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Is Gazprom Waiting to Pounce on a Piece of a Georgian Pipeline?

By Nino Pasturia | 13 July 2010

An effort to remove Georgia’s North-South gas pipeline from a list of strategic state-owned properties is stirring controversy. Officials in Tbilisi maintain that full privatization of the pipeline is not an option, but some economic analysts contend that even the projected sale of a minority stake in the route could threaten Georgia’s energy security.

During a second reading on July 13, the Georgian parliament approved amendments to privatization legislation that would strip the pipeline of its protected category as a “strategic object.” The amendments must go through a third reading before receiving final parliamentary approval.

 

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MP Lasha Tordia, one of the proposal’s sponsors and a member of the governing United National Movement, has argued that designating the trunk pipeline as a “strategic” asset is an outdated concept. The time has come for a “conceptual change” in how such assets are viewed, he declared at a July 12 round-table on the proposal, sponsored by the Open Society Georgia Foundation in Tbilisi.

“[W]e had no electricity and gas when the gas and electricity distributions were under state ownership, but this issue is solved now when they are in private ownership,” Tordia said. “Thus, this object [the pipeline] can also be in private ownership.” He rejected an assertion that the idea to sell off a stake in the pipeline was connected to a government budget deficit.

Prime Minister Nika Gilauri, a former energy minister, is on record as being a steadfast opponent of giving private owners a majority stake in the pipeline. But he conceded that 10-15 percent of the pipeline could be offered via the London Stock Exchange in the next few years.

Most Georgian critics of the amendments have focused on the possibility of the Russian state-controlled behemoth Gazprom gaining a stake in the pipeline, which carries Russian gas to Armenia. The energy giant had expressed interest in such a deal back in 2005, reportedly offering as much as $250 million for the pipeline. A $49.5-million energy infrastructure rehabilitation project from the US-run Millennium Challenge Corporation helped derail those Gazprom negotiations.

In Armenia, which depends on the pipeline for its gas supplies from Russia, many are worried about the possibility that an Azerbaijani buyer could come forward. Armenia and Azerbaijan have tangled for more than 20 years over the Nagorno-Karabakh territory, and an Azerbaijani stake in the pipeline would be viewed in Yerevan as a possible instrument of coercion in the peace process.

Aside from its cooperation with Tbilisi on the Baku-Ceyhan-Tbilisi and Baku-Erzurum pipelines, the State Oil Company of the Azerbaijani Republic (SOCAR) has a sizeable presence in Georgia’s retail gasoline market, and it is working to ship natural gas to the Black Sea port of Poti.

In Baku, SOCAR’s interest in the Georgian pipeline is widely viewed as tepid at best. Azerbaijani media outlets reported in early July that KazMunaiGas, a state-run Kazakhstani company, had opened negotiations about acquiring a stake in the Georgian pipeline. KazMunaiGas already runs Tbilisi’s gas distribution network and also owns an oil terminal in Batumi. Georgian Energy Minister Aleksandre Khetaguri denied the reports.

“No privatization of the main gas pipeline is being discussed at the moment, neither with the Kazakhs nor with anybody else,” Khetaguri told EurasiaNet.org. “Removal of the gas pipeline from the list of strategic objects never meant that it would be privatized. Only 10-15 percent of it can be divested via the LSE as the prime minister stated, and only in about two to three years.”

KazMunaiGas representatives were unavailable for comment. But many Georgian economic and energy analysts consider selling stakes in the pipeline a non-starter.

“The Georgian trunk pipeline is a political rather than an economic asset and it behooves the government not to divest it,” asserted economic analyst Shota Murghulia. “The entire world, including America, recognizes objects of strategic importance and I cannot understand why we play down this issue. This pipeline is a tool for bargaining with Russia that it is vitally interested to use to supply Armenia, its political ally.”

At the Open Society Georgia Foundation round-table, opposition MPs called for the insertion of language into the amendment that would explicitly prohibit private investors from acquiring controlling stakes in state property assets. Minister Khetaguri told EurasiaNet.org that there was no need for such measures since divesture of more than 75 percent of the pipeline is banned under the law. That provision, however, has done little to reassure the opposition. [Editor’s Note: The Open Society Georgia Foundation is part of the Soros Foundations network. EurasiaNet.org operates under the auspices of the Open Society Institute, a separate part of the network].

The Millennium Challenge program to upgrade the pipeline “prohibits its divesture until the compact is finished [in April 2011],” said Vato Lezhava, an adviser to the prime minister. A US Agency for International Development project to enhance gas supplies to Poti “also prohibits divesture of the North-South pipeline for several years,” he said.

In response to critics, MP Todia asserted that “[e]ven if Russia owns it, I see no danger as you do.” Russian, Kazakhstani and Czech companies’ ownership of various parts of Georgia’s energy network means that no single company can gain a strategic hold on the sector, he claimed.

Georgia’s talk of a limited sell-off could be a trial balloon designed to gauge international interest, suggested energy analyst Liana Jervalidze. As other players enter the South Caucasus energy market, that interest is likely to extend beyond Russia. “I do not exclude that Armenia, Kazakhstan, even Iran or some other investor would bid for these assets,” Jervalidze noted.

 


Editor’s note: Nino Patsuria is a freelance business reporter based in Tbilisi.

 

Copyright (c) 2003 Open Society Institute. Reprinted with the permission of the Open Society Institute, 400 West 59th Street, New York, NY 10019 USA, wwwEurasiaNet.org. or www.soros.org.

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