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08TBILISI2190 2008-11-24 13:55:00 CONFIDENTIAL Embassy Tbilisi
Cable title:  

GEORGIA SIGNS 5 YEAR MOU FOR GAS WITH SOCAR

Tags:   ECON ENRG PGOV PREL RU AZ GG 
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1. (C) Summary and Comment: After months of discussion, the
Georgian government signed a five-year memorandum of
understanding (MOU) with SOCAR, the Azerbaijani state oil and
gas company, to provide natural gas to Georgia. The
agreement will, in principle, take effect on January 1, 2009
following the expiration of Georgia's current contract with
SOCAR. The actual amount of gas Georgia purchases will
depend on demand. The MOU states the agreement will provide
for any deficit between supply and "social" demand at
existing prices. Negotiating on the actual contract for 2009
continues, and the GOG worries it may not be concluded by
January 1. For its part, the Government of Georgia will sell
26 regional gas distribution networks, covering the whole
country except for Tbilisi, to SOCAR. This deal has yet to
be finalized, although talks continue. The pre-conflict
status quo regarding the operation of the Enguri power plant
(the dam is in Georgia, but the power station across the
"border" in Abkhazia) seems to have taken hold, although the
threat of a power shutoff remains real. Georgia appears to
have made significant progress to ensure its energy needs in
the short term. End Summary and Comment.

VOLUME TO MAKE UP GEORGIAN DEFICIT



2. (C) According to First Deputy Minister of Energy
Valishvili, the amount of gas provided under the MOU will
vary based on season and demand. The MOU is written to meet
any deficit demand of commercial and individual customers.
The volumes will essentially equal total Georgian "social"
demand minus transit gas from Russia and Georgia's transit
allotment from the South Caucasus Pipeline (SCP). The actual
volume will vary, as Georgian natural gas demand in winter is
approximately 9 mcm/day, while it is merely 2 mcm/day in the
summer. Approximately two-thirds of Georgian gas consumption
is used mostly for residential customers and for power
production, with the remaining one-third being used
commercially. Based on these figures, contracted volumes
with Azerbaijan as of 2009 could be as high as 5 to 6 mcm/day
in winter.

PRICES REMAIN STABLE



3. (C) According to the GOG, the five year agreement, which
will run through December 31, 2013, keeps prices at the
current rate. Georgian Minister of Energy Khetaguri
elaborated that the price for &social8 users, which
includes residential and thermal power plants, would be
approximately 164 USD/tcm. The commercial rate would vary
based on market prices. Commercial contracts will be
negotiated and agreed directly by SOCAR and commercial users.
According to Khetaguri, the current commercial rate in
Georgia is 258 USD from SOCAR and 280 USD from Gazprom. Some
commercial entities, including Itera, are buying gas directly
from Gazprom, although the Georgian Oil and Gas Company is
not currently buying gas from Gazprom.

SIGNED ON THE DOTTED LINE, NOW THE HARD WORK STARTS



4. (C) Now that the MOU has been signed, Valishvili stressed
that the hard, painful work of negotiating a contract has
begun. She is hopeful that an agreement can be reached for
2009 by January 1, but is skeptical. She said the
bureaucracy of the Azerbaijani system, both within the
government and SOCAR, will make the contract negotiations
challenging and likely lengthy.

NEGOTIATING CONTINUES ON SALE OF GAS NETWORKS TO SOCAR



5. (C) Minister Khetaguri confirmed to us that the Georgian
government has agreed to sell all 26 regional gas
Qgovernment has agreed to sell all 26 regional gas
distribution networks to SOCAR as part of the larger MOU
negotiation. (Note: This does not include the Tbilisi
system which is currently owned by KazTransGas). Valishvili
said the Ministry of Economic Development is continuing to
negotiate with SOCAR over final sale of the distribution
assets. She did not know when the final sale will be
completed.

ENGURI ) MAINTAINING THE STATUS QUO



6. (C) On Enguri, Khetaguri said not much has changed in
recent days. He said the sharing of power from the Enguri
station continues as it did prior to the conflict, and the
Abkhaz and Russians have been relatively quiet. He stressed
that the five yearMOU with SOCAR is the best defense against
an Russian/Abkhaz shutoff of the Enguri power station.
(Embassy note: Georgia reportedly depends upon power from
Enguri to meet 40% of its energy needs during winter. The

TBILISI 00002190 002 OF 002


Abkhaz have repeatedly threatened to stop the operation of
the power plant (located in Abkhazia) and cut off power to
Georgia; the Georgian have responded with a threat to cut off
the water from the dam, stopping the supply of electricity to
Sukhumi and the rest of Abkhazia. End note.) With Georgian
natural gas needs met, Khetaguri said that the country could
deal with the threat of a cut off of Enguri power much more
easily than the Abkhaz could in Sukhumi. In his view, the
Russians, or their Abkhaz allies, would only decide to cut
the power from Enguri to Georgia only if they are sure that
such a move would completely cripple the Georgian government.
TEFFT