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Violations in Georgian Oil and Gas Corporation

LLC Georgian Oil and Gas Corporation (GOGC) was founded under the March 21, 2006 decree of Minister of Economic Development.

The state co-participation ratio in the enterprise made up 100%. LLC Georgian Oil and Gas Corporation became an assignee of JSC Georgian Gas International Corporation and JSC Georgian Oil International Corporation.

Before 2010, LEPL Enterprise Management Agency, a body under management of Ministry of Economy, used to perform commissions of the corporation partner.

In 2010 amendments were made to the president’s decree and 76% of the corporation were transmitted to Ministry of Energy under management rights. Based on the above-mentioned, on September 21, 2011, changes were made to agreement on transmission of shares and stakes under management right. The document was signed by Ministry of Economy and Ministry of Energy. Under government resolution,  100% of corporation shares were directed to the capital of JSC Partnership Fund.

In 2012, 2013 and 2014 the corporation has received 1 201 747 685 GEL revenues, including operating incomes marked 988 320 290 GEL and nonoperating revenues made up 213 427 395 GEL. Salaries of directors general and financial, commercial and technical managers in 2012 was 13 200, 10 200 and 9 000 GEL, in 2013 – 12 500, 10 200 and 9000 GEL and in 2014 – 12 500, 10 200 and 9 000 GEL. Bonuses of directors general and their assistants in 2012 made up 80 522, 62 200 and 58 900 GEL respectively.

Gas Consumed without Purpose

In 2012-2014 five foreign companies extracted 34 million cubic meters of accompanying gas at 14 drills, of which 11 million cubic meters were emitted to the air or burnt on Tower and this gas was not used for commercial goals.

Under the agreement between the corporation and the contractor on product interest allocation, the extracted accompanying gas may be used for commercial purposes by the side that considers it as a commercial product. The auditing service report reads: “The corporation failed to submit a conclusion of either contractor or its owner about commercial character of gas. The corporation has not submitted gas utilization plans either”.

Based on the above-mentioned circumstance, the auditing service has issued recommendation, under which the gas corporation,  for optimization of revenues from gas extraction, should carry out more effective measures. Namely, if the contractor and corporation agree that excessive accompanying gas does not have commercial value, then other plan should be developed for gas consumption.

The corporation has sent a letter to the Ifact to explain that Georgia does not own commercial gas field and extracted gas is only the gas accompanying oil extraction process in very small volumes.

“That volume of accompanying gas that may be supplied to consumers is sold by investor companies on the market,while noncommercial volume (or gas volume, which is unprofitable to supply because of its small volumes and lack of due infrastructure) is subject to utilization by investor companies, including, the gas should be emitted to the air or burnt, in compliance with international practice of oil industry and Georgian legislation requirements.

Questionable Deals

In 2011 JSC Georgian Oil and Gas Corporation signed an agreement with LLC New-Energy for construction of electricity transmission lines and substations in Svaneti. Total value of the agreement was 44.5 million GEL. The auditing service report reads that the company has cut 546.174 cubic meters of ground, while in the event of 24-hour operation, excavators could cut only 315.548 cubic meters of ground, down 230.626 cubic meters as compared to the actually fulfilled job.

The same situation is repeated in case of transportation of cut ground, when the performed job is appraised by 558 672 cubic meters of ground, while machines could cut only 375 774 cubic meters of ground in 24-hour regime operation.

Tornike Shermadini, head of State Auditing Service Department for Auditing Economic Activities, noted that they expect the Prosecutor’s Office to investigate the case.

Partnership between the corporation and LLC ElGeorgia-2006 also raises certain questions. The construction project made by the company, according to the auditing service, does not comply with the agreement requirements. As part of the mentioned cooperation the company cut and transported  ground of VII category and received 3.9 million GEL in exchange, while, according to geological-lithology research works on the projecting territory, this category of ground is not registered at all.

Unclear Administration of Funds Attracted from Bonds

Under loan agreements signed between JSC Georgian Oil and Gas Corporation and LLC State Service Bureau on September 5, 2012 and September 27, 2012, the Bureau received 15 million USD and 13.5 million USD loans from the corporation and the annual interest rate of the loan marked 11% (total of 28.5 million USD).

The loan was to be paid within a year after the loan agreement came into force. Because of unfulfilled agreement terms, as of October 10, 2013, the amount of 26 443 929 USD was not paid.

Because of the borrower’s financial problems, LLC State Service Bureau and the corporation signed an agreement on May 21, 2014 and the unpaid sum (26 443 928 USD) was restructured. To serve the assumed obligations, the borrower mortgaged a 100% stake of Batumi Tower on behalf of the corporation. Under the article 5 of the agreement, the mortgagor was obliged to maintain the mortgaged subject value (85 738 000 GEL) within the agreement validity period. However, on April 6, 2015 LLC Batumi Tower property was sold at 25 004 426 USD and the value of the mortgaged property was significantly reduced.