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DE RUEHSI #3399/01 3601308
ZNR UUUUU ZZH
R 261308Z DEC 06
FM AMEMBASSY TBILISI
TO RUEHC/SECSTATE WASHDC 4980
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 03 TBILISI 003399 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/CARC AND EB/ESC/IEC 
COMMERCE FOR 4231 DANICA STARKS 
 
E.O. 12958: N/A 
TAGS: ENRG PREL GG
SUBJECT: NO SHAH DENIZ GAS MEANS TOUGH CHOICES FOR GEORGIA 
 
REF: BAKU 1840 
 
¶1.  Summary:  BP reported the delay in availability of Shah 
Deniz gas to the Embassy on December 21. ACG associated gas, 
which is now being re-injected to support oil production, 
could supply up to 8.1 million cubic meters (cm) per day to 
Azerbaijan and Georgia.  However, the old pipeline from 
Azerbaijan to Georgia can only handle 3.3 million cm per day, 
without upgrading.  How much the Shah Deniz pipeline could 
supply depends on the capacity of a small input at the 
Sangachal distribution center in Azerbaijan.  Georgia (and 
Azerbaijan) could reduce their dependence on natural gas by 
using mazut, or heavy fuel oil, in electricity generation. 
We estimate that using mazut in the three generating units at 
Gardabani that can do so would cut Georgia's daily gas needs 
by 3.4 million cm.  The GOG estimates that mazut is more 
costly than the $235 per thousand cubic meter price of 
Russian gas, but they would be very interested in finding 
cheaper supplies (possibly from Iraq) to burn at Gardabani. 
Transport from Iraq could be difficult since there are no 
direct rail connections from Turkey to Georgia. 
 
2, On December 21, Embassy and USAID energy officers met with 
Hugh McDowell, General Manager for BP's office in Tbilisi. 
McDowell explained the problems reported reftel with the 
annulus at the Shah Denis I gas well, which he said will 
delay BP's ability to supply gas from the Shah Deniz field to 
Georgia and Azerbaijan until "mid-February to mid-March".  He 
expects the other two Shah Deniz gas wells to come on line in 
the second quarter of 2007.  McDowell had informed Georgian 
PM Noghaideli of the serious delay in gas supply from Shah 
Deniz.  This was important, he said, because Gazprom had 
given Azerbaijan and Georgia until 3 pm on December 22 to 
tell Gazprom how much gas the two governments intend to buy 
from it in 2007.  He added that in his understanding, Gazprom 
is pressing this deadline in order to settle its plans for 
distribution of gas domestically in Russia and to Europe. 
 
¶3.  Given the unavailability of Shah Deniz gas to meet 
Georgia's winter demand this year, the conversation turned to 
the "associated" gas, which is produced by the ACG oil wells 
operated by BP and is normally used to maintain pressure to 
lift oil from the wells.  McDowell recalled BP's promise to 
supply as much of this gas to Azerbaijan as Azerbaijan can 
take, with the intention to help Georgia meet its needs. 
According to McDowell, the ACG field can provide 1.1 million 
cubic meters (cm) per day to Azerbaijan at an offshore oil 
production facility known as "Oily Rocks".  From there, 
Azerbaijan can feed the gas into the Azerbaijani gas 
distribution system.  Another pipe carries ACG gas to the 
Sangachal distribution center near Baku.  There, a limited 
amount of it is fed into the Shah Deniz pipeline, and the 
rest is fed into the Azerbaijani system.  The maximum 
possible amount of this gas McDowell estimated at 8 million 
cm/day.  McDowell did not know how much gas can be fed into 
the Shah Deniz pipeline, but the amount is limited by the 
size of the intake at Sangachal. 
 
¶4.  Therefore, absent any gas from the Shah Deniz fields, the 
amount of gas that could be available to Georgia from 
Azerbaijan is the amount of ACG gas which can be fed into the 
Shah Deniz pipeline, as yet unkown, plus the gas from the 
Azerbaijani system which enters Georgia through one older 
pipeline.  That older pipeline has a capacity of 3.3 million 
cm/day, and possibly, with repairs allowing higher pressure, 
4-5 million cm/day.  One potential problem McDowell pointed 
out is that gas may not be able to be transported from 
Eastern Georgia to Tbilisi and Western Georgia due to the 
design of the distribution system, separating the country 
into "islands". 
 
¶5. On December 20, the Embassy's Energy Officer visited 
Gardabani, where all of Georgia's thermal generating capacity 
is located.  Four units operate there: a combined cycle gas 
turbine (CCGT) owned by Energy Invest, with investment from 
Russia's Vneshtorgbank, two older units (numbers 3 and 4) 
owned by the state in the form of the state-owned company 
Tbilresi, and unit 9, owned by Russia's RAO-UES, operating as 
Mtkvari Energy.  The CCGT cannot run on mazut (Heavy Fuel 
Oil), only gas or diesel fuel.  Units 3, 4 and 9 can run on 
mazut or on a mazut/gas mixture.  There is storage for 40,000 
tons of mazut owned by Tbilresi, which is now empty.  Another 
160,000 tons of storage exists but is not operational. 
RAO-UES has no storage capacity, and also lacks the heating 
capacity needed to make the mazut flow into the burners. 
However, since units 3,4, and 9 were all part of the same 
complex at one time, connections exist which could allow unit 
 
TBILISI 00003399  002 OF 003 
 
 
9 to burn mazut if storage and heating tasks were shared by 
Tbilresi.  Information on these units in tabular form follows: 
 
Unit     Size     Daily Gas Consumption  Daily Mazut 
Consumption 
 
CCGT    110 MW      742,000                Can't run on Mazut 
                         630 tons diesel (USAID estimate) 
Unit 3  130 MW      1 million cm                1000 tons 
Unit 4  130 MW      1 million cm                1000 tons 
Unit 9  250 MW      1.4 million cm              1560 tons 
 
These figures are as reported by the operators we met at 
Gardabani. 
 
