WASHINGTON, April 9 (UPI) -- As oil and natural gas production has risen steadily in the former republics of the Soviet Union, a striking division has emerged between the have and have-not states. For the deprived newly independent nations of the Caucasus and Central Asia, their history since 1991 has been steadily rising energy prices as their hydrocarbon-rich neighbors attempt to raise fees to world-market rates. The one glimmer of hope for the hydrocarbon-deprived states of the Caucasus and Central Asia is to position themselves as transit nations, collecting revenue for pipelines crisscrossing their territory.
A key country in this category is Georgia, which eventually came to host two pipelines for transporting Caspian crude westward. The country's utility and apparent stability caught the eye of petrodollar-rich Kazakh investors, who went on a spending spree. The five-day conflict last August between Georgia and Russia highlighted the strategic fragility of the country as a transit corridor, and that geostrategic reality along with the global recession has left Kazakh investors in a skein of lawsuits as they try to unload their endangered properties.
In May 2006, KazTransGas, a subsidiary of Kazakhstan's state energy company KazMunaiGas, purchased the Georgian capital Tbilisi's TbilGas gas distribution company for the bargain price of $12.5 million, establishing KazTransGas-Tbilisi to oversee operations. In a development that in hindsight might have given the new owners pause, KazTransGas was the only bidder in the tender, which required the winner not only to maintain the company's profile but reconstruct the ramshackle Soviet-era system and retain all employees.
Seeking to further Kazakhstan's influence along its hydrocarbon export routes and diversify its options away from the Russian-dominated Caspian Pipeline Consortium pipeline to Novorossiisk, in 2005 KMG began to build a tanker fleet for the Caspian as well as acquire useful real estate. KMG, along with Western energy firms, pumped $5 billion into developing Georgia's Batumi, Poti and Kulevi Black Sea ports over the last decade, and in February 2008 KMG bought Georgia's Batumi Oil Terminal from Greenoak Holdings and French bank BNP Paribas. While the cost to KMG was not revealed, Greenoak had already invested more than $200 million in the terminal, which has a capacity to export 15 million tons per year of crude oil and products and two years earlier had paid $92 million for a 49-year lease to manage the port.
The deal gave KMG, through its subsidiary KazTransOil, direct access to the open sea, a most useful development in light of Kazakhstan's ambitions to increase crude oil production to 2.6 million barrels per day by 2015.
The champagne celebrations in Astana did not last long. Six months later, as the conflict intensified, on Aug. 10, Rovnag Abdullayev, head of the State Oil Co. of Azerbaijan Republic, said that because of the fighting, Batumi port authorities suspended the facility's seaborne 200,000 bpd shipments, which are supplied by rail.
The five-day conflict last August between Russia and Georgia highlighted the latter's strategic fragility as a transit corridor. With Batumi closed, Kazakhstan was unable to use Georgia's two transit pipelines. The $600 million, 515-mile Baku-Supsa 100,000-bpd pipeline, essentially a refurbished Soviet-era pipeline, opened in April 1999. The $3.6 billion, 1,092-mile, 1 million-bpd Baku-Tbilisi-Ceyhan pipeline, which began operations in May 2006, was the final element in Azerbaijan's drive for independence from the Kremlin over its energy exports. Both were closed by their operating companies over concerns about the fighting.
The clash's effects extended to the Caspian itself. The day after Abdullayev spoke, Kazakh Prime Minister Karim Massimov directed KMG officials to divert the country's maritime oil exports bound for Baku, Azerbaijan, to internal consumers until the dimensions of the conflict became clearer. KMG President Serik Burkitbayev told journalists, "In line with an order issued by the military administration, we took out of the port all our dry cargo vessels and tankers, which have been filled with oil. By this morning we filled up an oil tanker, but right now, all tankers have been taken out and we are sending oil to storage." The decision was hardly minor, as Burkitbayev said the port now handles nearly a million tons of crude oil a year.
Following the cessation of hostilities, BOT resumed exports, but if Kazakhstan is stuck with that particular investment, it is now seeking to divest itself of TbilGas. Since its 2006 purchase, KazTransGas-Tbilisi invested more than $100 million in the refurbishment and upgrading of Tbilisi's gas supply system, causing the system's natural gas losses to fall from 60 percent to 20 percent.
Despite the increase in efficiency, KazTransGas-Tbilisi's losses rose, and the company was driven into debt after SOCAR, its gas supplier, sharply raised prices. Now, KazTransGas-Tbilisi's parent company KMG is considering selling TbilGas if it can recoup its investment. During a March 23 news conference, KMG President Kairgeldy Kabyldin complained, "If SOCAR wants to help Georgia, why is it selling gas to Georgia at a horrendously high price? SOCAR sells gas to Russia and Ukraine at $280 per thousand cubic meters, yet offers it to Georgia at $400 per tcm. This is ridiculous, completely out of touch with reality."
The Georgian government moved quickly to block the Kazakh disinvestment. On March 16, the Georgian National Electricity Regulatory Commission appointed a "special administrator" to temporarily take over management of KazTransGas-Tbilisi and act as a general director until the Georgian government determines whether KMG is in breach of contract and how the company will discharge its outstanding $40 million debt. A week after the Regulatory Commission's action, Kabyldin said, "We are ready to sell TbilGas if our investment contributions, debt financing as well as the financial support are compensated."
Tbilisi's actions will be closely watched by the international investment community and energy companies, already leery of further investment in Georgia in the wake of its ill-advised military misadventure with Russia. For energy-poor Georgia to treat rising petro-state Kazakhstan as a potential fiscal scofflaw over KazTransGas-Tbilisi's debts may eventually enrich Tbilisi's treasury by $40 million, but the final cost may be far higher as energy-rich former Soviet states decide to invest their surpluses elsewhere. Given that Georgia's relations with energy giant Russia remain strained, it seems wishful thinking on the part of the Georgian government that such actions will not give foreign investors even more pause before investing there.
