GEORGIA: NOT QUITE THERE ON ENERGY INDEPENDENCE

C O N F I D E N T I A L SECTION 01 OF 02 TBILISI 003146

SIPDIS

SIPDIS

STATE FOR EUR/CARC. EUR DAS BRYZA, EEB/ESC/IEC AND EUR/RPM
DOE FOR LANA EKIMOFF
NSC FOR LAUREN CATIPON

E.O. 12958: DECL: 12/21/2017
TAGS: EPET ENRG PREL GG AJ RU TU
SUBJECT: GEORGIA: NOT QUITE THERE ON ENERGY INDEPENDENCE
FROM RUSSIA BUT MORE COMFORTABLE THAN 2006

REF: A. TBILISI 2657


B. BAKU 1456

C. 06 TBILISI 2949

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


1. (C) Summary: Georgia should be able to meet at least 3.5
million of its total 7 million cubic meter per day natural
gas needs from Azerbaijan, in the early part of 2008. The
rest will have to be purchased from Gazprom. The 2008
Gazprom price is expected to be higher than 2006, but not to
double as in years past. Azeri gas will be more expensive as
well, but its availability acts as a deterrent to intentional
stoppage of supply from Russia. Georgia's capacity to
receive gas from Azerbaijan now nearly equals its daily
needs, but actual supply will depend on negotiations with the
GOA, which are ongoing. The government is not talking about
buying Iranian gas, except in a dire emergency. End Summary.



2. (C) Georgia finds itself in a more comfortable position
with regard to its energy needs in the winter of 2007-2008
than it did in 2006-2007, but is not entirely free of
worries. According to GOG estimates, Georgia will need 8.8
million cubic meters (cm) of gas per day in January to serve
all residential, commercial and industrial customers and
generate electricity to supplement what is available from
hydropower sources. The similar figures for February and
March are 7.5 million and 7.2 million, respectively.
However, Georgia used less than 7 million cm in January 2007
and has ample supplies of hydropower that mean it will
probably use a similar amount in January 2008. April
consumption will be far less as the weather warms and thermal
electricity units at Gardabani begin to go off-line.


3. (C) Unlike last year, Georgia has a reliable supply of gas
from the SCP (Shah Deniz) pipeline, 200 million cm per year
free in return for transit, plus an additional 50 million cm
at $55 per thousand cubic meters (tcm). This "transit gas"
has been running about 1 million cm per day in December. BP
informs us that the offtake from SCP is being upgraded to
handle as much as 4-5 million cm per day, and could even
handle 8 million on an emergency basis for a short time.
About 1 million cm is available to Georgia in return for
transit of gas from Russia to Armenia. Azerbaijan is
supplying Georgia with 1.5 million cm of gas per day over a
second pipeline, separate from SCP, until January 15. Last
year, this pipeline had an estimated capacity of 3 million cm
per day, and with ongoing upgrades, it may have as much as 4
million cm this year.


4. (C) As of late December, the government continues
negotiations with Azerbaijan for 2008 natural gas from
non-SCP Azeri sources. These negotiations have been hampered
by Azeri concerns about the availability of re-injected gas
used to support oil production from the ACG field (ref B).
However, according to BP, the Azeris seem more relaxed about
their winter gas situation than they were earlier in the
year, which is beneficial to Georgia. Another supply
possibility, which apparently is as yet unexplored, arises
from the possibility that Turkey may not be able to take its
full commitment of gas from SCP. In that event, Azerigas has
first call, and could sell Turkey's unused share to Georgia.
The 2007 price for Azeri gas imported to Georgia was $120 per
tcm. The GOG has not been forthcoming about what it thinks
the 2008 price will be, but it is likely to be higher, in the
range of $150-190, based on conversations with BP and with
KazTransGaz, which supplies Tbilisi residential customers.


5. (C) Thus, we roughly estimate that under normal
circumstances, and assuming agreement can be reached on
continued supply from Azerbaijan, Georgia will have at least
3.5 million cm of gas per day from Azerbaijan and from
Armenian transit to meet its estimated 7 million cm per day
January consumption. The rest, 3.5 million cm, will have to
be purchased from Gazprom in Russia unless Azerbaijan is more
generous in the still ongoing negotiations with Georgia. The
upgrades to the SCP offtake and the other Azeri pipeline
suggest that in a pinch, if no gas were available to Georgia
from Russia, Azerbaijan could supply nearly all of Georgia's
needs -- if the will is there and the price is right. This
fact, coupled with Armenia's continuing dependence on Russian
gas, is Georgia's best deterrent to an intentional
interruption of supply from Russia, such as is alleged to
have occurred in January 2006. It may also explain why the
GOG is not showing the level of concern about winter gas

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supply that it did in late 2006.


6. (C) Russian gas is expensive. However, the Georgian
economy absorbed a quadrupling of the price of gas from
Russia since 2005, along with the Russian embargo, and still
grew more than 10 percent in 2007. Georgian gas consumers'
contracts with Gazprom all run out on December 31. Gazprom
will undoubtedly seek a price increase for 2008 in its
negotiations with the consumers. The Georgian government
does not conduct negotiations with Gazprom or with Russia
directly. We spoke to Geno Malazonia, General Director of
Energy Invest, which uses gas for fertilizer production and
electricity generation. He said that Gazprom has not yet
said what price it will seek, but that he expects a 10% or so
increase. Earlier this year, KazTransGaz's general director
suspected that Gazprom would charge about $270 per tcm,
compared to 2007's $235. Such an increase will contribute to
Georgia's problems with controlling inflation and to the
lower estimate of growth expected for 2008 -- only 6%
according to the Ministry of Finance, mostly because of the
political uncertainty affecting foreign investment. Tbilisi
consumers are feeling the pinch from a nearly 50% increase in
the residential gas tariff in April 2007. They will likely
see further increases in 2008.


7. (C) Georgian officials continue to assure us they have no
intention to purchase gas from Iran. However, Deputy
Minister of Energy Giorgi Abdushelashvili told us on December
20 that the GOG would consider talking to Iran if it faces
"nationwide freezing", as occurred in January 2006. However,
based on the analysis above, this seems to be a remote
possibility at this point.
TEFFT