NO SHAH DENIZ GAS MEANS TOUGH CHOICES FOR GEORGIA

UNCLAS SECTION 01 OF 03 TBILISI 003399

SIPDIS

SIPDIS

STATE FOR EUR/CARC AND EB/ESC/IEC
COMMERCE FOR 4231 DANICA STARKS

E.O. 12958: N/A
TAGS: ENRG PREL GG
SUBJECT: NO SHAH DENIZ GAS MEANS TOUGH CHOICES FOR GEORGIA

REF: BAKU 1840


1. Summary: BP reported the delay in availability of Shah
Deniz gas to the Embassy on December 21. ACG associated gas,
which is now being re-injected to support oil production,
could supply up to 8.1 million cubic meters (cm) per day to
Azerbaijan and Georgia. However, the old pipeline from
Azerbaijan to Georgia can only handle 3.3 million cm per day,
without upgrading. How much the Shah Deniz pipeline could
supply depends on the capacity of a small input at the
Sangachal distribution center in Azerbaijan. Georgia (and
Azerbaijan) could reduce their dependence on natural gas by
using mazut, or heavy fuel oil, in electricity generation.
We estimate that using mazut in the three generating units at
Gardabani that can do so would cut Georgia's daily gas needs
by 3.4 million cm. The GOG estimates that mazut is more
costly than the $235 per thousand cubic meter price of
Russian gas, but they would be very interested in finding
cheaper supplies (possibly from Iraq) to burn at Gardabani.
Transport from Iraq could be difficult since there are no
direct rail connections from Turkey to Georgia.

2, On December 21, Embassy and USAID energy officers met with
Hugh McDowell, General Manager for BP's office in Tbilisi.
McDowell explained the problems reported reftel with the
annulus at the Shah Denis I gas well, which he said will
delay BP's ability to supply gas from the Shah Deniz field to
Georgia and Azerbaijan until "mid-February to mid-March". He
expects the other two Shah Deniz gas wells to come on line in
the second quarter of 2007. McDowell had informed Georgian
PM Noghaideli of the serious delay in gas supply from Shah
Deniz. This was important, he said, because Gazprom had
given Azerbaijan and Georgia until 3 pm on December 22 to
tell Gazprom how much gas the two governments intend to buy
from it in 2007. He added that in his understanding, Gazprom
is pressing this deadline in order to settle its plans for
distribution of gas domestically in Russia and to Europe.


3. Given the unavailability of Shah Deniz gas to meet
Georgia's winter demand this year, the conversation turned to
the "associated" gas, which is produced by the ACG oil wells
operated by BP and is normally used to maintain pressure to
lift oil from the wells. McDowell recalled BP's promise to
supply as much of this gas to Azerbaijan as Azerbaijan can
take, with the intention to help Georgia meet its needs.
According to McDowell, the ACG field can provide 1.1 million
cubic meters (cm) per day to Azerbaijan at an offshore oil
production facility known as "Oily Rocks". From there,
Azerbaijan can feed the gas into the Azerbaijani gas
distribution system. Another pipe carries ACG gas to the
Sangachal distribution center near Baku. There, a limited
amount of it is fed into the Shah Deniz pipeline, and the
rest is fed into the Azerbaijani system. The maximum
possible amount of this gas McDowell estimated at 8 million
cm/day. McDowell did not know how much gas can be fed into
the Shah Deniz pipeline, but the amount is limited by the
size of the intake at Sangachal.


4. Therefore, absent any gas from the Shah Deniz fields, the
amount of gas that could be available to Georgia from
Azerbaijan is the amount of ACG gas which can be fed into the
Shah Deniz pipeline, as yet unkown, plus the gas from the
Azerbaijani system which enters Georgia through one older
pipeline. That older pipeline has a capacity of 3.3 million
cm/day, and possibly, with repairs allowing higher pressure,
4-5 million cm/day. One potential problem McDowell pointed
out is that gas may not be able to be transported from
Eastern Georgia to Tbilisi and Western Georgia due to the
design of the distribution system, separating the country
into "islands".


5. On December 20, the Embassy's Energy Officer visited
Gardabani, where all of Georgia's thermal generating capacity
is located. Four units operate there: a combined cycle gas
turbine (CCGT) owned by Energy Invest, with investment from
Russia's Vneshtorgbank, two older units (numbers 3 and 4)
owned by the state in the form of the state-owned company
Tbilresi, and unit 9, owned by Russia's RAO-UES, operating as
Mtkvari Energy. The CCGT cannot run on mazut (Heavy Fuel
Oil),only gas or diesel fuel. Units 3, 4 and 9 can run on
mazut or on a mazut/gas mixture. There is storage for 40,000
tons of mazut owned by Tbilresi, which is now empty. Another
160,000 tons of storage exists but is not operational.
RAO-UES has no storage capacity, and also lacks the heating
capacity needed to make the mazut flow into the burners.
However, since units 3,4, and 9 were all part of the same
complex at one time, connections exist which could allow unit

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9 to burn mazut if storage and heating tasks were shared by
Tbilresi. Information on these units in tabular form follows:

Unit Size Daily Gas Consumption Daily Mazut
Consumption

CCGT 110 MW 742,000 Can't run on Mazut
630 tons diesel (USAID estimate)
Unit 3 130 MW 1 million cm 1000 tons
Unit 4 130 MW 1 million cm 1000 tons
Unit 9 250 MW 1.4 million cm 1560 tons

These figures are as reported by the operators we met at
Gardabani.


