Legislative Update July 00 - February 01

Electricity Sector
Oil and Gas

There have been no major changes to the legislation or regulatory framework of the Georgian power and natural resources sector in the last six months. However, the Georgian government has enacted new resolutions to address local power generation and energy import matters. In addition, Georgia has taken steps to develop further the legal regime for hydrocarbon transportation across its territory.

Electricity Sector

Power generation
Thermal power has historically been the second most important source of electric power supply in Georgia. Thermal power is primarily used to provide base load energy during the autumn and winter low water seasons. Georgia has only one major thermal plant, located to the southeast of Tbilisi in Gardabani. Its total nameplate capacity is 1850 megawatts (MW), of which approximately 500MW are currently available to produce power. The next largest thermal plant is a 200MW oil-fired station located in Tkvarcheli in the breakaway republic of Abkhazia. This plant was badly damaged during the civil war. Its restoration is highly unlikely due to its low cycle efficiency and location in the conflict zone.

Due to the extreme power shortage in the country, the Georgian government supports projects aimed at improving power generation. The government adopted changes to Resolution 543 of September 16 1999, regarding the construction of a 2 X 125MW coal-fired thermal plant in Tkibuli in western Georgia. It also ordered the relevant state agencies to issue necessary permits promptly to foreign investors to operate in Georgia and to support the implementation of the project. The construction of a thermal plant will also encourage local coal production.

The Georgian government has also adopted a resolution for the construction of a 7MW hydroelectric plant in the Mtskheta-Mtianeti region in an effort to provide electricity to mountainous regions of central Georgia. According to the project, Austrian SHPT Ltd and its Georgian partner Energo-Aragvi Ltd will complete the plant before the end of 2001.

Imports
The Georgian government began preparations to import electricity for winter in early Autumn 2000. In November, the government adopted several resolutions and orders to ensure parallel operation of the Georgian energy system with those of the neighbouring states. Currently, Georgia imports electricity from all of its neighbours. This is not enough, however, to resolve the problem of electricity shortage, including in the capital. Tbilisi currently receives only four to five hours of electricity daily. This problem has been compounded by Russia, which, on two occasions, cut off gas supplies to Georgia in December 2000 and, as a result, negatively affected the thermal power generation at the Gardabani plant.

Tariffs
The National Electricity Regulatory Commission (NERC) adopted Resolution 8 of August 31 2000, which adjusts tariffs on electricity for all categories of consumers of 380/220 volts in Georgia, starting September 1 2000. NERC is authorized to regulate electricity tariffs in Georgia pursuant to the Law on Electricity and Natural Gas of 1997.

The new electricity tariffs were set as follows:

• for Tbilisi - 9.8 tetri (4.9 cents) per kilowatt-hour (kWh). The Tbilisi tariff reflects certain tariff schedule adjustments required by the investment programme approved in the privatization agreement between the Georgian government and AES Telasi, the Tbilisi electricity distribution operator;

• for Autonomous Republic of Adjara - 8.5 tetri (4.25 cents)/kWh; and
  
  
• for the rest of Georgia - 8.4 tetri (4.2 cents)/kWh.

The resolution introduces energy generation tariffs at hydroelectric and thermal plants. It further provides the calculation of electricity tariffs for the autumn and winter period, as well as the Electric Balance Estimate of Georgia from September 1 2000 until September 1 2001. Finally, the resolution grants NERC the authority to set tariffs for imported and exported electricity on a case-by-case basis.

Oil and Gas

Refining industry
In Soviet times two refineries operated in Georgia. The larger one is located in the Black Sea port of Batumi. There also existed a smaller refinery in the Iori Valley, east of Tbilisi, which was designed to process locally produced crude. In the post-Soviet era, Georgia developed a number of plans to modernize its existing refineries and construct new ones. However, since domestic oil production, as well as plans for Azerbaijani oil supplies to be brought to Georgia, has remained far behind original expectations, the implementation of these plans has lagged behind schedule.

The Batumi refinery suffered considerably in the 1990s. The pipelines that used to deliver oil from Russia and Azerbaijan to the plant have ceased to function. As a result, the refinery, which has an annual capacity of more than 5 million tons, is receiving only small amounts of crude. Georgia awarded a $250 million contract to Japan's Marubeni to rehabilitate the refinery in 1997. The project envisaged the construction of a new refining complex with an annual capacity of 2.5 million tons. The plan, however, was based on expectations that Georgia would soon receive oil from Azerbaijan through a main export pipeline to be constructed via Georgia to Turkey. When the decision on the main export pipeline was delayed until year 2000, the contract was terminated.

The president of Georgia issued a decree on the establishment of a commission for the development of a state oil-refining programme on November 20 2000. The goal of the decree is to revive the oil-refining industry in Georgia and to promote foreign investment in the sector. The programme will be submitted for presidential consideration by April 2001.

Natural gas pipeline project
The Shah Deniz field in Azerbaijan was found to contain large gas reserves, with some estimates totalling 35 trillion cubic feet (Tcf). The production at the Shah Deniz field is expected to start by 2004, and Azerbaijan can become a net exporter sometime during the next decade if the proposed infrastructure development goes forward. Azerbaijan plans to export over 70 billion cubic feet (Bcf) of natural gas per year to Georgia once production at the Shah Deniz field begins. Turkey would be the first export market, with Bulgaria, Greece and Romania also possible markets. Exports to Georgia could begin with the reconstruction of a 40-mile pipeline in Azerbaijan and Georgia. The proposed pipeline will be further extended to Erzerum, Turkey, in order to export 300-350 Bcf of gas to Turkey. A feasibility study on utilizing existing pipelines for exports is being developed under the European Union's INOGATE programme.

The proposed 1 Tcf Trans-Caspian Gas Pipeline would make possible large-scale natural gas exports to Turkey from Turkmenistan and the Caspian region. Currently, the project is deadlocked as Azerbaijan, which would like to exploit the Shah Deniz field, insists upon 50% of the pipeline's capacity and this is not acceptable to Turkmenistan.

In order to facilitate natural gas transportation across Georgia, the president of Georgia issued a decree on measures for the development of a natural gas pipeline projects on July 31 2000. The Georgian International Gas Corporation (GIGC) was designated to conduct all negotiations concerning natural gas pipeline projects with interested countries and potential participants. Georgian ministries and state agencies are requested to assist GIGC by issuing permission to participants without delay. GIGC and relevant ministries are also requested to ensure the establishment of the same legal and taxation regime as provided for the Baku-Tbilisi-Ceyhan main export pipeline project.

For further information on this topic please contact Dan Matthews or Revaz Javelidze at Baker & McKenzie's Baku office by telephone (+994 12 98 17 01) or by fax (+994 12 98 17 05) or by e-mail ([email protected] or [email protected]). Alternatively, contact Mark Lockwood at Baker & McKenzie's Almaty office by telephone (+7 3272 50 99 45) or by fax (+7 3272 50 95 79) or by e-mail ([email protected]).