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Reference ID Created Released Classification Origin
07TBILISI2657 2007-10-26 07:26 2011-08-30 01:44 CONFIDENTIAL Embassy Tbilisi

DE RUEHSI #2657/01 2990726
R 260726Z OCT 07

C O N F I D E N T I A L SECTION 01 OF 03 TBILISI 002657 
E.O. 12958: DECL: 10/22/2017 
REF: BAKU 1268 
Classified By: Ambassador John F. Tefft, reason 1.4(b) and (d). 
1. (C) Summary: The Ambassador met with Georgia's new 
Minister of Energy, Aleksandr Khetaguri, on October 18. 
Khetaguri outlined increasing hydroelectric production in 
Georgia that has enabled Georgia to export significant 
amounts of power to Russia, Turkey and Azerbaijan in 2007, as 
well as supply its domestic market.  He estimates Georgia's 
demand for natural gas at 1.8-1.9 BCM annually.  This demand 
will be met with modest amounts of gas received for transit 
to Turkey and Armenia, and a mix of Russian and Azeri gas. 
Because of its desire to limit the need for expensive Russian 
gas, Georgia is vitally interested in the AIOC-Azeri 
government negotiations over the ACG production sharing 
agreement and AIOC's recent decision to resume re-injecting 
ACG associated gas.  Khetaguri said that Georgia will be 
unwilling to permit AIOC to ship additional amounts of oil 
that may be produced with the help of that re-injected gas. 
He said that Armenia's demand for Russian gas shipped through 
Georgia will not be reduced because of new Iranian supplies 
to Armenia until late in 2008.  The GOG continues to work on 
plans for storage of natural gas.  Nuclear power is a much 
more long-range possibility, Khetaguri said.  End Summary. 
2. (C) Khetaguri was a Deputy Minister of Energy from 
2004-2006 after a long tenure with the Georgian National 
Electricity Regulatory Commission.  In 2006, he became 
president of the Georgian Oil and Gas Corporation and ran it 
until he was appointed as Minister to replace Nika Gilauri, 
who was shifted to head the Ministry of Finance, in October 
2007.  He holds a bachelor's degree in computer science from 
Tbilisi State University and a Master's degree in accounting 
from the Tbilisi Business and Marketing Institute. 
3. (C) Khetaguri said that in summer 2006 Georgia exported 
800 million kilowatt hours (KWH) of electric power pursuant 
to swap agreements with Turkey, Azerbaijan and Russian 
utility RAO/UES.  He expects to receive less this winter in 
return from Georgia's foreign partners, because Georgia will 
have "plenty of electricity".  To the extent it is not 
compensated in kind, Georgia will receive cash, he said. 
Khetaguri was pleased that in 2007, Georgia provided some 300 
million KWH of electricity to Russian utility RAO/UES worth 
USD 12 million.  The new exchange deal with Russia, which 
returns power kilowatt for kilowatt, or for cash, is similar 
to a deal in place with Turkey.  This swap deal continues 
through 2009.  Khetaguri sees it as unfortunate that Gazprom 
and RAO/UES "hate each other," making a gas for electricity 
swap with Russia impossible.  Khetaguri reported that Georgia 
is exploring a power swap deal with Azerbaijan that would see 
summer hydropower from Georgia exchanged for winter gas. 
Such a deal is supported by both nations, but Khetaguri 
laments that it cannot be concluded until Azeri production 
meets internal demands, which means at the earliest 2009. 
4. (C) Water levels at the Enguri and other hydroelectric 
dams are at historically high levels, Khetaguri said. 
Rehabilitation of the second generating unit at Enguri is 
finished, which will increase Enguri's capacity by 160-170 
megawatts (MW) with a lower risk of failure due to improved 
infrastructure.  Work is proceeding on the third of Enguri's 
five  units, which will further increase the capacity at 
Georgia's largest source of electricity as each of these new 
repairs comes on line (one year is required to complete works 
on each).  Comment:  For the first time in decades Georgia 
can fully exploit Enguri for its intended purpose: to provide 
peaking power that complements Georgia's base-load thermal 
and hydropower assets. 
5. (C) Thermal electrical generation capacity is the same, 
that is, Gardabani unit 9, run by RAO/UES subsidiary Mtkvari 
Energy (capacity 250 MW), state-owned units 3 and 4 (130 and 
140 MW respectively) and EnergyInvest's gas turbines (two 
units, capacity 55 MW each).  Unit 9 is forecast to run from 
the end of September to the end of March and Unit 3 from 
mid-November to mid-March.  Unit 4, which Khetaguri hopes 
will not be used, is being readied for a maximum of one month 
mid-December to mid-January if needed.  The gas turbines are 
being "held in reserve," at very high cost to the network. 
They will operate only as needed, Khetaguri said. 
TBILISI 00002657  002 OF 003 
6. (C) Khetaguri said that demand for natural gas this winter 
will not vary much from last year.  He estimates Georgia's
total natural gas consumption for 2008 to be 1.85 billion 
cubic meters (BCM), down from over two BCM forecast for 2007. 
 The reduction is due in part to more rational use of power 
generation capacity that minimizes high-cost thermal 
generation.  Gas demands will be met by 0.2 BCM received from 
Russia for transit of gas to Armenia, 0.25 BCM from South 
Caspian Pipeline (SCP) gas from the Shah Deniz field in 
Azerbaijan, and the rest from a mix of Azeri and Russian gas. 
 Comment: Imports of electricity that could offset gas 
imports are missing from the 2008 Georgian electricity 
balance, principally because Georgia is unwilling to rely on 
