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Azerbaijan’s Role in Georgia’s Energy Security

Azerbaijan’s Role in Georgia’s Energy Security

Discussion about availability of deteriorating partnership relations between Azerbaijan and Georgia arose after Georgia conducted negotiations with Russian state company Gazprom over growth in gas transit volumes. These countries have passed a long way of partnership political relations. Naturally, Azerbaijan, as our neighboring country, is one of the main important strategic partners for Georgia.

Besides political relations, our countries have also gained important experience of partnership in the energy field. The objective of cooperation between the two countries aim at diversifying energy resources and routes. At the same time, these countries make contribution to the European energy security issues.

Georgia and Azerbaijan established diplomatic relations more than 20 years ago. Strategic partnership between these two countries has been preconditioned by objective and subjective geopolitical reasons, in most cases.

Our countries have not launched cooperation under the ruling of either the United National Movement (UNM) or the Georgian Dream coalition. After the Soviet Union Collapse, Georgia and Azerbaijan became independent countries and naturally, it was necessary that the Post-Soviet countries launch new relations. Moreover, in 1996 our countries signed an agreement on friendship, cooperation based on mutual assistance and good neighborhood principles.

If we overview the ruling period of Saakashvili  or the Georgian Dream, it is evident the power change has not  particularly revised our cooperation. This is natural, because the strategic partnership and bilateral relations always prevail over political goals of this or that specific  regime. However, it should be noted under the ruling of the Georgian Dream, the TransAnatolia (TANAP) pipeline construction project was inaugurated. Naturally, similar large-scale projects take Georgia-Azerbaijani strategic partnership relations to higher levels.

Therefore, Georgia and Azerbaijan should cooperate in constant regime in different fields to deepen the strategic partnership. Taking into account geopolitical situation in our countries, any ruling political forces in our countries should enhance cooperation to follow common goals and jointly overcome all challenges.

Besides our cooperation in political aspects, the power sector represents the most important field of cooperation between our countries.

On the one hand, Azerbaijani is a country rich of natural resources and this is one of the fundamental issues for Georgia’s energy security.

On the other hand, based on the geopolitical location, Georgia remains the most important strategic partner for Azerbaijan.

Both countries are interconnected through such large-scale and regional-importance energy projects as Kulevi Oil Terminal, Baku-Supsa and Baku-Tbilisi-Ceryhan oil pipelines, Baku-Tbilisi-Erzurum gas pipeline and the above-mentioned TANAP gas pipeline.

It is evident that involvement of both countries in large-scale international projects will essentially upgrade energy security issues.

It should be also noted Georgia and Azerbaijan have signed a special agreement on cooperation in the energy sector. The agreement calls for active development of bilateral cooperation in electricity, oil and gas fields.

The Energy Bridge project that connects power systems of Azerbaijan and Georgia includes the high-voltage (500kv) transmission line. This infrastructure enables to connect power networks of Turkey and Azerbaijan     via Georgia. Naturally, cooperation in this respect raises higher interest in the strategic partnership enhancement.

Along with Georgia’s economic development, naturally, the demand for energy carriers also grows. Currently, Georgia’s natural gas consumption exceeds 2 billion cubic meters and this volume will permanently increase along with the gasification project expansion. Moreover, Georgia’s electricity consumption grows every year and the ratio of steam power plants in the electricity generation sector also rises. Moreover, vehicles are actively moved to natural gas systems and commercial gas consumption further grows. As a result, the statistics shows that natural gas consumption has increased by 147% in 2003-2014.

At the same time, it should be noted the Gardabani combined-cycle steam power plant was inaugurated and the facility’s daily natural gas consumption is about 1 million cubic meters. Moreover, Georgia records the so-called peak periods in winter season. Consequently, the mentioned steam power plant will also work in winter period and this will be additional burden in the peak periods.

The above-mentioned analysis suggests that the Georgian government’s negotiations on natural gas diversification were dictated by real energy security enhancement needs, in practice.

About 90% of Georgia’s natural gas market is supplied by Azerbaijani gas. Therefore, it is natural for many years SOCAR has grown into a market monopolist. Moreover, SOCAR is developing the retail network and the gasification process in intense regime and, besides the wholesales trades, SOCAR grows its market ratio in the retail sector too.

When discussing monopolies, we should also remember that SOCAR is an only supplier in the motorgas market and it controls a considerable part in the retail network. In 2014 SOCAR increased supply tariffs to competitors in the retail network, while decreased wholesales tariffs within its own network. As a result, a part of competitor companies went bankrupt and SOCAR additionally strengthened positions in the retail network. Later, the company increased tariffs in its network too. This monopolistic decision has damaged the autogas market and Georgian consumers.

Under the recently concluded memorandum, Georgia will receive additional 500 million cubic meters of natural gas from Azerbaijan. At the same time,

SOCAR has expressed readiness to lower tariffs on 1000 cubic meters of commercial gas by 35-40 USD for gas fueling stations. At the same time, SOCAR and Azot have reached an agreement on natural gas supply at preferential tariffs (as reported, Azot plant is one of the major consumers of natural gas and its annual consumption makes up 300 million cubic meters).

Pragmatic appraisal of this situation suggests that SOCAR decided to revise tariffs only after the Georgian government and the Energy Minister conducted active meetings and negotiations with Russian Gazprom.

Furthermore, Georgia will start constructing its first gas storage reservoir by the end of 2016 to store 210-280 million cubic meters of natural gas. SOCAR has expressed much interest in implementing this project and supposedly, the Azerbaijani company will be involved in the project implementation. Naturally, SOCAR involvement will further expand its monopolistic positions.

Market diversification and creating competitive environment is one of the important challenges before the Authorities. In any case, I believe the Georgian government should not suspend negotiations with new suppliers for the purpose of market diversification. The energy market is a specific segment, where natural monopolies are created in most cases. Naturally, in similar situations it is very difficult to improve competitive environment, but if the market is regulated properly, competition may be geared up in the supply chain.

Under the Georgian regulations, admission of the third body into the natural gas sector is entirely deregulated and therefore, real competition may be achieved by inviting new supplires to the market.

Besides SOCAR, Georgia is able to receive natural gas from Russia. For many years Georgia has received a certain volume of natural gas from Gazprom. Appropriate infrastructure exists with Iran through both Armenia and Azerbaijan. Naturally, Georgia should make a maximal use of similar opportunities and create competitive supply market.

It should be stressed the natural gas market diversification will not harm Georgia-Azerbaijan strategic partnership format. I believe. Besides energy projects, our partnership is based on deeper political and geopolitical aspects. Therefore, I am sure, despite any scenario in our energy relations, Georgia-Azerbaijan friendship and strategic partnership will last forever.

Andria gvidiani