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Reference ID Created Released Classification Origin
08TBILISI387 2008-03-07 14:41 2011-08-30 01:44 CONFIDENTIAL Embassy Tbilisi

DE RUEHSI #0387/01 0671441
R 071441Z MAR 08

C O N F I D E N T I A L SECTION 01 OF 03 TBILISI 000387 
E.O. 12958: DECL: 03/06/2018 
Classified By: Amb. John F. Tefft, reason 1.4(b) and (d). 
1. (C) Summary: The Ambassador met with Georgian Minister of 
Energy Aleko Khetaguri on February 27.  Khetaguri told the 
Ambassador that Georgia is not willing to approve expansion 
of the Baku Tbilisi Ceyhan (BTC) pipeline until it receives 
an explanation of BP's plans for re-opening the Baku-Supsa 
oil pipeline, which has been closed down for repairs for 
several months.  Khetaguri said that the government has 
dropped linkage between BTC expansion and its demand for 
flexibility by BP and AIOC in providing gas to Azerbaijan 
from the ACG oil field -- flexibility that will free up Azeri 
gas for Georgia's potential use.  Overall, Khetaguri knows 
that larger oil transit volumes are in its interest, and he 
supports an active export route via ship or pipeline across 
the Black Sea to the Odessa-Brody pipeline, that would handle 
increased shipments via the Caucasus from Kazakhstan.  To 
obtain gas for the future, Georgia has proposed a five-year 
contract with Azerbaijan for gas at a price of USD 150-160, 
calculated on the cost Azerbaijan must pay to burn mazout in 
place of gas supplied to Georgia.  After 2009, when more gas 
is on line in Azerbaijan, Georgia would pay a commercial 
price.  Khetaguri downplayed the importance of Georgian plans 
to sell Georgian Railways.  He said that the government is 
seeking expressions of interest in order to figure out a 
value for the system, and would at first sell no more than 10 
percent of it.  The Government is pursuing plans to further 
increase production of hydropower for domestic use and export 
to its neighbors.  End Summary. 
2. (C) Khetaguri noted that Georgia has just survived the 
coldest winter on record, with temperatures of minus 14-15 
for two weeks in a row at one point.  The country suffered no 
noticeable shortages of natural gas over the period. 
However, Khetaguri said he finds the situation with regard to 
oil better than that for gas.  Khetaguri is well aware of 
BP's and AIOC's desire to increase the capacity of the Baku 
Tbilisi Ceyhan (BTC) pipeline from 1 million bbl/day to 1.2 
million, and then to 1.6 million with infrastructure 
upgrades.  Khetaguri said the BP is telling him that the 
Baku-Supsa pipeline, which has been idle for more than a 
year, will start operations again in April, though he has his 
doubts that target will be met.  He is also hearing that BP 
wants to transfer operation of the Baku-Supsa pipeline to the 
Azeris, as BP has already done on the Northern Route pipeline 
through Russia. 
3. (C) Khetaguri noted that Baku-Supsa carries 175,000 
barrels of oil per day when operating.  He expressed concern 
that the 200,000 bbl/day capacity to be added to BTC will be 
sufficient for BP to redirect all the oil that flows through 
Baku-Supsa to the BTC.  There will, of course, be Kazakh oil 
available for both routes, if Azerbaijan's SOCOR allows it, 
he said.  SOCOR already is preparing the Kulevi oil terminal 
in Georgia on the Black Sea for opening, and the only way 
there is by rail.  Khetaguri worries that if SOCOR takes over 
Baku Supsa, it will have a near-complete monopoly on oil 
transit through Georgia.  The only exception will be the 
Batumi Oil Terminal, which the Danish company GreenOak has 
sold to Kazakhstan.  The Azeris are already creating problems 
for the Kazakhs at the port in Baku and on the railroad in 
4. (C) Despite these concerns, Khetaguri looked forward to 
increasing shipments of oil via Georgia, and is supportive of 
the building of an oil pipeline across the Black Sea, if 
there is commercial will to do it.  The best starting point, 
he believes, is Supsa because the Baku-Supsa pipeline ends 
there.  Nevertheless, ships would keep all the Georgian oil 
terminals in operation and would be faster to put into 
operation.  Khetaguri noted that to handle a pipeline or 
increased oil volumes by ship, the Odessa-Brody pipeline will 
have to be reversed to supply Europe, something that has not 
yet come to pass despite Ukraine's support for the idea.  He 
is pleased, however, that Memoranda of Understanding have 
been signed among the Azeri, Georgian, Ukraine, Latvian and 
Polish governments.  On the other hand, he observed, there is 
no agreement yet between Kazakhstan and Azerbaijan. 
Georgia's interest is to maximize oil transit volumes, 
Khetaguri said, and Georgia is free and willing to negotiate 
with anyone to accomplish that.  He added that if a new oil 
pipeline becomes feasible, it would make sense to construct a 
TBILISI 00000387  002 OF 003 
gas pipline alongside it. 
5. (C) The Ambassador raised BP's concerns about the GOG's 
delay in authorizing the increase in capacity of t
he BTC 
pipeline.  Khetaguri said that the GOG is no longer linking 
approval of the BTC pipeline expansion to BP's provision of 
gas from the ACG field to Azerbaijan.  He said that after he 
and PM Gurgenidze met with BP's Andy Inglis in London 
(apparently in December), the issue of BTC expansion is now 
linked to the GOG receiving a good explanation of when the 
Baku-Supsa pipeline will reopen, who will operate it and how. 
 The additional capacity on BTC is more than the Baku-Supsa 
pipeline normally transits, he said.  Khetaguri's concern is 
that the Baku-Supsa pipeline might essentially be abandoned 
as oil that is currently shipped through it by the Western 
companies will be diverted to BTC.  He added that the closure 
of Baku-Supsa cost the Georgian government $17 million in 
