09TBILISI529, GEORGIA: GOG TAKES OVER KAZTRANSGAZ, OVERWHELMING

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Reference ID Created Released Classification Origin
09TBILISI529 2009-03-20 12:42 2011-08-30 01:44 CONFIDENTIAL Embassy Tbilisi

VZCZCXRO5397
OO RUEHDBU RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSR
DE RUEHSI #0529/01 0791242
ZNY CCCCC ZZH
O 201242Z MAR 09
FM AMEMBASSY TBILISI
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1216
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHAH/AMEMBASSY ASHGABAT PRIORITY 0857
RUEHTA/AMEMBASSY ASTANA PRIORITY 0028
RUEHEK/AMEMBASSY BISHKEK PRIORITY 0337
RUEHNT/AMEMBASSY TASHKENT PRIORITY 0670

C O N F I D E N T I A L SECTION 01 OF 02 TBILISI 000529 
 
SIPDIS 
 
E.O. 12958: DECL: 03/18/2019 
TAGS: ECON ENRG PGOV PREL RU GG
SUBJECT: GEORGIA: GOG TAKES OVER KAZTRANSGAZ, OVERWHELMING 
DEBTS MEAN BANKRUPTCY LIKELY 
 
Classified By: Ambassador John F. Tefft for reasons 1.4 (b) and (d). 
 
1.  (C) Summary. On March 16, the Georgian National 
Electricity Regulatory Commission (GNERC) announced it had 
appointed a &special administrator8 to manage 
KazTransGaz-Tbilisi, the Kazakhstani company that owns the 
Tbilisi natural gas distribution system.  KazTransGaz is 
owned by the Kazakhstani state company KazMunaiGaz.  Deputy 
General Director Mamuka Kikalashvili confirmed that the 
company is now under Georgian Government management, due to 
over USD 167 million in unpaid debt, of which USD 40.4 
million is to the Georgian Oil and Gas Company (GOGC).  While 
some media has speculated that Russian pressure could be 
behind the Kazakhstani state company refusing to pay 
outstanding debts, Kikalashvili insists that the state of the 
company is due to the failure of the Kazakhstani management 
and not political pressure.  Kikalashvili does not expect 
KazTransGaz to pay its outstanding liabilities, and therefore 
believes the company will eventually go into bankruptcy 
hearings and be sold by the government.  End summary. 
 
BEST OF INTENTIONS, BUT GAS CAN'T GO THROUGH RUSSIA 
 
2.  (C) KazTransGaz purchased the Tbilisi gas distribution 
system in 2006 for USD 12 million, an apparent good deal. 
However, given technical and commercial losses in 
distribution, the company ended up using over USD 100 million 
in investment money to fund the purchase of gas.  Deputy 
General Director Kikalashvili said that during 2006 and 2007 
the debt continued to grow, and no one in KazTransGaz or 
KazMuniGaz appeared to be paying attention.  When he was 
hired in 2008 to help turn the company around, Kikalashvili 
pointed out that debts already totaled more than USD 100 
million.  He said Kazakhstani management appeared to be 
surprised by these figures, had no idea where the money had 
gone, and was now refusing to invest in company operations. 
While he said in the past year commercial losses have dropped 
more than 20 percent, it has not been nearly enough to recoup 
corporate losses, a problem compounded by regulation that 
compels gas distributors to account for commercial losses at 
USD 280 per TCM.  Initially KazTransGaz purchased the Tbilisi 
gas distribution network with the intent of transiting its 
own gas, which the state-owned company could buy cheaply, 
through Russia and selling it at a mark up in Georgia. 
Unfortunately, soon after the purchase was made, the Russians 
essentially shanghaied the deal by refusing to allow transit. 
 
GOG TAKES OVER MANAGEMENT AFTER FAILURE TO SELL 
 
3.  (C) The GNERC has appointed Temur Kopaliani, a GOGC 
employee, as special administrator for the company. 
According to Kikalashvili, Kopaliani is already in place and 
appears to be competent.  He said that as a first measure 
many members of Kazakhstani management are being removed. 
All non-management jobs appear safe while the government 
completes its review.  Kikalashvili said that he does not 
expect KazTransGaz to pay the outstanding debt, and stressed 
that the company had been trying to sell the Tbilisi 
distribution system for some time, but with limited success. 
He said that while KazMuniGaz had had discussions with SOCAR 
(Azerbaijani) and Kala Capital (Georgian) on purchasing 
KazTransGaz-Tbilisi the asking price was astronomical.  When 
KazMuniGas finally dropped the price due to the global 
QKazMuniGas finally dropped the price due to the global 
financial crisis, interested companies wanted it to go even 
lower.  Kikalashvili expects that KazTransGaz-Tbilisi will be 
forced to declare bankruptcy and the government will then 
auction off the company cheaply, likely for no more than USD 
80 million.  He expects Kala Capital to be the eventual buyer. 
 
OUTSTANDING DEBTS TOTAL USD 167 MILLION 
 
4.  (C) In addition to the USD 40.4 million KazTransGaz owes 
GOGC, it must also repay USD 10.3 million to the Bank of 
Georgia and USD 50 million to Credit Suisse.  The company 
also has USD 9.7 million in outstanding debt to Georgian 
contractors, and USD 57 million to KazMuniGaz.  If bankruptcy 
is declared and the company sold, clearly the outstanding 
debt to GOGC will be the first paid, with Georgia banks 
likely next.  Given its daughter company's default, it is 
unlikely that KazMuniGaz will be repaid any of the USD 57 
million. 
 
5.  (C) Comment:  While many in Tbilisi are speculating that 
Russian pressure might have convinced the Kazakhstani state 
company to withhold payment to the Georgian government, 
reviewing the economics of the situation it appears that poor 
management is the real culprit.  However, the Russian refusal 
to allow cheap gas from Kazkahstan to transit Russia for sale 
 
TBILISI 00000529  002 OF 002 
 
 
in Georgia did scuttle Kazakhstan,s money-
making plans. 
Politics aside, it is easy to see why GazProm would have 
turned down the Kazakhstani request, as cheap gas from 
Kazakhstan would quickly become an attractive competitor to 
GazProm,s higher priced gas.  The Tbilisi gas distribution 
system is incredibly difficult to manage, especially as much 
of the infrastructure is dated and inefficient.  With bills 
for technical and commercial bill, plus losses from theft, 
totaling more than 40 percent of the value of gas purchased 
in 2006 and 2007, it is easy to see how a company not paying 
close attention could quickly find itself in serious debt. 
It is interesting, however, that despite KazTransGaz,s 
refusal to pay GOGC for gas, it continues to pay 100 percent 
of its bills to SOCAR.  While in the last year 
KazTransGaz-Tbilisi decreased losses to 20 percent, it was 
too little too late.  Despite the apparent failure of the 
company, it appears that the Government is committed to 
ensuring that gas service will continue un-interrupted to the 
population of Tbilisi. 
TEFFT

Wikileaks

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