Issue 3, 2014. June-July



Georgia is working hard to build its brand as an energy transportation hub through the Caucasus. The country offers regional producers an interesting possibility to diversify exportation routes, but competition in the region is high.

Régis Genté, Tbilisi

Georgia has been developing its ports, including Poti Port and Supsa Port along the Black Sea coastline.

When I met the Kazakh ambassador in Georgia, Yermukhamet Yertisbayev, he started our conversation by quoting Napoleon: "The policies of all powers are inherent in their geography." Then, this former very close adviser to President NursultanNazarbayev started to describe the routes through which his huge country should rely to export its hydrocarbon production: "Russia is our partner number one, and then it is China, then the Persian Gulf, through Turkmenistan, then the Caucasus. Caucasus is the fourth direction for us, which is very important as Kazakhstan needs to diversify its exportation routes and get access to the sea."

Being the "fourth direction" for such a big oil country as Kazakhstan, which aims to join the world's top 10 crude producers within the decade, is no small feat. The Caspian area reserves are significant and the region is considered by top experts, for example the U.S. Geological Survey (USGS), as a one of the "priority basins around the world." The U.S. Energy Information Administration (EIA) "estimates 48 billion barrels of oil and 292 trillion cubic feet of natural gas in proved and probable reserves in the Caspian basins."

What does this mean for Georgia? It means that Georgia indeed has huge potential as an energy transit country. It means also that it has to fight because other alternative routes already exist.

Despite government changes in Tbilisi, the energy transportation policy remains the same- inherently tied to Georgian geography. "Georgia is a very tiny market. It can be only a transit country," noted Mariam Valishvili, a deputy minister of energy of Georgia appointed under the previous administration. That means, over the past several years, Tbilisi has worked a lot to build energy transport infrastructure that allows the country move quickly on projects with regional producers as quickly as possible. "We're out of commercial deals, but what we can do is create favorable conditions for those projects and be a reliable and stable country," Valishvili added.

Georgia's top priority, since the mid-1990s, is to be a perfect partner in the South Caucasus transportation corridor. That corridor includes two oil pipelines (the Baku-Tbilisi-Ceyhan (BTC) pipeline, with a current throughput capacity of 1.2 million barrels per day, and the Baku-Supsa pipeline, also known as the Western Route Export Pipeline or WREP, with a capacity of 100,000 barrels perday) and a natural gas pipeline, the Baku-Tbilisi-Erzerum (25 billion cubic meters per year of potential capacity after the expansion). For crude oil, the Georgian transport capacity through pipelines is around 57 million tons per year. In 2013, only 38 million tons were actually transported through Georgia, however. From this, 8-9 million tons were carried by the Georgian railway system and delivered to the Batumi and the Kulevi ports: half of that volume was crude oil, while the other half was oil products. Another 8-9 million tons of Georgian ports' shipments are dry cargoes.

The ports' capacities are currently underutilized. The Batumi port, which is completely owned by KazTransOil (an affiliated company of the National Company of Kazakhstan), currently has a yearly capacity of 12megatons (Mt). The Kulevi port, owned and operated by the Black Sea Terminal Ltd. - a subsidiary of the Socar (State Oil Company of Azerbaijan Republic) - can handle 10Mt per year.

And one shouldn't forget the Poti port and its 2 Mt yearly capacity. Mamuka Bakhtadze, the General Director of the Georgian Railway company, says that the capacity of the Batumi and Kulevi ports, which are transshipping crude oil and oil products, "could be easily and quickly doubled."

How does one explain this untapped capacity at Georgian ports? Partly, it is due to the recent decrease of the volumes going through Georgia. For example, there are roughly two times fewer shipments of oil, oil products and liquefied gas going through Batumi Oil Terminal now than in 2006, an effect of Kazakhstan becoming a member of the Russia-Kazakhstan-Belarus Customs Union 2010. But another reason for this untapped capacity is the Georgian authorities' chosen strategy: "We needed to get infrastructures ready. We do believe that in the future there will be an increase in oil products production in Azerbaijan and in Central Asian Republics. We need to be ready to transport them if we want to get the contracts," says Bakhtadze.

Tbilisi is certainly betting on the future, both for geopolitical and commercial reasons. But it raises questions. For oil, for example, "the BTC is under-utilized, and will be the greatest export route of Azerbaijani oil and condensate in the future. Baku-Supsa is also underutilized; its throughput has been closer to only 80,000 b/d in recent years.

