Partners in pipelines, but not in energy exports

Though connected by two pipelines that convey Caspian Basin energy to Western markets, Georgia and Azerbaijan are having trouble working out a long-term gas-supply deal. Price appears to be a major sticking point.

In search of a long-term pact, Georgian Minister of Fuel and Energy Aleko Khetaguri traveled to Baku on February 13 to meet with his Azerbaijani counterpart, Natik Aliyev. Khetaguri was reportedly offering to pay in the range of $180-$190 per thousand cubic meters (tcm) for Azerbaijani gas in 2008, up from $120/tcm last year. The Azerbaijani side, meanwhile, indicated that it could supply only up to 500 million cubic meters (mcm) of gas to Georgia this year. Georgia wants the deal to cover upwards of 1.5 billion cubic meters (bcm) of gas.

Georgian Prime Minister Lado Gurgenidze is expected to visit Baku soon to press ahead with efforts to finalize a deal. The date of the visit, if it has already been set, has not been publicly announced.

Tbilisi’s quest for energy began in late 2006, when the country’s former chief supplier, the Russian government-controlled conglomerate Gazprom, imposed a stratospheric price increase that many outside observers saw as politically motivated. Tbilisi balked at meeting Gazprom’s demand of $235/tcm, and sought to secure alternate sources of energy.

It would appear that the price that Georgia is willing to pay is a major stumbling block to an agreement with Azerbaijan. After the expiration of the previous bilateral gas-supply contract in the early fall of 2007, Azerbaijani officials sent clear signals to Tbilisi that Georgia would have to start paying export prices that approached world market levels. Perhaps in part because of the domestic political turmoil swirling in Tbilisi in the fall, the Georgian government either did not properly interpret Baku’s signals, or ignored them, and continued to seek gas at the preferential $120/tcm price.

Last November 20, however, Azerbaijan sent a message that Georgian leaders couldn’t miss – the flow of gas from Azerbaijan to Georgia stopped, and so too did negotiations on a new deal. Exports officially resumed again, but experienced another cut-off on January 6.

Azerbaijan’s tough bargaining stance is apparently buttressed by the belief that it can get a world-market price for its gas elsewhere by relying on the recently opened Baku-Tbilisi-Erzurum pipeline. On February 14, Azerbaijani officials announced a short-term deal with Iran, under which Baku will receive a whopping $300/tcm to supply Iran with up to 30 mcm of gas. Areas of northern Iran bordering Azerbaijan have been hit hard by an energy crisis created by Turkmenistan’s unilateral efforts to impose a gas-export price hike on Tehran. Apparently out of a desire to teach Ashgabat a political lesson, Iranian leaders have agreed to pay Azerbaijan a higher gas price than that sought by Turkmenistan. [For background see the Eurasia Insight archive].

Some Georgian observers believe that price is not the only reason for the delay in negotiations. Liana Jervalidze, an independent energy analyst, questioned whether Azerbaijan had the capacity to meet Georgia’s supply request. Azerbaijan’s production at the Azeri-Chiragi-Giunshli fields stands at about 6 billion cubic meters per year, according to Jervalidze, who added that Baku would need to have up to 9 bcm in production to meet all of its domestic needs and export obligations.

Despite the difficult Georgian-Azerbaijani negotiations, along with Tbilisi’s reluctance to deal with Gazprom, Georgia does not appear to be suffering from an energy shortage, even though consumption during this especially harsh winter is roughly 25 percent higher than during the same period in the 2006-2007 season.

Georgian analysts believe there may be some sort o