6. The Energy Invest CCGT turbine is now built to run on
only one cycle. With an additional investment of $50
million, the exhaust gases from the turbines could be trapped
and used to heat water for steam, turning additional turbines
and generating an additional 40MW of electricity for the same
input of gas or diesel. The President of Energy Invest, Geno
Malazonia, said that he was not negotiating with Gazprom for
supplies but was waiting for the outcome of the
Georgia-Turkey-Azerbaijan negotiations on Shah Deniz (now
virtually a moot issue).


7. Tbilresi is in bankruptcy, but still operating under a
workout arrangement. Mazut has not been burned in units 3
and 4 for more than six or seven years, we were told by its
manager, Valeri Lomtatidze. A rail link to units 3 and 4 for
delivery of mazut is not operational but is expected to be
working by December 27. Tbilresi also controls two more
non-working units at Gardabani, numbers 7 and 8. If they
were refurbished, the Tbilresi manager said, they could
produce a total of 750 megawatts. Fixing unit 8 alone would
cost 7-8 million. In the last two years, $15 million was
spent on units 3 and 4 to repair and upgrade them. Units 3
and 4 work only from October to March.


8. RAO-UES's executive director was in Moscow, talking to
Gazprom, when we visited. Therefore, we talked to Nodar
Zakaidze, chief engineer. Like units 3 and 4, unit 9
operates from September to April. Zakaidze was concerned
that if the cost of gas is significantly higher, the GOG
energy regulator will have to permit RAO to raise the price
of electricity to its customers.


9. On December 22 we met with Archil Mamatelashvili, Deputy
Minister of Energy. Mamatelashvili said that Minister
Gilauri was returning from Turkey early on the morning of
December 23. He understood that a deal on Shah Deniz gas has
been reached between Turkey and Georgia, but did not know any
of the details. He agreed to facilitate a meeting with
Gilauri on December 23. Mamatelashvili said that Georgia has
activated its agreements on electricity with Azerbaijan and
Turkey and is now receiving 68 MW from Azerbaijan and 82 MW
from Turkey. The Turkish power is being used in Adjara. He
expects that even more can be purchased from Azerbaijan in
return for electricity to be furnished to Azerbaijan from
Georgia in the summer.


10. Like other Georgian officials, including PM Noghaideli,
Mamatelashvili was concerned that the cost of using mazut in
the Gardabani thermal generators is prohibitively expensive.
However, we informed him that a possibility exists of
sourcing low-cost mazut from Iraq. Mamatelashvili was eager
to explore this prospect. We compared USAID figures on the
relative cost of mazut and natural gas and found that our
calculations coincided well with Mamatelashvili's. If mazut
were available at $180 per ton, as some reports indicate
might be the cost of Iraqi mazut, we agreed that transport
costs would have to exceed $110 per ton before mazut would be
more expensive to use than $220 per mcm natural gas. We also
informed Mamatelashvili of the existence of the Exogenous
Shocks Facility at the IMF, and gave him the contact
information for the local IMF office to explore whether such
financing might be available, or even needed.


11. Mamatelashvili did give us one unwelcome piece of news.
He said that to his knowledge, there are no existing rail
links from Turkey into Georgia, a legacy of the poor
relations of the Soviet Union with Turkey. (Hence the
Kars/Akhalkalkhi/Baku rail project now being organized.)
Shipment of large quantities of mazut from Iraq might have to
go to Ceyhan (Mediterranean) or Samsun (Black Sea),be put on
ships and transported to Batumi, offloaded and then shipped
by rail to Gardabani. With only 40,000 metric tons of

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storage in Batumi, frequent deliveries of mazut would be
required.


12. Comment: The maximum conceivable use of mazut could
reduce Georgia's usual 8 million cm per day gas demand by up
to 3.4 million cm, to 4.6 million cm. Gas received in kind
from transit of gas to Armenia (0.7 mcm/day) and the 3.3
mcm/day the pipeline from Azerbaijan, could be augmented by
amounts of gas already in the Shah Deniz pipeline. BP's
McDowell estimated that by reducing the pressure in the
pipeline from 90 bar to 40 bar, about 1 mcm/day could be
supplied for up to 40 days. The small input at Sangachal
could possibly extend the viability of this route for gas in
an unknown amount and number of days. These amounts would
just barely cover Georgia's gas needs, as reduced by mazut
use. Variations in demand could be handled at the expense of
industrial customers like Azoti and Sakcementi.
MXPERRY