Global Insight Perspective | |
Significance | Rather than accept one-third of the gas imports it had originally sought from Russia in 2007, Azerbaijan, like its neighbour Georgia, is now refusing to pay Gazprom's asking price of US$230 per 1,000 cm for Russian gas supplies as of 1 January. |
Implications | The decision by Azerbaijan to forego Russian gas imports altogether has put added pressure on Georgia to reach a deal to buy more Azerbaijani gas from Turkey or face higher-priced Russian gas. |
Outlook | A share-out between Azerbaijan and Georgia of a portion of Turkey's quota of gas from the Shah Deniz field could resolve the supply-balance problems for both Caucasus countries, although Georgia may yet use some of its leverage as a transit state for Russian gas exports to Armenia in order to try to bring down the price of Russian gas supplies. |
Regional (Gas) Balancing Act
With the recent commissioning of gas supplies from Azerbaijan's Shah Deniz field, the gas supply woes of Azerbaijan and Georgia may soon be resolved (see "Related Articles"). After Gazprom, the Russian gas giant, said last month that it planned to more than double—from US$110 per 1,000 cm at present to US$230 per 1,000 cm—gas prices for Georgia in 2007, the Georgian government was sent scrambling for alternative sources of supply. Yet, while counting on additional gas supplies from the Shah Deniz field and the Baku-Tbilisi-Erzurum (BTE) pipeline under a 2001 supply agreement finally coming into force, Gazprom's decision to cut by two-thirds the volume of its gas exports to Azerbaijan in 2007—along with a parallel increase in price—put Georgia's supply balance back into peril, with Azerbaijan planning to consume more of this Shah Deniz gas at home.
Although negotiations between Georgia, Turkey, and Azerbaijan on a redistribution of planned 2007 Shah Deniz gas quotas are continuing, the Georgians have come under additional pressure with the Azerbaijani decision last week to forego any Russian gas imports next year. Gazprom's strategy—forcing Azerbaijan to pay more for Russian gas imports or prod the Azeris into cutting Shah Deniz exports in order to supply the domestic market—has thus far worked like a charm…for the most part. Although Azerbaijan swallowed hard and decided to cut back on its planned gas exports, thereby keeping Georgia under pressure and limiting the volume of Azeri gas competing with Russian supplies in the Turkish market, Azerbaijan's decision not to import any Russian gas next year could see Gazprom's strategy backfire.
Indeed, not only is the Russian gas giant now not going to receive the US$230 per 1,000 cm for 1.5 Bcm of gas that was to be sent to Azerbaijan (although, alternatively, this frees up more gas for Gazprom theoretically to shore up its European supply commitments), but the Georgians have shown little willingness to play ball with Gazprom either. The start-up of the Shah Deniz field, which is expected to pump out around 8.4 to 8.6 Bcm of gas in 2007, has given Georgia hope of meeting its own supply needs without having to pay extra for Russian gas. With Turkey already over-contracted for gas and looking to unload some of its quota (6.6 Bcm/year) of Shah Deniz gas under a 2001 supply deal, Georgia is eager to buy up a portion of that share.
Azerbaijan's decision not to import Russian gas in 2007 complicates Georgia's efforts to secure its own supply needs, but the issue now boils down to the need for a deal between Turkey and Georgia on a reported 0.8 Bcm of gas next year—hardly a major stumbling block between neighbours keen to improve co-operation. Georgian President Mikhail Saakashvili yesterday arrived in Turkey for several days of talks, with a gas deal high on the agenda, and all signs point to an agreement being signed before the Georgian president returns home. Azerbaijani Energy Minister Natik Aliyev said earlier this week that Azerbaijan wanted financial guarantees from Georgia before committing to supplying it with more Shah Deniz gas, and while there are still unresolved questions over the price that Georgia will pay (Azerbaijan is reportedly selling gas from Shah Deniz at just US$58 per 1,000 cm) and whether Georgia will repay Turkey with higher-priced gas in the future, these are obstacles that should be easily overcome.
Outlook and Implications
In what could be a safeguard for Georgia in the event that it cannot reach a deal with Turkey and Azerbaijan on a redistribution of Turkey's Shah Deniz gas quota, the Georgians may still have some leverage to exert if they come back to the table to negotiate with Gazprom. Since all Russian gas exports to Armenia must pass via Georgia and the North Caucasus-Trans-Caucasus pipeline, Georgia has a card left to play. Perhaps not coincidentally, a rupture on the main trunk pipeline over the weekend has put Russian gas supplies to Armenia—which earlier this year agreed to a deal with Gazprom to lock in gas prices until 2009—at risk.
Gazprom spokesman Segei Kupriyanov said yesterday that Russian gas exports to Armenia via Georgia have been interrupted over the past few days due to the burst pipeline, noting that "it is obvious that if repair work drags out for an extended period Armenia could be without gas in its underground storage tanks this winter". The reason for the break in the Georgian section of the pipeline is still unknown, but in lieu of the tense relationship between Georgia and Russia and the lack of an agreement over gas prices for 2007, it may be the case that Georgia is trying to use the same sort of "energy blackmail" tactics against Gazprom that the Russian gas giant itself was accused of using in the Ukraine gas dispute earlier this year.
Georgia could use the repair of the transit pipeline as leverage in negotiating down the price of gas imports from Russia for 2007, although it would do so at its own peril, as Russia has other economic policy instruments with which to pressure Georgia. Still, while the Russian government has given its full backing to Gazprom's policy of increasing gas prices for ex-Soviet states, the Russian gas giant may end up supplying little gas—if any—to Georgia and Azerbaijan at its desired price in 2007 as a result.
Related Articles
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
Georgia: 13 December 2006: Azerbaijan Offers Gas to Georgia Although Own Supply Problems Persist
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
CIS: 7 April 2006: Armenia Strikes Deal to Freeze Russian Gas Prices, Cede Gas Assets to Gazprom