GEORGIA'S NEW ENERGY MINISTER OUTLINES 2007-08

C O N F I D E N T I A L SECTION 01 OF 03 TBILISI 002657

SIPDIS

SIPDIS

STATE FOR EUR/CARC AND EEB/ESC/IEC

E.O. 12958: DECL: 10/22/2017
TAGS: ENRG EPET PREL GG RU AJ
SUBJECT: GEORGIA'S NEW ENERGY MINISTER OUTLINES 2007-08
ENERGY SITUATION, CONCERNS ABOUT AIOC/AZERBAIJAN PSA
NEGOTIATIONS

REF: BAKU 1268

Classified By: Ambassador John F. Tefft, reason 1.4(b) and (d).


1. (C) Summary: The Ambassador met with Georgia's new
Minister of Energy, Aleksandr Khetaguri, on October 18.
Khetaguri outlined increasing hydroelectric production in
Georgia that has enabled Georgia to export significant
amounts of power to Russia, Turkey and Azerbaijan in 2007, as
well as supply its domestic market. He estimates Georgia's
demand for natural gas at 1.8-1.9 BCM annually. This demand
will be met with modest amounts of gas received for transit
to Turkey and Armenia, and a mix of Russian and Azeri gas.
Because of its desire to limit the need for expensive Russian
gas, Georgia is vitally interested in the AIOC-Azeri
government negotiations over the ACG production sharing
agreement and AIOC's recent decision to resume re-injecting
ACG associated gas. Khetaguri said that Georgia will be
unwilling to permit AIOC to ship additional amounts of oil
that may be produced with the help of that re-injected gas.
He said that Armenia's demand for Russian gas shipped through
Georgia will not be reduced because of new Iranian supplies
to Armenia until late in 2008. The GOG continues to work on
plans for storage of natural gas. Nuclear power is a much
more long-range possibility, Khetaguri said. End Summary.


2. (C) Khetaguri was a Deputy Minister of Energy from
2004-2006 after a long tenure with the Georgian National
Electricity Regulatory Commission. In 2006, he became
president of the Georgian Oil and Gas Corporation and ran it
until he was appointed as Minister to replace Nika Gilauri,
who was shifted to head the Ministry of Finance, in October

2007. He holds a bachelor's degree in computer science from
Tbilisi State University and a Master's degree in accounting
from the Tbilisi Business and Marketing Institute.

"PLENTY OF ELECTRICITY"
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3. (C) Khetaguri said that in summer 2006 Georgia exported
800 million kilowatt hours (KWH) of electric power pursuant
to swap agreements with Turkey, Azerbaijan and Russian
utility RAO/UES. He expects to receive less this winter in
return from Georgia's foreign partners, because Georgia will
have "plenty of electricity". To the extent it is not
compensated in kind, Georgia will receive cash, he said.
Khetaguri was pleased that in 2007, Georgia provided some 300
million KWH of electricity to Russian utility RAO/UES worth
USD 12 million. The new exchange deal with Russia, which
returns power kilowatt for kilowatt, or for cash, is similar
to a deal in place with Turkey. This swap deal continues
through 2009. Khetaguri sees it as unfortunate that Gazprom
and RAO/UES "hate each other," making a gas for electricity
swap with Russia impossible. Khetaguri reported that Georgia
is exploring a power swap deal with Azerbaijan that would see
summer hydropower from Georgia exchanged for winter gas.
Such a deal is supported by both nations, but Khetaguri
laments that it cannot be concluded until Azeri production
meets internal demands, which means at the earliest 2009.


4. (C) Water levels at the Enguri and other hydroelectric
dams are at historically high levels, Khetaguri said.
Rehabilitation of the second generating unit at Enguri is
finished, which will increase Enguri's capacity by 160-170
megawatts (MW) with a lower risk of failure due to improved
infrastructure. Work is proceeding on the third of Enguri's
five units, which will further increase the capacity at
Georgia's largest source of electricity as each of these new
repairs comes on line (one year is required to complete works
on each). Comment: For the first time in decades Georgia
can fully exploit Enguri for its intended purpose: to provide
peaking power that complements Georgia's base-load thermal
and hydropower assets.


5. (C) Thermal electrical generation capacity is the same,
that is, Gardabani unit 9, run by RAO/UES subsidiary Mtkvari
Energy (capacity 250 MW),state-owned units 3 and 4 (130 and
140 MW respectively) and EnergyInvest's gas turbines (two
units, capacity 55 MW each). Unit 9 is forecast to run from
the end of September to the end of March and Unit 3 from
mid-November to mid-March. Unit 4, which Khetaguri hopes
will not be used, is being readied for a maximum of one month
mid-December to mid-January if needed. The gas turbines are
being "held in reserve," at very high cost to the network.
They will operate only as needed, Khetaguri said.

AIOC/AZERI DISPUTE CAUSES CONCERN

TBILISI 00002657 002 OF 003


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6. (C) Khetaguri said that demand for natural gas this winter
will not vary much from last year. He estimates Georgia's
total natural gas consumption for 2008 to be 1.85 billion
cubic meters (BCM),down from over two BCM forecast for 2007.
The reduction is due in part to more rational use of power
generation capacity that minimizes high-cost thermal
generation. Gas demands will be met by 0.2 BCM received from
Russia for transit of gas to Armenia, 0.25 BCM from South
Caspian Pipeline (SCP) gas from the Shah Deniz field in
Azerbaijan, and the rest from a mix of Azeri and Russian gas.
Comment: Imports of electricity that could offset gas
imports are missing from the 2008 Georgian electricity
balance, principally because Georgia is unwilling to rely on
Russia for electrical energy as well as natural gas. It is
also unwilling to turn to Armenia because it Armenian
generating assets are Russian-owned.


