I have been in Georgia several times this year, working on a feasibility study of transporting gas from the Caspian Sea countries – Azerbaijan, Kazakhstan and Turkmenistan – to European markets.
I have seen a lot of the country, including South Ossetia, and find Tbilisi one of the most enjoyable capitals in the region.
Georgia is a very important country in the region’s energy industry, not for its production but for its role as a key transit route for both oil and gas. The producing countries are all landlocked and require pipelines in order to export. Historically, most of the pipelines went via Russia, but since independence, Georgia has provided alternatives.
Both the European Commission (EC) and the US government are becoming increasingly concerned at Europe’s dependence on oil and gas imports from the Russian Federation and are very keen to encourage diversity of supplies. The Caspian countries can help with that, but Georgia is the key route.
The still new 1,040-mile oil pipeline Baku-Tblisi-Ceyhan (BTC) has enabled oil from Azerbaijan and Kazakhstan to be exported via the Turkish port of Ceyhan, on the Mediterranean. The capacity is currently being increased to one million barrels per day.
There is also another oil pipeline from Baku to the Georgian port of Supsa, on the Black Sea, and a surprising quantity of crude is also moved by rail across Georgia to the Black Sea ports.
A new gas pipeline, South Caucasus Pipeline (SCP), is moving gas from the Shah Deniz field in the Caspian Sea across Georgia to Turkey and then on to European markets. Its capacity will also be increased in the near future.
The EC has been strongly supporting another gas pipeline project via Georgia, Nabucco, but that has yet to come to fruition, despite years of planning.
The Russians, in the form of Gazprom, are opposed to Nabucco. They have already built an alternative gas pipeline, Blue Stream, across the Black Sea to Turkey and have plans for another one, known as South Stream.
The Russians must be pleased with the outcome of the hostilities in South Ossetia and other parts of Georgia. Quite apart from the political implications, Georgia’s reliability as a transit country for oil and gas has been undermined.
The Georgian president gambled and failed miserably.
The fiasco could be the final nail in the coffin of the Nabucco project. I suspect that OMV and the other European companies behind this proposal will be very nervous about investing in infrastructure in Georgia, at least in the near future.
The country’s credibility with its neighbours, particularly Azerbaijan and Kazakhstan, must also have been badly damaged. Gazprom will not be slow to take advantage of that.
The Chinese are also interested in importing gas from Turkmenistan and Kazakhstan, so Nabucco could lose out to them as well.
I am less worried about the security of Europe’s gas supplies than the EC is. Caspian gas would be very welcome, but the huge investments in LNG terminals in recent years now give us many import options.
That does not just apply to the UK because other EU countries, such as Italy, Spain and France, have also built new LNG facilities in recent year.
There are other pipeline options as well. I have recently been working on a possible extension of the Arab Gas Pipeline, which supplies gas from Egypt to Jordan and Syria, and could be extended to Turkey and then on to EU markets. It could provide an export route for gas from Iraq.
There are, of course, various pipelines across the Mediterranean from North Africa to Spain and Italy. They currently supply gas from Algeria and Libya, but that network could be expanded to handle gas from other countries, even as far away as Nigeria, though Gazprom is sniffing around there, too.
The only winners from the Georgian crisis will be the Russians. The western response has been lamentable and highlighted yet again the inconsistencies in EU energy policies and the disagreements between some of the key member states, such as Germany and France. Consequently, Gazprom may become even more dominant in the region.
Tony Mackay is MD of Mackay Consultants