Russia for electrical energy as well as natural gas.  It is 
also unwilling to turn to Armenia because it Armenian 
generating assets are Russian-owned. 
7. (C) The amount and price of gas to be received from 
Azerbaijan and Russia are currently unknown beyond existing 
contracts for $235/tcm from Russia which expire December 31. 
Obtaining greater quantities of Azeri gas is the subject of 
negotiations that are currently stalled as Azerbaijan irons 
out differences with BP and the BTC consortium AOIC over 
future production of oil and gas from the ACG and Shah Deniz 
fields (reftel).  Khetaguri said that Azerbaijan had promised 
Georgia one BCM in 2008, but that discussions were halted 
when the Azerbaijan-AIOC negotiations went off the rails. 
Currently, no deliveries of gas are being received, but the 
Azeris have confirmed they will supply 1.3 million cubic 
meters daily until January (out of Georgia's approximately 
8.3 million cubic meter peak demand in mid-winter). 
8. (C) Khetaguri explained to us that AIOC is contractually 
obligated to deliver 1.4 BCM of gas to Azerbaijan from the 
ACG field.  He said that ACG gas production has exceeded the 
2 BCM previously estimated and should total 4 BCM per annum. 
This implies that AIOC now has 2.6 BCM to reinject or sell to 
Azerbaijan - significantly more gas than the previously 
forecasted 0.6 BCM.  Last year, as delays in gas production 
from Shah Deniz occurred, AIOC had agreed with SOCAR to 
reduce the amount of gas reinjected into ACG and supply an 
additional 1.6 BCM to Azerbaijan, some of which was sold to 
Georgia to reduce its dependence on Russian gas.  Now, with 
SCP up and running, Khetaguri said that AIOC wants to 
reinject the entire 2.4 BCM to produce greater-than-planned 
amounts of oil and reap profits from the current high world 
prices for oil.  When negotiations on ACG's future broke 
down, AIOC stopped supplying the additional 1.6 BCM to 
Azerbaijan, supplying only the 1.4 BCM contracted volume. 
Khetaguri estimates that as a result, Azerbaijan will have a 
shortfall in its total needs of 500-600 million cubic meters. 
9. (C) If the Azeris cannot convince AIOC to increase the 
amount of ACG gas supplied, and if they want to remain free 
of any Russian gas imports, they will have to burn more 
expensive mazout than planned or cut supplies to Georgia. 
Both Khetaguri and Georgian Prime Minister Noghaideli want to 
avoid the latter outcome.  Khetaguri said that Georgia holds 
a card in the AIOC-Azeri discussions -- AIOC needs Georgia's 
permission to increase BTC shipments beyond those already 
contracted.  Khetaguri admits that the consortium is not 
immediately obligated to supply the reinjected gas to 
Azerbaijan, but if AIOC reinjects the gas into the ACG field 
to increase oil production, it will not have any way to ship 
that oil to market without Georgia's and Azerbaijan's 
cooperation.  It is this threat to which PM Noghaideli was 
referring in his most recent conversation with the 
Ambassador, and as clarified by Khetaguri, it does not seem 
to involve repudiating agreements or cutting off shipments to 
which the GOG has already agreed.  Khetaguri said that he has 
met and exchanged views on this issue with Georgia BP Chief 
Hugh McDowell.  Comment: Under the scenario as explained by 
Khetaguri, the best outcome of the AIOC-Azeri negotiations 
would seem to be a compromise under which some gas is 
reinjected, some more oil is produced and shipped via BTC, 
and some gas is supplied to Azerbaijan and Georgia.  Both BP 
and Khetaguri believe that Azerbaijan will have to burn 
mazout for power in 2008, because even the additional 1.6 BCM 
is not enough to meet Azeri demand, let alone export gas to 
TBILISI 00002657  003 OF 003 
10. (C) The Ambassador asked Khetaguri his impressions of the 
gas supply to Armenia from Iran, as the new Iran pipeline 
comes into operation.  Khetaguri said that he understands 
from personal review of the Armenian gas balance that Armenia 
does not intend to reduce Russian gas imports until the end 
of 2008, implying there will be no real increase in supply to 
Armenia from Iran before then.  Therefore, he expects there 
will be no decrease in transit gas for Georgia from the 
North-South pipeline until that time.  As for Georgia's 
dealings with Iran on energy, Khetaguri said there have been 
no government-to-government negotiations since 2006.  He 
denied that KazTransGaz is negotiating with Iran for 
11. (C) Looking to the future, Khetaguri said that the next 
two to three years will be critical for both Georgia and 
Azerbaijan in terms of supplying their needs for natural gas. 
 After that, Georgia will need much less Russian gas as its 
transit fee for Shah Deniz gas trends up to a maximum of 0.8 
BCM per year.  In the short term, he said, gas which AIOC had 
intended to reinject to boost oil production will be needed. 
Khetaguri reiterated the GOG's willingness to "turn the 
screws" on AIOC to get its way.  The GOG is proceeding with 
feasibility studies for gas storage facilities, and has 
discussed obtaining financing for them from the Azeri 
government.  The options include a small (0.5 BCM) but 
inexpensive facility at Rustavi, and/or a larger (up to 5 
BCM) facility at Ninotsminda which would cost $60 million for 
the first, 400-500 million cubic meter stage alone.  He also 
sees a need for more gas storage in both Turkey and 
Azerbaijan. Khetaguri said that nuclear power is something 
the GOG is considering, but he sees it as something a long 
way off. 


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