GEORGIA CONCERNED ABOUT REPORTS OF GAZPROM

C O N F I D E N T I A L TBILISI 001019

STATE FOR EUR/CARC AND EEB/ESC/IEC

E.O. 12958: DECL: 06/11/2018
TAGS: EPET ENRG PREL GG
SUBJECT: GEORGIA CONCERNED ABOUT REPORTS OF GAZPROM
INTEREST IN BUYING AZERI GAS

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


1. (C) Georgia's Minister of Energy, Aleksandr Khetaguri, met
with Embassy Econoff and the Director of USAID's Office of
Energy and Environment on June 10. Khetaguri said that he is
deeply concerned by reports published the week of June 2 that
Gazprom is interested in purchasing Azeri gas. Khetaguri
said that his understanding was that Gazprom had offered to
buy all Azeri gas not already subject to contract for a price
between USD 250 and USD 300 per thousand cubic meters.
Khetaguri realizes that the offer is mainly aimed at closing
the door on non-Russian sources of gas for Europe. He
stressed the need for the Europeans to negotiate harder on
securing Azeri supplies for Nabucco and TGI. However, he is
equally as concerned that Gazprom's deep pockets may make it
difficult for Georgia to obtain gas from Azerbaijan in the
future. He fears it will be hard for the Azeris to say no to
Gazprom's offer. Even if the Azeris do refuse to sell,
Gazprom's offer may still increase the price of gas expected
by the Azeris from Georgia.


2. (C) Regarding Georgia's current gas supplies, Khetaguri
said that Georgia has an agreement with Azerbaijan to buy up
to 600 million cubic meters of gas until the end of 2008 at
USD 200 per tcm. It also has a promise from the Azeris that
they will cover all of Georgia's demand in 2009 at a price
still to be negotiated. With 300 million cm from Shah Deniz,
200 million cm from the North-South pipeline to Armenia,
Georgia would like to obtain 1.3 bcm from Azerbaijan in 2009.
Of the 1.3 bcm, 600 million cm is for power generation and
400 million cm for heating, with the rest needed by industry,
which must buy its inputs on the open market. Khetaguri told
us that us that Georgia has bought 500 million cm from
Gazprom at a price of USD 280 per tcm so far in 2008. He is
worried that the Gazprom offer may cause the Azeris to renege
on their promise to supply Georgia's needs in 2009.


3. (U) USAID introduced Khetaguri to the chief of party of a
new USAID project to support creation of energy policies that
will guide the GOG for the foreseeable future, including
those policies that affect regulation, export and import and
transit. Khetaguri said that developing natural gas storage
is now a top GOG priority.


4. (C) Khetaguri said that rehabilitation of the third of
five generators at the Enguri power plant is continuing, and
that three units will be fully operational by the end of

2008. The two other units are operating at reduced capacity
but are slated for rehabilition by 2010. The World Bank and
EBRD are going to help finance renovation of the Vardnili
cascade power plants below Enguri, Khetaguri said. The
Enguri plant and the cascade are in Abkhaz territory, while
the Enguri dam is in Georgia itself. Despite the recent
upsurge in political tensions over Abkhazia, there has been
no interference in the operation of the power plants, which
supply both Georgia and Abkhazia with power -- in Abkhazia's
case, all its electric power. The Abkhaz do not pay for the
power they receive, and the retail cost of power in Abkhazia
is still the same four kopeks per Kwh it was in Soviet days,
according to Khetaguri. The Abkhaz know they need the
Georgians to operate the plant, Khetaguri said. Enguri is
the only example of an area where there is real
Abkhaz-Georgian cooperation, he added.


5. (C) Comment: We understand from Embassy Baku that the
Gazprom offer to buy Azeri gas applies only to Shah Deniz
phase II gas. Even so, the offer is likely to make Azeri gas
more expensive for Georgia -- both from Shah Deniz phase II
and from other Azeri sources. There is no doubt that
Khetaguri will be watching closely to see whether the Gazprom
offer shakes Azeri resolve to meet Georgia's 2009 needs
fully.
TEFFT