Observations on the Agreement Reached with Gazprom

2017 / 02 / 22

Author: Amb. Valeri Chechelashvili, Senior Fellow at the Rondeli Foundation

The Georgian Prime Minister quite rightly stated in Davos that the agreement with Gazprom was “nothing to celebrate”. He went on to say that it was the best possible option in the current circumstances.

Achieving success in international negotiations depends, of course, on the art of negotiating. No less important, however, is the taking and upholding of a favorable and beneficial position. This is a complex task that requires close cooperation between government departments and well-coordinated activity in many directions, analysis of relevant legislative instruments, the use of personal contacts, and more. The art of diplomacy manifests itself in this process. Therefore, an inadequately prepared negotiating position predetermines an unfavorable outcome. In the conditions described, the negotiator’s knowledge, experience and skills might not suffice to remedy the situation.

If our delegation, in anticipation of the negotiations, was not satisfied with its established position, it could have chosen instead to temporize. For example, it could have rejected the “diagonal” format for negotiations and named the “Oil and Gas Corporation” as a party on behalf of Georgia. If necessary, the Ministry of Energy could have failed to approve the text of the reached agreement, or submitted it to a government session. And if the negotiations necessarily required the participation of the Energy Minister, we could have requested the other negotiating party to be represented by Gazprom’s CEO. Mr. Miller’s tight schedule would have been an advantage for us in such a case.

One may wonder who was in charge of preparing the negotiating position for the Energy Minister and why Georgia was deprived of the advantage it possessed. Attention is focused on that lost advantage because Russia and Armenia, rather than Georgia, were interested in changing the terms of a contract which had been operational for years. Thus, Russia should have  brought the arguments for the change to the bargaining table, which should have been at worst understandable for Georgia, or at best – beneficial.  If Russia failed to offer such arguments, the question may arise: who prepared the negotiating position for the Energy Minister? Who put him in a position where the best possible outcome was “nothing to celebrate”?

Following are a number of observations regarding the price Georgia will likely have to pay for its incompetence.

As the Energy Ministry states, in 2015-2016, Georgia received from Gazprom approximately 200 billion cubic meters of gas as the cost of transit to Armenia of 2 billion cubic meters of gas. Now, Gazprom is offering gas for US$185 per 1,000 cubic meters. For the acquisition of 200 billion cubic meters of gas at that price, Georgia will need US$37 million. If we receive this amount, Georgia will neither lose nor win. If Georgia manages to buy more than 200 mln cubic meters of gas from Azerbaijan or Iran for the same amount of money, it will financially gain; at that, the country’s level of independence would also increase. Should the amount prove insufficient, Georgia will lose.

If we suppose that last year Georgia transited to Armenia 2 billion cubic meters of gas, while the transit distance makes 221 km, it appears that in order to receive US$37 million, the transit tariff of 1000 cubic meters of gas per 100 km should be approximately US$8.37.

Interestingly, this figure is in full correlation with Ukraine’s position, as it deems US$7.90 to be the fair tariff for transit of Russian gas across its territory. Yet Gazprom pays US$2.5 and is against increasing the tariff. A prolonged judicial process between the respective agencies of Russia and Ukraine is expected in European courts but, based on the above, it is unlikely that Gazprom would allow for a harmful precedent to be set in the agreement made with Georgia. Supposedly, based on the Ukrainian case, Gazprom would offer the transit price at the rate of US$2-3, making an annual US$8.84 - 13.26 million. Additionally, Gazprom has consolidated its position, offering US$185 for 1000 cubic meters as a “good” price that actually is lower than the price offered to some European countries.

Our delegation was presumably also told that the price was the best, unless the better price offered by Russia, for political reasons, to Eurasian Economic Union Member States is taken into account. Consultations with the Ukrainian delegation were hopefully held during the meeting in Davos because the Ukrainians have the experience that we so urgently need now. The comparing of positions would be useful for both parties. Ukrainian experts have always been interested how Georgia once managed to persuade Gazprom to agree to a payment of transit fee in kind...  

In the negotiations held with Gazprom, another unconditional winner – Armenia – has been revealed as, with the agreement, the price of natural gas in Armenia was reduced. Armenia now feels obliged only to Russia, which has managed to subdue the “stubborn Georgians” and assisted its ally, Armenia, in reducing the gas price. Armenia fails to see Georgia’s good will in these developments, or, rather, we have done nothing much to show it to Yerevan. Accordingly, we cannot use this resource in our bilateral relations with Armenia.

It is expected that, as a result of such developments, and given the price reduction, the consumption of gas in Armenia will increase. Our transit revenue in currency will also grow. However, it will not be enough to cover the losses conditioned by the new contractual terms. In addition, it is doubtful that Gazprom will retain the price of US$185 per 1000 cubic meters of gas. And if Gazprom changes the price which is favorable for Georgia, the agreement may need to be revised on our part.

Where Russia’s major argument was monetization of the contract, our position should have been established as follows: Georgia should receive such transit revenue that would enable it to purchase from Gazprom 10 percent of the amount of gas transited to Armenia; a correlation between the gas price and transit tariff should have been established and in this correlation, the dynamics of the amount of gas delivered to Armenia should have been taken into account.

For the sake of simplicity, we do not take into consideration the prime cost of gas transit. However, our delegation should have taken advantage of the fact that the north-southern gas pipeline runs through a mountainous area - meaning that maintenance, as compared with the pipeline going through Ukraine, for example, is more complex and costly.

The negative responses from the population, the non-governmental sector and the opposition should have been taken into account as an additional argument. In such cases a government can turn strong opposition to its own advantage. In this respect, a couple of well-organized protest demonstrations would have strengthened the negotiating position of our delegation.

Conclusions / Recommendations

  1. If the transit tariff, in conditions of stable gas pricing, is truly stable; the transit tariff should be concurrently raised in proportion to the gas price increase.
  2. Where the conclusion of a two-year contract with Gazprom is inevitable, a new round of negotiations should necessarily be initiated and the contractual terms revised pending expiry.
  3. Where the contract is concluded for two years and the contractual terms of the second year are essentially worsened for Georgia, it might become necessary to revise the contract, especially as such a precedent has already been set.
  4. In addition to the above the Georgian government’s interest in agreeing to the contract might have been conditioned by the need to increase currency revenues against the background of national currency devaluation.
  5. Better financial resources within the contract should be transferred directly to the government’s account without intermediate legal persons so as to eliminate the possibility of corruption.

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