GEORGIA: SOCAR PURCHASES 22 OF GEORGIA'S INTERNAL

C O N F I D E N T I A L TBILISI 002493 E.O. 12958: DECL: 12/28/2018 TAGS: ENRG ECON PGOV PREL AZ GG SUBJECT: GEORGIA: SOCAR PURCHASES 22 OF GEORGIA'S INTERNAL GAS DISTRIBUTION SYSTEMS REF: A) TBILISI 2190 B) TBILISI 2426 Classified By: Ambassador John F. Tefft for reasons 1.4 (b) and (d). ¶1. (C) The Georgian Government has sold 22 regional natural gas distribution companies to the Azerbaijani State Oil and Gas Company SOCAR. Georgia had originally pledged to sell a number of its natural gas delivery systems to SOCAR during negotiations with Azerbaijan in November that resulted in the conclusion of a five year MOU to provide gas to Georgia at existing rates (ref A). While Government officials, including Minister of Energy Khetaguri and his Deputy Ministers, as well as now former First Deputy Minister of Economic Development Vato Lezhava worked hard to separate the MOU from the sale of the distribution system, the two were integrally tied. ¶2. (U) The sales agreement was signed on December 26 by Minister of Economic Development Lasha Zhvania and the Director General of SOCAR-Georgia Davit Zubitashvili. SOCAR now owns regional distribution companies in Kakheti, Mtskheta-Mtianeti, Shida Kartli, Kvemo-Kartli, Adjara, Guria, Imereti and Samegrelo. (Note: The Tbilisi distribution system currently remains under the control of KazTransGas, which is owned by the Kazakh state-owned KazMunai Gas, though the company has said they are interested in selling the asset. End note.) As a stipulation to the sale, SOCAR must invest $40 million to further develop and upgrade gas distribution systems within three years. As a result of expansion, SOCAR has also pledged to bring 150,000 new subscribers into the system. ¶3. (C) Comment: While the purchase price for the 22 distribution systems has not been publicized, Georgian officials have hinted that it was lower than the original 10 million USD asking price. This was in large part due to the favorable terms Azerbaijan and SOCAR granted to Georgia in the overall five year MOU to supply gas to the country. SOCAR,s promise to invest heavily in the gas distribution network is crucial for Georgia, as the government does not have the money to do the necessary upgrades and expansions to serve the needs of the population. While post has yet to receive information on exactly which distribution companies within the regions now belong to SOCAR, with the purchase of regional networks in Shida Kartli and Mtskheta it is possible that SOCAR will now be responsible, at least in part, for providing Tskhinvali and South Ossetia with gas. This could prove to be a serious headache for the company and a possible pressure point for Azerbaijan with the Russians as the latter pushes to restore gas supplies to South Ossetia despite restricting access to repair infrastructure damaged during the August conflict (ref B). End Comment. TEFFT