As a result of the contract with Gazprom, Georgia loses GEL 66 million annually
Without Verdict
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At a press conference to address the issue of the amount of money that Georgia receives in exchange for transiting gas to Armenia, United National Movement member, Roman Gotsiridze, stated: “The amount of damage for Georgia as a result of the contract with Gazprom, concluded by Kaladze, is GEL 66 million annually.”

FactCheck took interest in the accuracy of the statement.

The North-South Magistral Gas Pipeline starts at the Russia-Georgia border and continues to the Georgia-Armenia border. The pipeline allows Russian gas deliveries to Georgia and Armenia although it mostly serves to supply Russian gas to Armenia given the small share of Russian gas in Georgia’s total consumption.

Prior to 2017, Georgia was receiving 10% of the total volume of natural gas exported by Gazprom to Armenia (the approximate volume in the last years being 200 million cubic metres per year) as a transit fee whilst paying USD 215 for additional purchases of natural gas beginning from the second half of 2016. The Russian side considered payment with raw material to be in contradiction with world practice and periodically put offers forward to replace the raw material payment with monetary payment. Taking into account the present conjuncture of the energy market, this can be profitable for Georgia only in exceptional circumstances (if in the nearest future the price of gas drops significantly or if Georgia gets a much higher transit fee as compared to the existing rates which is less likely). Specifically, the monetary payment model stipulates that payment is made in accordance with the transit fee imposed for the transportation of 1,000 cubic metres of natural gas at a distance of 100 kilometres. The transit fee is usually determined as a result of private negotiations and fluctuates from USD 2.7 to USD 4.5 throughout the region according to available information. As the length of the North-South Gas pipeline is only 221 kilometres, Georgia theoretically cannot afford to purchase the same amount of gas (considering the present price of natural gas) with the transit fee as it would be able to with payment in raw material.

The negotiations about the changes in the form of payments became especially tense by the end of 2015 (see FactCheck’s research – link 1 and link 2). At that time, the Georgian side managed to maintain the status quo; however, after several rounds of negotiations which started at the end of 2016, Georgia agreed to move to the monetary payment model for the transit fee. The details of the two-year long contract have not been publicised although it is known that Georgia will receive part of the transit fee in accordance with the old contract throughout 2017; that is, by raw material payments and then completely switching to the monetary form from 2018. Additionally, the Russian side took the obligation to supply natural gas to Georgia in sufficient quantities for the country’s present needs at a price fixed. According to the information of the Ministry of Finance of Georgia, the price for Russian natural gas was USD 215 as of June 2017 whilst this has decreased to USD 195 since August. These figures give us the ground to assume that the price fixed in advance is USD 195.

In regard to possible losses associated with the new form of payment, Armenia’s annual consumption of Russian gas in the last few years is in the margins of 2 billion cubic metres. Therefore, in accordance with the terms of the old contract, Georgia was supposed to receive 200 million cubic metres of natural gas. The price of Russian gas for Georgia was USD 215[1] per 1,000 cubic metres. Therefore, the total price of the raw materials delivered to Georgia as a transit fee amounted to USD 43 million.

In order to calculate possible losses or profits, the aforementioned price should be compared to the sum of the direct and indirect benefits that Georgia is supposed to receive as a transit fee under the new contract. The direct benefit means remuneration for transit whilst indirect benefit assumes the reduction of expenditures as a result of the price bargain. As the price bargain constitutes USD 20, the benefit would be that amount of money multiplied by the total volume of natural gas purchased from Gazprom. As of today, Georgia purchased natural gas for a reduced price only in August (2,104,700 cubic metres of natural gas for USD 411,768) with the benefit from the price bargain at USD 40,734. The amount of annual indirect benefit depends on the actual volume of natural gas purchases from Gazprom. The calculation of the exact figure will be possible by the end of the year.

