Pipeline dominos – is Georgia next?

The issue of European gas transit and its potential, significant ramifications, came to the forefront when dispute between Russia and Ukraine led to natural gas supplies being cut off to European customers in the middle of winter.

The issue of gas transit and energy security was again highlighted by the recent dispute between Russia and Belarus.

The Russia-Ukraine dynamic has now changed dramatically with Gazprom and Naftogaz Ukrainy, the Ukraine state-run energy company, agreeing to move toward a complete merger after they create a joint venture. This would in effect led to Russian control over the Ukrainian pipelines transiting gas westward.

Attention may soon turn towards Georgia, where Parliament recently approved legislation that could permit the privatization of country’s main gas pipeline network, which transits Russian gas across Georgia to Armenia.

Earlier this month, Georgian Prime Minister Nikoloz Gilauri revealed in an interview of plans to sell 10% to 15% of Georgia’s trunk gas pipeline on the London Stock Exchange in two to three years' time.

This has led to concerns from Georgia nationalists that sale could give Russian more control over the regional energy market, and from the Armenian government, which is worried about the possibilities that Azerbaijan could move on the pipeline, negatively impacting Armenia.

The issue of privatization was first brought up in 2005, when President Mikheil Saakashvili announced that talks were underway with Gazprom over the privatization of the main gas pipeline network, which required significant capital expenditures for rehabilitation.

The announcement drew sharp criticism from the United States. As a result funds for rehabilitating the gas pipeline were included in a $295.4 million U.S.’s assistance program to Georgia.

However, the issue of privatization is not so clear-cut.   Under the aid agreement with the independent US foreign aid agency Millennium Challenge Corporation the Georgian Gas International Corporation (GGIC), which manages the pipeline, agreed would not privatize the asset without written consent from the MCC. The agreement, which ended in February 2010, also stipulated that if Georgia privatizes the gas pipeline in any way, the country must return all the financial aid.

In addition, Georgia does not have procedures in place to accommodate foreign investment in Georgian businesses. 
A change in regulation is needed to allow non Georgian-national companies to acquire stakes in the country’s businesses.

Gazprom has said that it is not actively seeking a stake should privatization occur.

A Gazprom official told Energy Risk: “We do not hold any equity in the pipeline at all. If we even considered it a possibility, the first step would be to await the final decision from the Georgian Parliament, not only through first session results but also on final results on its [economic and business] restructuring programme. The complete pipeline would have to be included in the list for privatization.”

Given the Russian the gas monopoly’s very significant interest in acquiring the Georgian pipeline system in 2005 this statement is likely Gazprom's wily attempt at deflecting criticism voiced by those fearing greater Russian control over the transportation of gas in the region.