WEG: Georgia Losing in Gazprom Deal
The Government of Georgia accepted the Gazprom Export Deal to shift to monetary payment for Russia -Armenia gas transit. With this agreement, Georgia loses the benefits of receiving in kind gas materials and becomes more sensitive to gas price volatility, claims independent think-tank World Experience for Georgia (WEG).
It is clear, they say, that according to the new terms of monetary compensation, Georgia will receive less value than it could get from natural gas according to the previous agreement.
“Georgia will be receiving gas from Russia for $185 per 1,000 cubic meters but this refers only to the so called ‘social’ sector and only in case of deficit. There is no expectation of competition with SOCAR in the ‘commercial’ sector,” the WEG site reads. “It’s a two-year long deal and in 2017 the in-kind payment will be maintained partially, for 1bcm. However, it is unlikely that Georgia will ever return to the terms and conditions of the previous agreement and receive 10% of gas from transit. Further, the Ministry of Energy indicates that this was not a free choice and negotiation outcomes were forced by Russia.”
WEG experts say that although the monetary settlement for transit is more in line with international practice and WTO rules, the new transit conditions are significantly worsened with respect to previous ones, both in economic and energy security terms.
“Negotiations with Gazprom Export were conducted one-on-one, behind closed doors, without proper risk analysis, negotiation strategy, scenarios analyses and involvement of international or local experts, international political allies or general public. These circumstances raise doubt as to whether the country’s interests were fully defended and the best possible outcome was achieved,” WEG says. “Considering the existing non-transparent environment, it is important to understand how and why it was possible to maintain the existing deal in the last year; what was the convincing argument that made Russia agree to favorable conditions for Georgia, and what has changed now?”
WEG is concerned by the secrecy surrounding the deal. The Ministry claimed that the transit fee is a “commercial secret” yet the negotiating parties were not full-fledged commercial agents and the price remains "secret" only to the Georgian population while, WEG says, it is very likely that all other interested stakeholders will easily access this information from their own sources.
WEG points out that the Transit fee was not set by the regulator (GNERC); it was negotiated by the Ministry of Energy of Georgia and most probably does not reflect all previous and future costs related to transit.
“The negotiated Gas purchase price for Georgia ($185 per 1,000 cubic meters) is political,” says WEG. “It is higher than the price for Armenia ($165 USD/1000m3) and even for Germany ($160 USD/1000m3). In addition, the purchase agreement is not signed with a fixed volume of gas, which strengthens SOCAR’s monopoly power (especially in 'Commercial' sector) even further, while Russia is being treated as a common trade partner in negotiations, despite the fact that it explicitly violates international law, has obvious political interests and holds many economic, energy or political and military leverages against Georgia (Enguri HPP and electricity consumption of Abkhazia, dependence on electricity import, ownership of energy assets etc.),” the WEG site claims.
WEG concludes that the negotiations with Gazprom Export go well beyond the energy framework and need to be discussed in the context of National Security. “The involvement of the Ministry of Foreign Affairs, National Security Council and other security stakeholders, as well as international organizations and partner countries, is crucial but was not considered in the recent negotiations,” WEG states.
They consider it equally important to consider political preparation, use expert knowledge and a systematic approach to ensure transparency and public involvement in order to reduce risks and protect the best interests of the country.
“The existing non-transparent and non-competitive environment in the gas market contradicts the interests of the country and consumers. Gas market reform and introduction of transparent regulations and healthy competition is vital for future democratic development and energy security,” WEG says, adding that the country’s needs an energy security strategy which will define sector development and guide the actions of policy makers. “The existing practice of non-transparent governance in the energy sector does not allow the full defense of national interests and needs to be changed through reforms.”
Note: North-south gas transit does not fall under the regulation of Energy Community accession process for Georgia, according to the membership protocol, gas transit agreements are exempt from the requirements of EU directives (Derogation).
World Experience for Georgia (WEG) is an independent, non-profit think tank dedicated to strengthening Georgia’s energy security and economic sustainability, supporting and challenging Georgian decision-makers at all levels to make informed decisions based on accurate analysis and knowledge, and providing a platform for engaging partners, stakeholders and citizens in the country’s policy-making in the debate about the future of the country in its path to Euro-Atlantic integration.
Katie Ruth Davies