If the amount of indirect benefit can be calculated more or less accurately, it is not possible to determine the amount of direct benefit because the terms of the contract are a commercial secret and have not been disclosed. According to the United National Movement’s information, the transit fee for every 1,000 cubic metres of natural gas at 100 kilometres constitutes USD 3. FactCheck does not consider this information as a fact and makes no judgment in regard to the reliability of the information in that there is no authentic source to confirm or reject it. The following analysis is based on hypothetical assumption alone in order to assess what would be the result if this information were true.

Under the given amount of the transit fee, the total amount of the annual transit fee would be USD 13.3 million (2.21*3*2,000,000). The difference between the benefit envisioned by the old contract (USD 43 million) and the direct benefit[2] envisioned by the new contract (USD 13.3 million) is USD 29.74 million. Taking into account the USD to GEL exchange rate at the time of Roman Gotsiridze’s statement (2.48), this constitutes approximately GEL 74 million. However, of note is that considering the amount of gas received from Russia and the changes in price, the old form of payment was maintained in the first two quarters of 2017. As of July 2017, the total volume of natural gas exported by Gazprom to Armenia was approximately 1 billion cubic metres (half of Armenia’s total consumption). Therefore, by taking the new terms into account, the hypothetical damage decreases to GEL 37 million for the year. Presumably, by the end of the year this amount will decrease further by the benefit which Georgia will get from purchasing (usually, natural gas consumption increases in autumn and winter which necessitates the purchase of additional Russian gas) Russian gas at a reduced price.

After moving to a fully monetary system of payment (beginning in 2018), we can conclude that if Georgia does not purchase Russian gas at all (will not get an indirect benefit) and Armenia’s consumption will not change significantly, the transit fee in the new contract for 1,000 cubic metres for 100 kilometres in order to maintain the same benefits as under the old contract will be USD 9.73 which is highly unlikely. At the same time, the indirect benefit for every 1,000 cubic metres of natural gas Georgia will have to purchase from Russia amounts to USD 20. In the past few years, the share of Russian gas in Georgia’s total consumption was hovering at 10%-12% which corresponded to 200-300 million cubic metres. If the consumption of Russian gas is kept at 300 million cubic metres in Georgia’s total natural gas consumption, Georgia will get USD 6 million in additional benefit. In combination with the income of the transit fee to Armenia (USD 13.3 million), Georgia will have USD 20 million benefit in total whereas we used to receive natural gas valued at USD 43 million under the old contract.

 

Conclusion

Considering the statistics of the last years, the average price of natural gas (roughly calculated) which Georgia received as a transit fee for delivering Russian gas to Armenia was USD 43 million under the old contract. Whether or not the Georgian side will receive the same amount of benefit under the new contract depends on the transit fee and the volume of natural gas which Georgia will have to purchase from Russia. In the absence of information about the transit fee envisioned in the Georgia-Gazprom contract, it is impossible to precisely determine the damage and or the profit for Georgia under the new contract.

However, even if it is assumed that the aforementioned amount of transit fee (USD 3) is true, the damage figure for 2017 is perhaps much less than GEL 66 million because the respective calculations have not taken into account the possibility of receiving additional benefits under the terms of the new contract. At the same time, the effect of maintaining the old contract’s practice of receiving raw material as payment in the first half of 2017 is also neglected. All things being equal, the damage from 2018 will increase to USD 23 million.

Considering all of the aforementioned, Georgia will most likely get less benefit under the new contract as compared to the terms of the old contract. However, in the absence of an authentic source of specific contract figures, it is impossible to name the precise amount of losses.

Therefore, FactCheck leaves Roman Gotsiridze’s statement WITHOUT A VERDICT.

 

[1] The current price to purchase gas from Russia is USD 195. The reduction of the natural gas price is one of the conditions of the new contract and the price would not have decreased if the old contract were kept. Therefore, for our calculations, it is more appropriate to use the price which was in force prior to the new contract.

[2] If we assume this information is true.

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