¶6.  The Energy Invest CCGT turbine is now built to run on 
only one cycle.  With an additional investment of $50 
million, the exhaust gases from the turbines could be trapped 
and used to heat water for steam, turning additional turbines 
and generating an additional 40MW of electricity for the same 
input of gas or diesel.  The President of Energy Invest, Geno 
Malazonia, said that he was not negotiating with Gazprom for 
supplies but was waiting for the outcome of the 
Georgia-Turkey-Azerbaijan negotiations on Shah Deniz (now 
virtually a moot issue). 
 
¶7.  Tbilresi is in bankruptcy, but still operating under a 
workout arrangement.  Mazut has not been burned in units 3 
and 4 for more than six or seven years, we were told by its 
manager, Valeri Lomtatidze.  A rail link to units 3 and 4 for 
delivery of mazut is not operational but is expected to be 
working by December 27.  Tbilresi also controls two more 
non-working units at Gardabani, numbers 7 and 8.  If they 
were refurbished, the Tbilresi manager said, they could 
produce a total of 750 megawatts.  Fixing unit 8 alone would 
cost 7-8 million.  In the last two years, $15 million was 
spent on units 3 and 4 to repair and upgrade them.  Units 3 
and 4 work only from October to March. 
 
¶8.  RAO-UES's executive director was in Moscow, talking to 
Gazprom, when we visited.  Therefore, we talked to Nodar 
Zakaidze, chief engineer.  Like units 3 and 4, unit 9 
operates from September to April.  Zakaidze was concerned 
that if the cost of gas is significantly higher, the GOG 
energy regulator will have to permit RAO to raise the price 
of electricity to its customers. 
 
¶9.  On December 22 we met with Archil Mamatelashvili, Deputy 
Minister of Energy.  Mamatelashvili said that Minister 
Gilauri was returning from Turkey early on the morning of 
December 23.  He understood that a deal on Shah Deniz gas has 
been reached between Turkey and Georgia, but did not know any 
of the details.  He agreed to facilitate a meeting with 
Gilauri on December 23.  Mamatelashvili said that Georgia has 
activated its agreements on electricity with Azerbaijan and 
Turkey and is now receiving 68 MW from Azerbaijan and 82 MW 
from Turkey.  The Turkish power is being used in Adjara.  He 
expects that even more can be purchased from Azerbaijan in 
return for electricity to be furnished to Azerbaijan from 
Georgia in the summer. 
 
¶10.  Like other Georgian officials, including PM Noghaideli, 
Mamatelashvili was concerned that the cost of using mazut in 
the Gardabani thermal generators is prohibitively expensive. 
However, we informed him that a possibility exists of 
sourcing low-cost mazut from Iraq.  Mamatelashvili was eager 
to explore this prospect.  We compared USAID figures on the 
relative cost of mazut and natural gas and found that our 
calculations coincided well with Mamatelashvili's.  If mazut 
were available at $180 per ton, as some reports indicate 
might be the cost of Iraqi mazut, we agreed that transport 
costs would have to exceed $110 per ton before mazut would be 
more expensive to use than $220 per mcm natural gas.  We also 
informed Mamatelashvili of the existence of the Exogenous 
Shocks Facility at the IMF, and gave him the contact 
information for the local IMF office to explore whether such 
financing might be available, or even needed. 
 
¶11.  Mamatelashvili did give us one unwelcome piece of news. 
He said that to his knowledge, there are no existing rail 
links from Turkey into Georgia, a legacy of the poor 
relations of the Soviet Union with Turkey.  (Hence the 
Kars/Akhalkalkhi/Baku rail project now being organized.) 
Shipment of large quantities of mazut from Iraq might have to 
go to Ceyhan (Mediterranean) or Samsun (Black Sea), be put on 
ships and transported to Batumi, offloaded and then shipped 
by rail to Gardabani.  With only 40,000 metric tons of 
 
TBILISI 00003399  003 OF 003 
 
 
storage in Batumi, frequent deliveries of mazut would be 
required. 
 
¶12. Comment: The maximum conceivable use of mazut could 
reduce Georgia's usual 8 million cm per day gas demand by up 
to 3.4 million cm, to 4.6 million cm.  Gas received in kind 
from transit of gas to Armenia (0.7 mcm/day) and the 3.3 
mcm/day the pipeline from Azerbaijan, could be augmented by 
amounts of gas already in the Shah Deniz pipeline.  BP's 
McDowell estimated that by reducing the pressure in the 
pipeline from 90 bar to 40 bar, about 1 mcm/day could be 
supplied for up to 40 days.  The small input at Sangachal 
could possibly extend the viability of this route for gas in 
an unknown amount and number of days.  These amounts would 
just barely cover Georgia's gas needs, as reduced by mazut 
use.  Variations in demand could be handled at the expense of 
industrial customers like Azoti and Sakcementi. 
MXPERRY