Despite months of assurances, Georgia's demands for high transit tariffs have stalled a project to pipe gas from Azerbaijan to Turkey. Recent comments suggest that Tbilisi is seeking a premium because of the risk that Russia may interfere. RFE/RL correspondent Michael Lelyveld examines the issues involved.
Boston, 24 August 2001 (RFE/RL) -- An impasse between Azerbaijan and Georgia over a gas pipeline to Turkey has raised a series of old and stubborn issues in the Caspian region.
The long negotiations over transit fees seem nearly identical to those that stalled the Baku-Ceyhan oil line 18 months ago.
Then as now, Georgia demanded transit revenues that were higher than the oil companies or its neighbors were willing to give. Then as now, Azerbaijan and Turkey showed patience, but neither was willing to pay Georgia so much that the deal would become impractical.
In the current case, negotiations have gone into overtime since 27 July, when Georgian President Eduard Shevardnadze was due to arrive in Baku for a signing ceremony that would clear the way for a $1.3 billion pipeline from Azerbaijan's offshore Shah Deniz gas field.
Shevardnadze cancelled the visit at the last minute, later citing an emergency over the killing of Georgian TV journalist Georgi Sanaya. But it then developed that there was no agreement on Georgian transit fees ready to be signed.
Nearly a month after the postponement, Azerbaijan and Georgia still seem far apart. According to a "Financial Times" report this week, Tbilisi is demanding more than double the amount that the consortium for the gas field has offered.
Giorgi Chanturia, head of the Georgian International Oil Corporation, said, "We say that the tariff should correspond to world standards, of a range from $5-10 per 1,000 cubic meters." The consortium is said to be offering a rate of $2. Chanturia cited a World Bank recommendation in supporting Georgia's demand.
The haggling over fees has set the project back by far more than a month. Britain's BP oil company, which is leading the Shah Deniz consortium, had originally hoped that a deal with Georgia would be signed by the end of last year.
The situation is similar to the problem that plagued the Baku-Ceyhan pipeline after the euphoria that surrounded the signing of agreements at the OSCE summit in Istanbul in November 1999. After the ceremony, the reality of reaching a deal on Georgian transit fees set in.
In March 2000, an accord was reached only after Azerbaijan President Heidar Aliyev agreed to forgo his country's transit fees in order to meet Georgia's demands. The politically unpopular agreement took two more months to ratify.
The precedent of that concession now seems to haunt Shah Deniz, at a time when both Russia and Iran are pushing their own projects to reach the Turkish market, which may already be saturated with gas.
The stakes for Georgia are high, but so are the risks that the deal will collapse. According to Caucasus Press, Georgia is seeking annual income of $92 million from the gas transit. A report by the Russian newspaper "Vremya" puts the demand at $125 million, or $1.875 billion over 15 years.
As a share of Georgia's $3 billion economy, as estimated by the International Monetary Fund, the fees would represent 3 to 4 percent of the country's gross domestic product last year. Georgia, which has relied entirely on Russian gas, has few energy resources of its own.
The pressure on Azerbaijan may be equally high. A series of recent oil projects have come up empty. The country has reported no major new discoveries in the past three years, making it all the more important to export the gas from Shah Deniz.
But some of Georgia's arguments for the high tariff may raise as much concern as the impasse. Speaking to the "Financial Times," Chanturia warned that Russia could resist the project because it would break Moscow's monopoly over the Georgian gas market.
Chanturia said: "We expect that (Russia's) pathology towards Georgia will increase. This will not necessarily mean an attack or bombing of the pipeline, but the creation of instability in and around Georgia."
The implication is that Georgia should be paid more for taking the risk with Russia. In Western business terms, investors usually seek higher returns in countries where the risk is great, because they can always invest in countries where the risk is less.
Ultimately, the cost of the project and the price of the gas will set limits that make it impossible for all of the parties to charge more. It is also unclear how long Georgia can continue without wrecking its relations with Azerbaijan.
On the one hand, Georgia expects trouble from Russia. On the other, it could wind up with more dependence than ever unless it agrees to a deal.