Identifier
Created
Classification
Origin
08TBILISI387
2008-03-07 14:41:00
CONFIDENTIAL
Embassy Tbilisi
Cable title:  

GEORGIA MINISTER OF ENERGY ON BTC PIPELINE

Tags:  ENRG EPET PGOV PREL GG 
pdf how-to read a cable
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DE RUEHSI #0387/01 0671441
ZNY CCCCC ZZH
R 071441Z MAR 08
FM AMEMBASSY TBILISI
TO RUEHC/SECSTATE WASHDC 9043
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
C O N F I D E N T I A L SECTION 01 OF 03 TBILISI 000387 

SIPDIS

SIPDIS

STATE FOR EUR/CARC AND EEB/ESC/IEC
DEPT OF COMMERCE FOR DANICA STARKS
DEPT OF ENERGY FOR LANA EKIMOFF

E.O. 12958: DECL: 03/06/2018
TAGS: ENRG EPET PGOV PREL GG
SUBJECT: GEORGIA MINISTER OF ENERGY ON BTC PIPELINE
EXPANSION, GEORGIA'S GAS NEEDS

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

C O N F I D E N T I A L SECTION 01 OF 03 TBILISI 000387

SIPDIS

SIPDIS

STATE FOR EUR/CARC AND EEB/ESC/IEC
DEPT OF COMMERCE FOR DANICA STARKS
DEPT OF ENERGY FOR LANA EKIMOFF

E.O. 12958: DECL: 03/06/2018
TAGS: ENRG EPET PGOV PREL GG
SUBJECT: GEORGIA MINISTER OF ENERGY ON BTC PIPELINE
EXPANSION, GEORGIA'S GAS NEEDS

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


1. (C) Summary: The Ambassador met with Georgian Minister of
Energy Aleko Khetaguri on February 27. Khetaguri told the
Ambassador that Georgia is not willing to approve expansion
of the Baku Tbilisi Ceyhan (BTC) pipeline until it receives
an explanation of BP's plans for re-opening the Baku-Supsa
oil pipeline, which has been closed down for repairs for
several months. Khetaguri said that the government has
dropped linkage between BTC expansion and its demand for
flexibility by BP and AIOC in providing gas to Azerbaijan
from the ACG oil field -- flexibility that will free up Azeri
gas for Georgia's potential use. Overall, Khetaguri knows
that larger oil transit volumes are in its interest, and he
supports an active export route via ship or pipeline across
the Black Sea to the Odessa-Brody pipeline, that would handle
increased shipments via the Caucasus from Kazakhstan. To
obtain gas for the future, Georgia has proposed a five-year
contract with Azerbaijan for gas at a price of USD 150-160,
calculated on the cost Azerbaijan must pay to burn mazout in
place of gas supplied to Georgia. After 2009, when more gas
is on line in Azerbaijan, Georgia would pay a commercial
price. Khetaguri downplayed the importance of Georgian plans
to sell Georgian Railways. He said that the government is
seeking expressions of interest in order to figure out a
value for the system, and would at first sell no more than 10
percent of it. The Government is pursuing plans to further
increase production of hydropower for domestic use and export
to its neighbors. End Summary.

LINKING BTC EXPANSION TO CLARITY ON
BAKU-SUPSA, NOT GAS FROM ACG
--------------


2. (C) Khetaguri noted that Georgia has just survived the
coldest winter on record, with temperatures of minus 14-15
for two weeks in a row at one point. The country suffered no
noticeable shortages of natural gas over the period.

However, Khetaguri said he finds the situation with regard to
oil better than that for gas. Khetaguri is well aware of
BP's and AIOC's desire to increase the capacity of the Baku
Tbilisi Ceyhan (BTC) pipeline from 1 million bbl/day to 1.2
million, and then to 1.6 million with infrastructure
upgrades. Khetaguri said the BP is telling him that the
Baku-Supsa pipeline, which has been idle for more than a
year, will start operations again in April, though he has his
doubts that target will be met. He is also hearing that BP
wants to transfer operation of the Baku-Supsa pipeline to the
Azeris, as BP has already done on the Northern Route pipeline
through Russia.


