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UNCLAS SECTION 01 OF 02 ASTANA 000531 
 
SIPDIS 
 
STATE FOR SCA/CEN, EUR/CARC, EEB/ESC 
STATE PLEASE PASS TO USTDA FOR DAN STEIN 
 
E.O. 12958: N/A 
TAGS: PGOV ECON EPET EINV KZ
 
SUBJECT:  KAZAKHSTAN:  WILL KAZTRANSGAS LEAVE GEORGIA? 
 
REF:  (A) TBILISI 0529 (B) ASTANA 2081 
 
ASTANA 00000531  001.2 OF 002 
 
¶1.  SUMMARY:  This report provides a Kazakhstani perspective on the 
management changes to KazTransGas-Tbilisi (KTG-Tbilisi) reported in 
reftel A.  It is derived entirely from open source material.  On 
March 16, the Georgian National Energy and Water Supply Regulatory 
Commission appointed the Chief of Security Department of the 
Georgian Oil and Gas Corporation (GOGC) to serve as interim manager 
in KazTransGas-Tbilisi (KTG-Tbilisi), which allegedly incurred a 
$47.9-million debt to GOGC.  KTG-Tbilisi, which is wholly owned by 
national oil company KazMunaiGas (KMG), in turn complained that 
residents of Tbilisi have not paid for more than $30 million of 
natural gas already delivered.  GOGC's interim manager will remain 
in charge until KTG-Tbilisi clears its debts.  In the meantime, 
KTG-Tbilisi will retain ownership of its assets in Georgia.  END 
SUMMARY. 
 
GEORGIA TAKES OVER MANAGEMENT OF THE COMPANY 
 
¶2.  The Director General of KTG-Tbilisi, Sanzhar Shokatayev, 
promised to cooperate with the new Georgian management, ensuring 
that "this decision has nothing to do with politics, and there can 
be no talks about seizure of property."  Nevertheless, he was 
skeptical of the decision, saying, "I doubt that a new management 
can change the situation."  According to the Georgian National 
Energy and Water Supply Regulatory Commission (GNERC), KTG-Tbilisi 
has debts of $47.9 million, of which $40.7 million is owed to GOGC. 
 
 
A DISTRESSED ASSET 
 
¶3.  In May 2006, KazTransGas bought the natural gas distribution 
company Tbilgas for $12.5 million, including 2,400 kilometers of gas 
pipeline and associated transportation and distribution 
infrastructure.  Although Tbilgas had no debt when KazTransGas made 
its acquisition, its distribution network was built during the 
Soviet era and was rapidly deteriorating.  During its first year of 
operation, the company incurred significant losses of natural gas 
due to leaky gas pipelines and outright theft.  In 2006, losses 
totaled 42 percent of total gas consumed, but this was reduced to 13 
percent by August 2008, partly due to a new partnership with 
U.S.-based Climate Capital Change. 
 
KAZTRANSGAS INSISTS INVESTMENT WILL PAY DIVIDENDS 
 
¶4.  KazTransGas said on March 25 that it has invested more than $100 
million in KTG-Tbilisi to buy new meters, construct new gas 
distributing stations, purchase equipment for the technical 
diagnosis of gas pipes, and develop technical staff.  In its first 
year of operation, KTG-Tbilisi revenue totaled $26.5 million; two 
years later, revenue tripled to $75 million.  KTG-Tbilisi annually 
sells more than 300 million cubic meters of gas to 300,000 Tbilisi 
residents and 5,000 companies, which comprise 37% of the Georgian 
gas market. 
 
