Issue 3, 2012. June-July



Next year the Shah Deniz consortium is scheduled to decide the final route for the Southern Corridor Pipeline. Regardless of how the gas arrives in Europe, industry specialists say Georgia's role in the transit is secure - and Tbilisi is poised to become more important for Europe.

With just a year left before the Shah Deniz consortium - which includes BP, Statoil, SOCAR, and LukOil - decides on the final route from the Caspian Sea to Europe, Georgia is one of the few countries that can rest assured it will benefit regardless of which pipeline plan is chosen.

The 2013 decision will determine if the gas will travel from Turkey to Italy, and head to Europe via the Mediterranean, or if it will go to Eastern Europe - either through the EU-backed Nabucco West, a revised version of the EU-backed Nabucco venture, South-East Europe Pipeline, or the Trans-Adriatic Pipeline.

But, regardless of which route is selected, by the end of the pipeline construction, Georgia is set to receive $2 billion in foreign direct investment, including transit fees for 350 thousand metric tons of equipment, according to Neil Dunn, the general manager of BP Georgia.

The pipeline will also bring an estimated 2000 short term - and 125 long term - jobs for Georgia's troubled labor market. He noted, however, that the "big deal" for Georgia will be the gas it receives as transit fees. Under the initial agreement for Shah Deniz gas sent through the Southern Caucasus Pipeline, Georgia receives five percent a year, reportedly 200 million cubic meters, and can purchase 0.5 billion cubic metres a year at a discounted price.

"The big deal here, I think, is the increased amount of gas that Georgia will get. So, by expanding the pipeline, Georgia' s off take - the supply they will be entitled to from the South Caucasus pipeline -- will essentially double," Dunn said.

"We will get to a point where their entitlement will just about meet current demand...we expect the demand to grow...but it is a significant amount of gas for Georgia, which supports Georgia's energy security."

Energy security is at the heart of the project, for Europe as well as Georgia, noted Giorgi Vashakmadze, the director of development for the White Stream Pipeline - a complementary project that will provide a diversification for gas from the Caspian to Europe via Georgia and the Black Sea. Vashakmadze said the Southern Corridor is one of the key European energy infrastructure priorities since it will provide the continent with a steady alternative to Russian gas.

"The Southern Gas Corridor is designed by the EU to diversify the routes and sources of pipeline gas," he said in an email interview.

"The EU needs such diversification of pipeline gas supply in order to rely on gas as an important component in its energy mix."

For Georgia, that means the pipeline could bring more than just energy security; it could serve to tighten relations between Tbilisi and the EU as the country becomes part of the larger picture of the European energy supply.

"That supply chain to Europe is really only as strong as its weakest link," Dunn said.

"So it really doesn't matter what part of that chain you are; it makes every link in that chain very strategic and very important to Europe."

Economists Intelligence Unit specialists Peter Kiernan and Alice Mummery agreed that the pipeline will turn Georgia into a player in European energy security. They stopped short, however, of tying the project to early EU membership for Georgia, noting that is a "longer term prospect."

"As a transit country, Georgia is obviously important, and obviously for all parties concerned, security and stability in Georgia as a key transit country of the "Southern Energy Corridor" is important," Kiernan noted in an email interview.

"Within the EU, natural gas production is declining and thus alternative and diversified sources of gas need to be secured. As a transit country, Georgia plays its part in this European energy security objective."