3. (C) Khetaguri noted that Baku-Supsa carries 175,000
barrels of oil per day when operating. He expressed concern
that the 200,000 bbl/day capacity to be added to BTC will be
sufficient for BP to redirect all the oil that flows through
Baku-Supsa to the BTC. There will, of course, be Kazakh oil
available for both routes, if Azerbaijan's SOCOR allows it,
he said. SOCOR already is preparing the Kulevi oil terminal
in Georgia on the Black Sea for opening, and the only way
there is by rail. Khetaguri worries that if SOCOR takes over
Baku Supsa, it will have a near-complete monopoly on oil
transit through Georgia. The only exception will be the
Batumi Oil Terminal, which the Danish company GreenOak has
sold to Kazakhstan. The Azeris are already creating problems
for the Kazakhs at the port in Baku and on the railroad in
Azerbaijan.


4. (C) Despite these concerns, Khetaguri looked forward to
increasing shipments of oil via Georgia, and is supportive of
the building of an oil pipeline across the Black Sea, if
there is commercial will to do it. The best starting point,
he believes, is Supsa because the Baku-Supsa pipeline ends
there. Nevertheless, ships would keep all the Georgian oil
terminals in operation and would be faster to put into
operation. Khetaguri noted that to handle a pipeline or
increased oil volumes by ship, the Odessa-Brody pipeline will
have to be reversed to supply Europe, something that has not
yet come to pass despite Ukraine's support for the idea. He
is pleased, however, that Memoranda of Understanding have
been signed among the Azeri, Georgian, Ukraine, Latvian and
Polish governments. On the other hand, he observed, there is
no agreement yet between Kazakhstan and Azerbaijan.
Georgia's interest is to maximize oil transit volumes,
Khetaguri said, and Georgia is free and willing to negotiate
with anyone to accomplish that. He added that if a new oil
pipeline becomes feasible, it would make sense to construct a

TBILISI 00000387 002 OF 003


gas pipline alongside it.


5. (C) The Ambassador raised BP's concerns about the GOG's
delay in authorizing the increase in capacity of the BTC
pipeline. Khetaguri said that the GOG is no longer linking
approval of the BTC pipeline expansion to BP's provision of
gas from the ACG field to Azerbaijan. He said that after he
and PM Gurgenidze met with BP's Andy Inglis in London
(apparently in December),the issue of BTC expansion is now
linked to the GOG receiving a good explanation of when the
Baku-Supsa pipeline will reopen, who will operate it and how.
The additional capacity on BTC is more than the Baku-Supsa
pipeline normally transits, he said. Khetaguri's concern is
that the Baku-Supsa pipeline might essentially be abandoned
as oil that is currently shipped through it by the Western
companies will be diverted to BTC. He added that the closure
of Baku-Supsa cost the Georgian government $17 million in
transit fees last year. He contends that all necessary work
on the pipeline in Georgia is complete, but there is work to
be done on the Mtkvari (Kura) river crossing in Azerbaijan.
(Note: BP's country manager for Georgia, Hugh McDowell, was
unaware of the change of tactics by Khetaguri and the GOG
when we called him to ask if he had heard about it from the
GOG. On March 7, we talked to Mat Taylor in BP's office who
said that BP has provided an update on the Baku-Supsa
reopening to Khetaguri, and is waiting to see if the
information has satisfied the Ministry. Taylor said that the
consortium voted on March 6 in Baku to move forward with the
BTC expansion.)