transit fees last year.  He contends that all necessary work 
on the pipeline in Georgia is complete, but there is work to 
be done on the Mtkvari (Kura) river crossing in Azerbaijan. 
(Note: BP's country manager for Georgia, Hugh McDowell, was 
unaware of the change of tactics by Khetaguri and the GOG 
when we called him to ask if he had heard about it from the 
GOG.  On March 7, we talked to Mat Taylor in BP's office who 
said that BP has provided an update on the Baku-Supsa 
reopening to Khetaguri, and is waiting to see if the 
information has satisfied the Ministry.  Taylor said that the 
consortium voted on March 6 in Baku to move forward with the 
BTC expansion.) 
6. (C) Khetaguri said that Georgia would like to see the Shah 
Deniz agreement amended to give Georgia an option to purchase 
at commercial prices any gas not taken by the Turks or that 
is produced in excess of quantities foreseen in the existing 
contract.  He said that AIOC had agreed in principal to this 
in December and were supposed to send a draft contract but 
have not yet done so.  As for SOCAR gas, Khetaguri said SOCAR 
has told the GOG it has no gas to deliver until May, when it 
can begin supplying 3.5 million cm/day, sufficient to cover 
all Georgia's needs until September.  After that, he said, 
SOCAR will face a deficit and can't say what will be 
available to Georgia.  Khetaguri said that Azerbaijan burned 
a million tons of mazout in 2006-07, but only 350-400,000 
tons in 2007-2008, so it has the option to burn more in 
2008-2009.  Khetaguri said that he had offered Azerbaijan a 
five year contract, and was willing to pay $150-160 per tcm 
of gas, an amount calculated based on the cost of mazout that 
Azerbaijan would have to burn to free up gas for Georgia (as 
much as 850 million cm, according to Khetaguri).  The Azeris 
are increasing domestic production and storage capacity. 
After mid-2009, when sufficient gas is available that 
Azerbaijan can supply Georgia gas without burning mazout, 
Georgia would pay a commercial price for its supplies, 
Khetaguri said.  The only response from the Azeris, according 
to Khetaguri, is that a fair price for gas is $160-180 -- if 
gas were available, which the Azeris say it is not. 
Khetaguri remains disappointed by BP's unwillingness to sell 
more gas that it usually reinjects into the ACG oil field. 
He said that Georgia would even be willing to buy mazout for 
Azerbaijan and take gas in return.  Also, an offer to swap 
100 megawatts of Georgian electricity for gas was refused by 
the Azeris, ostensibly because the power lines into 
Azerbaijan cannot handle the load.  Khetaguri disputes that. 
7. (C) Khetaguri estimates Georgia's current yearly gas needs 
at 1.85 billion cubic meters.  1.3 bcma is needed for 
residences and power generation, he said.  As of October 
2007, he said, all new customers have no regulated tariff and 
must pay commercial prices for gas from whatever source they 
can find.  Gazprom is now chargin $280 per thousand cubic 
meters, he said.  This year, Georgia is entitled to 300 
million cm from Shah Deniz, 200 million for transit from 
Gazprom and has an option for 300 million more at a cheap 
price from Shah Deniz.  This leaves a deficit of 500 million 
cm that must be procured at commercial prices.  In 2009, 
there will be an additional 100 million available from Shah 
Deniz and the deficit will be only 400 million cm.  The GOG 
got the population through the current winter by subsidizng 
gas prices, via a credit to Georgia Oil and Gas Corporation, 
which markets it to customers in Georgia.  GOGC's profits 
will be accordingly reduced as it has to pay back the credit, 
he said. 
TBILISI 00000387  003 OF 003 
8. (C) The Ambassador asked Khetaguri about his opinion of 
plans to sell Georgian Railways, which transports millions of 
barrels of Azeri oil to the Batumi Oil Terminal and soon to 
the Kulevi terminal.  He said that by seeking expressions of 
interest in purchasing the railroad, the government is trying 
to get a realistic idea of what the value of the railroad is. 
 Current plans call for selling just a 10 percent interest to 
a strategic partner, with a sale of the rest of the railroad 
to come sometime in the future. 
9. (C) Khetaguri said the government now has a feasibility 
study in hand, funded by a USTDA grant, for a 220 kilovolt 
transmission line to Turkey.  Construction of the line is 
expected to begin in early 2009.  He said that originally, an 
upcoming issue of Eurobonds by the GOG was intended to fund 
this project and the much-needed gas storage project. 
However, the German development bank, KfW, has offered even 
more attractive terms than the Eurobond and the GOG will use 
that money to fund construction of the transmission line. 
Once the line is up and running, he said, the government will 
sell the company that runs it.  The proceeds will be used to 
make further energy infrastructure upgrades around Georgia. 
Additionally, the government is planning to rapidly increase 
hydroelectric capacity.  It has an MOU with Turkish investors 
to build seven new plants in Adjara which will add 119 
megawatts of capacity by 2015.  Kuwaiti investors have backed 
out from construction of a new plant on the Rioni river, but 
the government is studying the project and intends to re-open 
it for tenders.  The project for a large dam and power plant 
at Khudoni is proceeding with World Bank assistance and is 
expected to be completed in 2012 or 2013.  Khetaguri said 
that past plans had not properly accounted for efficiencies 
created at power plants downstream from Khudoni, and the 
entire project will actually produce 1 billion kilowatt hours 
more than previously calculated, making it more financially 
viable than previously believed. 


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