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Gazprom’s Victory: Russian Gas Giant to Pay Money for Gas Transit via Georgia

Georgia has accepted the offer of Russian gas giant Gazprom. As a result, the gas transit via Georgian corridor will be paid in money, instead of previous natural gas.

Minister of Energy Kakha Kaladze noted that Georgia has obtained discount terms from Gazprom. If the country needs additional volume of natural gas, Gazprom will supply natural gas to Georgia for 185 USD per 1000 cubic meters, instead of previous 215 USD.

As a result of long-term negotiations with the Russian state company, under the 2-year agreement, mixed payment mechanism will run for the initial year, while the second year will be entirely oriented on money payment. According to government members, this offer is not unfavorable and in practice nothing changes for Georgia, while political opponents and a part of experts appraise the agreement as a step backward and unacceptable compromise.

“We are able to replenish seasonal deficit, if necessary, and receive additional volumes of natural gas for 185 USD instead of 215 USD per 1000 cubic meters”, Kaladze noted.

Starting 2018 Georgia will receive money payment for natural gas transit via main gas pipeline, instead of 10% volume of transited natural gas. The service will be paid in natural gas throughout 2017. Georgia’s dependence on Russia will not increase through this change, Kaladze noted.

“At the government meeting we discussed a final proposal by Gazprom concerning natural gas transportation to Armenia. The existing agreement validity expired on December 31, 2016. After negotiations of several stages, we have managed to obtain optimal conditions from Gazprom-Export, based on the existing circumstances. Government has analyzed this offer and took decision to sign this agreement. I would like to stress that by this agreement Georgia’s dependence on Russian energy carriers will not increase. Only the form of payment will change, namely, our service will be paid in money, instead of natural gas, in line with international practice. As to gas transit tariff to be paid to Georgia, it will be one of the highest one in Europe. I do not know their arguments as if we have agreed on cheap tariffs. International practice suggests to follow monetization practice. As to competitive tariffs, we receive almost the same result as in case with natural gas.

I reaffirm that we have taken an optimal decision, based on the current circumstances”, Kaladze noted.

According to information of Minister of Energy, Gazprom-Export is ready to sell additional volumes of natural gas to Georgia for 185 USD per 1000 cubic meters, instead of previous 215 USD.

Georgia’s main gas pipeline has transported total of 2.1 billion cubic meters of natural gas to Armenia in 2016, of which 0.3 billion cubic meters remained in Georgia.

It should be also noted that money payments for natural gas transit will be more unfavorable for Georgia, compared to payment in raw material, because there is no more favorable mechanism for  transit tariff payment than the raw material is.

Moreover, it should be also noted that Russia supplies natural gas to Armenia for lower tariffs compared to market prices. This signifies that Georgia will not receive adequate remuneration for gas transit so as to buy the corresponding volume of natural gas later. Therefore, this decision cannot be appraised as successful. However, government officials assert that the mentioned agreement was an optimal variant amid current situation.

Gazprom was trying to revise the existing agreement conditions even in 2016. In that period the Russian company set ultimatum that it would supply natural gas to Armenia from Iran if Georgia would not accept monetization mechanism. However, it is famous that 700mm gas pipeline’s capability between Iran and Armenia does not exceed 1 billion cubic meters a year, while Armenia consumes 2 billion cubic meters. However, negotiation process changed in March 2016, when SOCAR President and Kakha Kaladze signed agreement on growth in Azerbaijani gas supply to Georgia. And in 2017 Georgia accepted Gazprom conditions.

It should be also noted that the 2-year agreement conditions are classified and Georgian society cannot learn even the amount of tariffs. Therefore, it is unclear how much our country will be damaged of this new agreement. One thing is evident, this agreement cannot be appraised as a step forward.

By Merab Janiashvili
Economic Analyst
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