7. (C) The amount and price of gas to be received from
Azerbaijan and Russia are currently unknown beyond existing
contracts for $235/tcm from Russia which expire December 31.
Obtaining greater quantities of Azeri gas is the subject of
negotiations that are currently stalled as Azerbaijan irons
out differences with BP and the BTC consortium AOIC over
future production of oil and gas from the ACG and Shah Deniz
fields (reftel). Khetaguri said that Azerbaijan had promised
Georgia one BCM in 2008, but that discussions were halted
when the Azerbaijan-AIOC negotiations went off the rails.
Currently, no deliveries of gas are being received, but the
Azeris have confirmed they will supply 1.3 million cubic
meters daily until January (out of Georgia's approximately
8.3 million cubic meter peak demand in mid-winter).


8. (C) Khetaguri explained to us that AIOC is contractually
obligated to deliver 1.4 BCM of gas to Azerbaijan from the
ACG field. He said that ACG gas production has exceeded the
2 BCM previously estimated and should total 4 BCM per annum.
This implies that AIOC now has 2.6 BCM to reinject or sell to
Azerbaijan - significantly more gas than the previously
forecasted 0.6 BCM. Last year, as delays in gas production
from Shah Deniz occurred, AIOC had agreed with SOCAR to
reduce the amount of gas reinjected into ACG and supply an
additional 1.6 BCM to Azerbaijan, some of which was sold to
Georgia to reduce its dependence on Russian gas. Now, with
SCP up and running, Khetaguri said that AIOC wants to
reinject the entire 2.4 BCM to produce greater-than-planned
amounts of oil and reap profits from the current high world
prices for oil. When negotiations on ACG's future broke
down, AIOC stopped supplying the additional 1.6 BCM to
Azerbaijan, supplying only the 1.4 BCM contracted volume.
Khetaguri estimates that as a result, Azerbaijan will have a
shortfall in its total needs of 500-600 million cubic meters.



9. (C) If the Azeris cannot convince AIOC to increase the
amount of ACG gas supplied, and if they want to remain free
of any Russian gas imports, they will have to burn more
expensive mazout than planned or cut supplies to Georgia.
Both Khetaguri and Georgian Prime Minister Noghaideli want to
avoid the latter outcome. Khetaguri said that Georgia holds
a card in the AIOC-Azeri discussions -- AIOC needs Georgia's
permission to increase BTC shipments beyond those already
contracted. Khetaguri admits that the consortium is not
immediately obligated to supply the reinjected gas to
Azerbaijan, but if AIOC reinjects the gas into the ACG field
to increase oil production, it will not have any way to ship
that oil to market without Georgia's and Azerbaijan's
cooperation. It is this threat to which PM Noghaideli was
referring in his most recent conversation with the
Ambassador, and as clarified by Khetaguri, it does not seem
to involve repudiating agreements or cutting off shipments to
which the GOG has already agreed. Khetaguri said that he has
met and exchanged views on this issue with Georgia BP Chief
Hugh McDowell. Comment: Under the scenario as explained by
Khetaguri, the best outcome of the AIOC-Azeri negotiations
would seem to be a compromise under which some gas is
reinjected, some more oil is produced and shipped via BTC,
and some gas is supplied to Azerbaijan and Georgia. Both BP
and Khetaguri believe that Azerbaijan will have to burn
mazout for power in 2008, because even the additional 1.6 BCM
is not enough to meet Azeri demand, let alone export gas to
Georgia.

ARMENIAN DEMAND FOR IRANIAN GAS
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10. (C) The Ambassador asked Khetaguri his impressions of the
gas supply to Armenia from Iran, as the new Iran pipeline
comes into operation. Khetaguri said that he understands
from personal review of the Armenian gas balance that Armenia
does not intend to reduce Russian gas imports until the end
of 2008, implying there will be no real increase in supply to
Armenia from Iran before then. Therefore, he expects there
will be no decrease in transit gas for Georgia from the
North-South pipeline until that time. As for Georgia's
dealings with Iran on energy, Khetaguri said there have been
no government-to-government negotiations since 2006. He
denied that KazTransGaz is negotiating with Iran for
supplies.

THE FUTURE: MORE DIVERSITY, LESS RUSSIAN GAS
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11. (C) Looking to the future, Khetaguri said that the next
two to three years will be critical for both Georgia and
Azerbaijan in terms of supplying their needs for natural gas.
After that, Georgia will need much less Russian gas as its
transit fee for Shah Deniz gas trends up to a maximum of 0.8
BCM per year. In the short term, he said, gas which AIOC had
intended to reinject to boost oil production will be needed.
Khetaguri reiterated the GOG's willingness to "turn the
screws" on AIOC to get its way. The GOG is proceeding with
feasibility studies for gas storage facilities, and has
discussed obtaining financing for them from the Azeri
government. The options include a small (0.5 BCM) but
inexpensive facility at Rustavi, and/or a larger (up to 5
BCM) facility at Ninotsminda which would cost $60 million for
the first, 400-500 million cubic meter stage alone. He also
sees a need for more gas storage in both Turkey and
Azerbaijan. Khetaguri said that nuclear power is something
the GOG is considering, but he sees it as something a long
way off.
TEFFT