GEORGIAN OFFERS IN TOUGH NEGOTIATIONS
WITH THE AZERIS
--------------


6. (C) Khetaguri said that Georgia would like to see the Shah
Deniz agreement amended to give Georgia an option to purchase
at commercial prices any gas not taken by the Turks or that
is produced in excess of quantities foreseen in the existing
contract. He said that AIOC had agreed in principal to this
in December and were supposed to send a draft contract but
have not yet done so. As for SOCAR gas, Khetaguri said SOCAR
has told the GOG it has no gas to deliver until May, when it
can begin supplying 3.5 million cm/day, sufficient to cover
all Georgia's needs until September. After that, he said,
SOCAR will face a deficit and can't say what will be
available to Georgia. Khetaguri said that Azerbaijan burned
a million tons of mazout in 2006-07, but only 350-400,000
tons in 2007-2008, so it has the option to burn more in
2008-2009. Khetaguri said that he had offered Azerbaijan a
five year contract, and was willing to pay $150-160 per tcm
of gas, an amount calculated based on the cost of mazout that
Azerbaijan would have to burn to free up gas for Georgia (as
much as 850 million cm, according to Khetaguri). The Azeris
are increasing domestic production and storage capacity.
After mid-2009, when sufficient gas is available that
Azerbaijan can supply Georgia gas without burning mazout,
Georgia would pay a commercial price for its supplies,
Khetaguri said. The only response from the Azeris, according
to Khetaguri, is that a fair price for gas is $160-180 -- if
gas were available, which the Azeris say it is not.
Khetaguri remains disappointed by BP's unwillingness to sell
more gas that it usually reinjects into the ACG oil field.
He said that Georgia would even be willing to buy mazout for
Azerbaijan and take gas in return. Also, an offer to swap
100 megawatts of Georgian electricity for gas was refused by
the Azeris, ostensibly because the power lines into
Azerbaijan cannot handle the load. Khetaguri disputes that.


7. (C) Khetaguri estimates Georgia's current yearly gas needs
at 1.85 billion cubic meters. 1.3 bcma is needed for
residences and power generation, he said. As of October
2007, he said, all new customers have no regulated tariff and
must pay commercial prices for gas from whatever source they
can find. Gazprom is now chargin $280 per thousand cubic
meters, he said. This year, Georgia is entitled to 300
million cm from Shah Deniz, 200 million for transit from
Gazprom and has an option for 300 million more at a cheap
price from Shah Deniz. This leaves a deficit of 500 million
cm that must be procured at commercial prices. In 2009,
there will be an additional 100 million available from Shah
Deniz and the deficit will be only 400 million cm. The GOG
got the population through the current winter by subsidizng
gas prices, via a credit to Georgia Oil and Gas Corporation,
which markets it to customers in Georgia. GOGC's profits
will be accordingly reduced as it has to pay back the credit,
he said.

TBILISI 00000387 003 OF 003



NOT SO FAST ON SELLING GEORGIAN RAILWAYS
--------------


8. (C) The Ambassador asked Khetaguri about his opinion of
plans to sell Georgian Railways, which transports millions of
barrels of Azeri oil to the Batumi Oil Terminal and soon to
the Kulevi terminal. He said that by seeking expressions of
interest in purchasing the railroad, the government is trying
to get a realistic idea of what the value of the railroad is.
Current plans call for selling just a 10 percent interest to
a strategic partner, with a sale of the rest of the railroad
to come sometime in the future.

INCREASING HYDROPOWER
--------------


9. (C) Khetaguri said the government now has a feasibility
study in hand, funded by a USTDA grant, for a 220 kilovolt
transmission line to Turkey. Construction of the line is
expected to begin in early 2009. He said that originally, an
upcoming issue of Eurobonds by the GOG was intended to fund
this project and the much-needed gas storage project.
However, the German development bank, KfW, has offered even
more attractive terms than the Eurobond and the GOG will use
that money to fund construction of the transmission line.
Once the line is up and running, he said, the government will
sell the company that runs it. The proceeds will be used to
make further energy infrastructure upgrades around Georgia.
Additionally, the government is planning to rapidly increase
hydroelectric capacity. It has an MOU with Turkish investors
to build seven new plants in Adjara which will add 119
megawatts of capacity by 2015. Kuwaiti investors have backed
out from construction of a new plant on the Rioni river, but
the government is studying the project and intends to re-open
it for tenders. The project for a large dam and power plant
at Khudoni is proceeding with World Bank assistance and is
expected to be completed in 2012 or 2013. Khetaguri said
that past plans had not properly accounted for efficiencies
created at power plants downstream from Khudoni, and the
entire project will actually produce 1 billion kilowatt hours
more than previously calculated, making it more financially
viable than previously believed.
TEFFT