The partners are expected to continue using this route for the foreseeable future. This is likely to continue through the term of the ACG (Azeri-Chirag-Guneshli) contract, though volumes will decline as production falls," remarks Nick Gellatly, Head of Caspian upstream research at Wood Mackenzie. Does that mean Georgia has built too much energy transportation infrastructure?

The Role of Geopolitics

Geopolitics plays a big role. If Georgia becomes an important chain link in world energy markets, the rest of the world, especially the West, will presumably work to protect Georgia from its unfriendly Russian neighbor. That's also why the current government is continuing former president Mikheil Saakashvili's project to build a new port in Anaklia. Feasibility and business studies are underway.This new deep water port, which could require $6 billion in investments, could be dedicated mostly to top dry cargo "but also potentially to LNG [liquefied natural gas]. I think that within three to five years, there will be LNG projects in the region," says Valishvili.

Tbilisi's bet depends on several industrial projects in the region, whose republics are invested in doing more than just producing raw materials. "We think that within five years, up to nine million tons of petrochemical and oil products will be manufactured and will have to be transported through Georgia and its ports," says Bakhtadze. Azerbaijan, through Socar, is building a urea plant in Kulevi, while Azmeco last year commissioned the Karadagh Methanol Plant in Baku with a capacity of more than 65 metric tons per year. Turkmenistan has several ongoing projects, including a second refinery plant near Turkmenbashi port to manufacture plastic or methanol. Kazakhstan also has such industrial ambitions, aiming to produce Vacuum Gas Oil (VGO) and fuel oil. Kazakhstan could rely more and more on Georgia and the Caucasus to export its hydrocarbons, especially when Kashagan starts to deliver part of its huge oil reserves, once Kazakhstan overcomes the current technical problems associated with that oilfield.

Georgia's ports play an important role in transit but the country also has the potential to produce energy.

Georgia seems to be on the right track to offer to the Central Asian Republics and Azerbaijan a really attractive alternative route. "The recent consolidation of the rail market through the acquisition of the Georgia Transit company by Georgia Railways has provided further clarity to oil shippers," Wood Mackenzie's Gellatly underscored. Some obstacles have also been removed on the Azerbaijani side, asserts Bakhtadze: "The railway corridor was not fully open, being unfairly used by private companies. But, at the beginning of 2013, there were negotiations at a very high level between Georgians, Kazakhs and Azerbaijanis. A coordination committee was established. Azerbaijan understood that it was in its interest to strengthen our corridor." In recent years, indeed, many in the energy transportation sector were complaining that "the railway shipment, and maritime transport for Kazakh oil, were operated by Azerbaijani companies like Azersun Holding, with links to state officials and the ruling elite. These operators have murky ownership structures and help President Aliyevgain support from powerful business interests. One could say that this railway route serves the purpose of pleasing the interests of domestic Azeri oligarchs who get to benefit from these kinds of projects," says FaridGuliyev, a doctoral candidate in political science at Jacobs University Bremen, Germany.

If indeed those obstacles are at least partially left as stumbling blocks, Georgia has more leverage to be a genuine competitor in the great region around the Caspian basin. "Much depends now on the developments on the other side of the Caspian Sea. Because, for the Western side, given the dwindling oil reserves in the Azerbaijani sector, most efforts are now concentrated on natural gas projects, the second phase of Shah Deniz deposit and the gas pipe going to European markets. If a trans-Caspian pipeline is ever going to be constructed, then it will make financial sense to increase the role of the Georgian ports. Recent developments show that it does not seem to be a key priority for any of the relevant players. Kazakhstan today is China's eighth-largest crude supplier," observes Guliyev.

Regional Competition

Russia is also a competitor in terms of energy transit. "For example, TCO (Tengizchevroil), the operator of the Tengiz field, has exported volumes via Batumi and more recently via Kulevi. These volumes are likely to be reduced, or potentially cease in the future, as the Caspian Pipeline Consortium (CPC) pipeline is expanded. This route (from Tengiz to Novorossiysk, on Russia's Black Sea coast) offers the most favorable netback value for Kazakh exporters," asserts Gellatly. The Caucasus is too far away to be, geographically, the first option for most of the oil and gas producers around the Caspian Sea - a reality no one should forget.