KAZTRANSGAS CONSIDERING INTERNATIONAL ARBITRATION 
 
¶5.  On March 25, KazTransGas announced that it is reviewing a 
Georgian court decision to replace the company's management and may 
go to international arbitration to appeal the ruling.  On March 16, 
a city court in Kutaisi endorsed GNERC's decision that day to 
appoint a special administrator to run KazTransGas-Tbilisi.  The 
court ruling was made without company representatives present.  In a 
press statement, KazTransGas said it "finds the decision of the 
regulator invalid and the steps it took premature and unjustified." 
KazTransGas said it had not violated its licensing agreement and 
announced that it will review the court decision to determine 
whether it constitutes a breach of contract.  KTG said it may 
ultimately file an appeal with an international arbitration court, 
although KMG President Kairgeldy Kabyldin said on March 25 that 
Kazakhstan would prefer to settle the dispute out of court.  "We 
have no desire to initiate litigation," he said at a press 
conference.  "We have a well-grounded position and we acknowledge 
 
ASTANA 00000531  002.2 OF 002 
 
 
the mutual obligations."  Kabyldin claimed that KMG's Georgian 
partners failed to fulfill their obligations.  "They first cited the 
elections, then the war, as reasons not to raise gas rates.  As a 
result, (KTG-Tbilisi) began experiencing financial problems and 
accumulated debt that we acknowledge, although it cannot be settled 
immediately, as Georgia wants," he said. 
 
KAZTRANSGAS READY TO LEAVE GEORGIA 
 
¶6.  Despite early optimism about the company's prospects, 
Shokatayev, speaking in October 2008, did not rule out the 
possibility that parent company KMG might sell KTG-Tbilisi if it 
needed "quick money."  On March 25, KMG President Kabyldin confirmed 
that intention.  He told local press in Astana, "We are ready to 
sell Tbilgas, if our investment contributions, including debt 
financing and financial support, are paid back." Kabyldin also 
promised that KTG-Tbilisi would repay its debts to Georgian 
companies according to "a certain time-schedule."  He said 
KTG-Tbilisi will use funds from Tbilisi clients to settle its debt 
for $30 million for gas supplied to the company.  According to 
Kabyldin, the remaining $10 million is owed to a Georgian bank, 
which has demanded expedited payment, which Kabyldin said "runs 
counter to our bilateral agreement with the bank." 
 
A SOCAR SQUEEZE PLAY? 
 
¶7.  Kabyldin ruled out the possibility that there may be a political 
motive behind the dispute, such as plans by the State Oil Company of 
the Azerbaijan Republic (SOCAR) to squeeze KMG out of the Georgian 
market.  "I don't believe that someone intends to drive a wedge 
between KazMunayGas and SOCAR," he said, noting that cooperation 
between the two national oil companies is increasing.  "We have 
agreed with SOCAR on Baku-Ceyhan and we have a plan to boost transit 
shipment via Baku-Batumi," he added.  However, he noted somewhat 
ruefully that KazTransGas' losses increased sharply due to the price 
increase for gas from SOCAR.  "If they really want to help Georgia, 
why sell gas to Georgia at such a horrendously high price?  SOCAR 
sells gas to Russia and Ukraine at $280 per thousand cubic meters, 
while it offers gas to Georgia at $400 per thousand cubic meters. 
This is ridiculous," he said, "such a price does not exist." 
Kabyldin emphasized that both Azerbaijan and Georgia are interested 
in the transit of Kazakhstani oil.  "Georgia, Kazakhstan, and SOCAR 
are all interested in the transportation of Kazakhstani oil though 
their pipelines.  This will yield bigger returns than a one-time 
profit from reselling KazTransGas-Tbilisi and ousting KazMunaiGas 
from Georgia," he said. 
 
¶8.  KTG-Tbilisi has struggled with nonpayment from corporate and 
residential customers.  In addition, the company has had tense 
relations with political parties and non-governmental organizations 
in Tbilisi, particularly when it forced customers to settle their 
debts and raised gas tariffs.  On December 9, 2008, the leader of 
the Georgian Labor Party, Paata Jibladze, accused KTG-Tbilisi of 
forcing Tbilisi residents to replace old meters with new ones at 
their own expense.  At a press conference, he said, "We demand that 
the actual owner of KazTransGas, Nursultan Nazarbayev, withdraw his 
company from Georgia, so that the residents of Tbilisi can manage 
this strategic object on their own." 
 
MILAS