Who’s the winner in “gas battle”?
After the negotiations having lasted for around a year, it was stated on January 11 that Georgian Government and “Gazprom” Company came to an agreement regarding the payment of transit gas supplied to Armenia through the territory of Armenia.
It should be noted that for gas transit “Gazprom” was paying to Georgia not with financial resources, but with goods, by 10% of the supplied gas. The Russian company intended to refuse that option and totally pass on to the mechanism of direct financial payments. Yet in January 2016 the then head of “Gazprom-Armenia” (incumbent head of State Revenue Committee) Vardan Harutyunyan in an interview with “168 Hours,” reflecting to negotiations around gas transit, stated that price for Georgian transit—10%, is the most expensive price, functioning in the world.
“Currently it isn’t acceptable for “Gazprom” to pay for Georgian transit, for which negotiations should be launched. Finally, price paid for that transit is included in our tariff, and our consumers should understand that through negotiations “Gazprom” intends to reach reduction of transit price, which will have a direct influence on the border price,” Vardan Harutyunyan said, adding that by construction of Iran-Armenia gas pipeline more favorable conditions have been created for “Gazprom,” so that they could negotiate from stronger positions with the Georgian side.
He stated that in case of the worst option—if negotiations enter into a deadlock—Russia will have any other option of supplying gas to Armenia through Iran, and that technically it’s possible. “As a result, Georgians will suffer, as they won’t receive their transit payment,” he said. Thus, initially there was an impression that Georgians have no place to “flee” and will have to agree with new conditions. However, Georgians were opposing, in the period of 2016 they were being held first in Milan, then in Minsk.
Meanwhile, parallel to ongoing negotiations, “Gazprom-Armenia” stated on November 1, 2016 that it intends to apply to RA Public Services Regulatory Commission (PSRC) with the claim of review of gas tariffs for consumers in Armenia. For gas tariff reduction the Company was stating 4 factors, one of which was reduction of gas transit price through the territory of Georgia.
“Deadline of the agreement on natural gas transit provided to Armenia terminates by the end of the year and a new agreement should be signed between “Gazprom Export” LLC and “Georgian gas and transport company” LLC. On account of it, RA Government, together with “Gazprom Armenia” CJSC, “Gazprom export” LLC and the Georgian side has launched negotiations on review of natural gas transit price,” the statement reads.
The Company applied it, PSRC approved new tariffs, which have become valid since January 1, i.e. negotiations were underway, however, possible reduction of gas transit through the territory of Georgia was approved as an already implemented fact. Currently negotiations have been terminated. It’s mentioned that a mutually beneficial agreement has been reached. Georgian Energy Minister Kakha Kaladze stated on January 11 that after a few stages of negotiations they succeeded to have an optimal proposal.
“By this agreement Georgia’s dependence on the Russian energy resources is not increasing. Only the payment format is changing, transition to monetary payment in accordance with the international practice. The agreement is a short-term, it’ll be signed for two years only,” Kaladze said. On January 13 “Gazprom Export” Company also issued an official statement, which said that the parties agreed to pass on to monetary payment for gas transit. “According to reached agreements, the Russian party guarantees payment for 2-2.2 m3 gas per year supplied to Armenia through the territory of Georgia,” the statement said.
Neither the Georgian side, nor “Gazprom export” didn’t state how much will transit price comprise. And during the meeting on January 13 Armenian PM Karen Karapetyan, reflecting to Georgia-Russia negotiations, stated that price for the transit price is lower, than 10% gas. “Accordingly, during this transit “Gazprom” Company gains certain money, planned in tariff reduction,” he said.
As for the Georgian side, Kaladze’s enthusiasm wasn’t shared by the many in Georgia, as, although it’s stated on mutually beneficial deal, “Gazprom’s” benefit in this case is perceived as a loss for Georgia. This agreement in Georgia was already named as Georgia’s “betrayal” and ”capitulation.” According to Georgian analysts establishment of direct financial connections with “Gazprom” contains serious risks, and official Tbilisi should have done everything possible for the maintenance of “gas for transit” formula.
It should also be noted, that 2 days ago 80 NGOs of Georgia addressed a letter to Georgian Government demanding to publish details of Russia-Georgia agreement signed with “Gazprom” on payment of transit gas, supplied to Armenia.
Representatives of Georgia’s NGOs have concerns that risks are involved in the agreement. Moreover, not only the opposition, but also Georgian president Giorgi Margvelashvili, are against the gas agreement. The latter’s press spokesperson Eka Mishveladze told reporters, that according to Margvelashvili that agreement damages the country.
On account of this all, seemingly “Gazprom” was the winner, it reached its goal: shift was made to monetary payment, and its cost is lower, than the gas price. However, everything isn’t that simple. The point is PM Karen Karapetyan during the very press conference on January 13 mentioned a crucial “nuance,” which wasn’t attached due attention.
“Russia and Georgia agreed on gas transit the following way. 10% of former agreement was paid with goods, for the rest 1 million m3 money is allotted, which is lower by its price, than 10% gas,” he said.
On average 2 billion m3 gas is supplied to Armenia from Russia per year. This means that “Gazprom” has partially reached its purpose, as for half of that volume yet the option of goods will function: Georgia will receive its 100 million m3 gas.
Moreover, “Gazprom” has reached its purpose not partially, but less—30% or 40% due to decrease in gas volumes.
Thus, in 2015 Russia supplied 2 billion m3 gas to Armenia. Annual import index for 2016 hasn’t been published yet, however, data for January-September are available—gas volume imported from Russia comprises 1.122 billion m3. 1.373 billion m3 gas was imported in the same period of 2015, i.e. gas import volume has decreased by 18% and if in the fourth quarter 2016 the same temp was maintained, then gas with the volume of a bit more than 1.6 billion m3 was imported from Russia in 2016.
There is no any guarantee that this year import volumes will be recovered and reach 2 billion m3. Of course, purpose of tariff reduction by “Gazprom Armenia” was consumption increase, however, Karen Karapetyan himself isn’t sure that gas supplier will reach that goal.
“What’s the expectation of “Gazprom”? Establish the possibility of market enlargement, in case of which it won’t suffer losses. If in the period of one year it isn’t compensated, and the year will show whether it’ll boldly go in that direction,” he said on January 13. If in 2017 Armenia imports gas less than 2 billion m3, it’ll mean Georgia will have greater part of transit payment on its preferred option—goods.
Thus, touching upon “Gazprom’s” total victory is exaggeration, and maybe it’ll be more proper touching upon Georgia’s victory.
To conclude, “Gazprom” has stated 4 factors of gas price reduction:
1.Decrease of price in natural gas transit through the territory of Georgia,
2. Anticipated growth of consumption volumes as a result of tariff decrease,
3. Optimization of financial expenditures of “Gazprom Armenia” CJSC,
4. Planned financing by only shareholder of “Gazprom Armenia” CJSC—“Gazprom,” with the purpose of fostering natural gas consumption market stabilization and market stabilization tendencies.
Basically, the fourth point isn’t a factor: it means covering the risk of failure of the other 3. The first factor, as we saw, works partially. Consumption growth (point 2) is more an after-effect, and not a factor. And if in 2017 gas consumption volumes don’t grow in Armenia, the only hope will remain optimization of financial expenditures. And as it won’t be sufficient to cover the loss, Russian “Gazprom” will be urged to cover the immense loss of its “daughter.”
And time will show how we are going to compensate it.
By Babken Tunyan
