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Georgia's Main Gas Pipeline Up For Grabs

Any bidders?
Any bidders?
Georgia's parliament passed on July 6 in the first reading by a vote of 88 to five a draft law on the privatization of state assets that abolishes the existing restrictions on the sale of the main North-South gas pipeline. The Georgian opposition has already expressed concern that Russia might acquire a controlling stake in the pipeline, giving it huge economic leverage. Meanwhile, there is concern in Armenia, which receives a large share of its gas via that pipeline, that Azerbaijan, which already manages much of Georgia's gas distribution network, might seek to acquire it.

The possibility of privatizing the North-South gas pipeline first surfaced five years ago. In January 2005, President Mikheil Saakashvili told the Italian daily "La Stampa" that the Georgian government was in talks with Russian gas monopoly Gazprom on the sale. But then-U.S. presidential adviser for Caspian energy issues Steven Mann immediately made clear Washington's objections, noting that the sale would increase Georgia's dependence on Russia and negatively impact on the planned Baku-Tbilisi-Erzerum gas pipeline project.

In May 2005, then-Georgian Energy Minister Nika Gilauri (now prime minister) traveled to Washington for talks with U.S. officials, who persuaded the Georgian government not to sell the pipeline, and agreed to provide within the framework of the Millennium Challenge program funds for urgently needed repairs to it. (The pipeline was built in the 1970s and had last been repaired in the 1980s.)

Then in March 2006, Reuters quoted Gilauri as saying that Tbilisi would be prepared to sell the pipeline to Gazprom if the price and conditions were acceptable. He subsequently joked that by "a fair price" and conditions he meant $1 billion (Gazprom had reportedly offered $250 million), plus a 30-year contract to supply Georgia with gas at a price of $30 per 1,000 cubic meters, according to Caucasus Press on March 15, 2006.

Under an agreement concluded between the U.S. and Georgian governments in September 2005, Georgia received $295 million under the Millennium Challenge program to finance four separate infrastructure projects. Of that sum, $70 million was earmarked for repairs to the North-South gas pipeline, the total cost of which were estimated at $216 million, according to Caucasus Press on April 26, 2006. In return, the Georgian government undertook "not to sell or transfer" ownership of the pipeline, or to permit any such sale or transfer, for five years, i.e. before April 2011.

Within months, however, it was rumored that the Georgian government might nonetheless agree to sell the pipeline to Gazprom in return for a binding agreement to shelve the planned increase in the price of Russian gas from $110 to $230 per 1,000 cubic meters. On November 8, 2006, Gilauri denied that the Georgian government had discussed the issue with Gazprom. U.S. Ambassador to Tbilisi John Tefft, for his part, told journalists that "the U.S. position towards the issue has not changed. This gas pipeline is a considerable asset of the governments of Georgia and the U.S. have already made investments in its renovation."

In September 2008, Georgia received additional Millennium Challenge funds to finance the second stage of repairs to the pipeline, according to Caucasus Press on September 23, 2008.

The bill on removing the pipeline from the list of strategic assets that cannot be privatized was drafted by two parliamentarians from President Saakashvili's United National Movement (EEM). One of them, Pavle Kublashvili, explained on June 30 that "in general, the principle is very simple -- any enterprise is managed much better by the private sector then by the government. That's a fact; that's an axiom for those who are proponents of a free economy. So not a single enterprise should be excluded from privatization list."

When asked outright if the Georgian government indeed plans to sell the North-South pipeline, Kublashvili hedged, saying that decision does not have to be taken immediately.

Prime Minister Gilauri reportedly assured the Georgian parliament on July 2 that the government has no "immediate plans" to sell the pipeline. At the same time, he did not exclude the sale through a public offering on the London Stock Exchange at some point in the next two years of a 10-15 percent stake in the pipeline, but he said the government will definitely not give up the controlling stake.

During the first reading on July 6, however, EEM parliamentarians rejected a demand by the minority to incorporate into the draft a provision limiting the sale of shares to 49 percent. Parliament deputy speaker Mikheil Machavariani (EEM) said: "We will not take any decision, which is against Georgia’s interest. Each and every decision taken by us is directed towards a stronger economy. We do not want closed economic system managed by the government.... This is yet another option to help attract investment into Georgia." Machavariani further denied that any "backstage deals" are in the works, Caucasus Press reported on July 7.

About This Blog

This blog presents analyst Liz Fuller's personal take on events in the region, following on from her work in the "RFE/RL Caucasus Report." It also aims, to borrow a metaphor from Tom de Waal, to act as a smoke detector, focusing attention on potential conflict situations and crises throughout the region. The views are the author's own and do not represent those of RFE/RL.


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