: Russian Gas Price Hike Raises Risks, but Unlikely to Cripple Georgian Economy
- CIS: 23 November 2006: Russian Gas Price Increases, Supply Plans Trigger Energy Scramble in Caucasus
- CIS: 9 November 2006: Georgian PM Rejects Russian Gas Price Hike as "Political Blackmail"
- CIS: 3 November 2006: Gazprom Proposes Doubling of Gas Prices for Georgia in 2007; Other Ex-Soviet Countries Also Face Increases