Itera Adds Fuel to Georgian Fire

Already reeling from a Kremlin threat to strike Chechen bases in the strategic Pankisi Gorge, Georgian President Eduard Shevardnadze must now engage Russia on another front: securing stable gas supplies.

With winter fast approaching, the former Soviet republic has no choice but to reverse a decade-long strategy and increase its energy dependence on Russia, despite the heightened military tensions.

The day of reckoning for Tbilisi came in late June, when monopoly gas supplier Itera turned off the valve and kept it off until its demands were met.

Now Itera looks set to expand its influence and take control of the country's gas pipeline network via a joint venture with the government. And officials are helpless to do anything but sign off on it, because they know what can happen if they don't.

While a lack of gas during the summer can be considered to be an inconvenience, during the winter, even in southern Georgia, it can be lethal.

The controversy surrounding Itera, which in Georgia has become a national debate, has been compounded by mounting tension with Russia. President Vladimir Putin on Wednesday ordered the military to draft plans to strike suspected Chechen bases in the gorge.

Georgia has run up $90 million in debt to Itera since 1996, when the gas trader picked up where Russian gas monopoly Gazprom left off. Both Gazprom and Turkmenistan stopped supplying Georgia in the mid-1990s because they were not getting paid.

Recently robbed of Gazprom's patronage, Itera has found itself in difficult financial straits and, as a result, has toughened its stance on its long-term debtors.

But Alexander Iskandaryan, deputy head of the Yerevan-based Caucasus Media Institute, sees political motivations behind Itera's crackdown.

"The pressure isn't economic, it's political," Iskandaryan said. "The decisions are made by the upper echelons of the Russian government. Georgia isn't able to resist because it is a small and weak state with many internal problems. Problems of domestic management. Problems of the entrenched government elite. Problems having to do with territorial disputes."

These problems, however, arose from the ashes of the Soviet Union's centralized economy and are only exacerbated by the domineering attitude of present-day Russia.

During Soviet times, Georgia grew dependent on cheap energy. Market realities settled in after the fall of communism, and consumption of natural gas fell more than 75 percent over the next 10 years to about 1 billion cubic meters.

Industry has fallen with it, plunging Georgia into a quagmire perpetuated by corruption and military clashes that have kept foreign investors away. To add to its woes, the country has also been caught in a tug-of-war between former Cold War foes.

Tensions have flared in the Pankisi Gorge, an area along the border from which Russian officials say rebels launch raids into Chechnya.

At the same time they were refusing Russia's request to send in its own troops to the gorge, Georgian officials said they would consider allowing U.S. troops to participate in anti-terrorist operations on its territory. In the wake of the Sept. 11 terrorist attacks, America has stepped up its overtures to Central Asian states and Georgia.

But security is not the only bone of contention. As more oil and gas deposits are being discovered in the Caspian basin, Georgia has evolved as a key transit country for bringing these hydrocarbons to the West by circumventing Russia.

Roman Gotsiridze, head of the Georgian parliament's budget office, is worried how a more influential Itera could affect those plans. "If it hands over gas transportation networks to Itera, the government might as well dig a grave for projects that would transport oil and gas from Azerbaijan through our country," Gotsiridze said.

The deal currently under negotiation would create Itera-Georgia, a company that would be jointly owned by Itera and the Georgian government. Itera would own 51 percent of the company and staff it with its own managers. It would also be obligated to upgrade Georgia's decrepit pipeline network, which employees say could break down at any time.

The government would hold the other 49 percent, bringing its state-owned Tbilgaz distributor to the table.

The deal is scheduled to be finalized by the beginning of heating season in early November.

"The Georgian side is probably interested in getting this done before winter," said Itera spokesman Nikolai Semenenko. "Why? It will be cold, and people will need gas to stay warm."

He said Itera has never threatened to cut off gas to get its way during various negotiations.

As for Russian influence, "it's very minimal," Semenenko said, pointing out that despite being headquartered in Moscow, the company is registered in Jacksonville, Florida.

Its out-of-the-way incorporation is not the only thing that makes Itera peculiar. The mystery of its creation and beneficial owners have fueled theories that are now the folklore of the post-Soviet gas industry. Most observers believe that former Gazprom executives created Itera -- which later became the lucky recipient of lucrative Gazprom assets -- while they were still in power and that they continue to finance their retirement with Itera's profits.

No smoking gun proving direct ownership, however, has ever surfaced. And debates over the firm's real motives continue. Is it an arm of some government? U.S.? Russian? Central Asian? Or does it act according to its own economic interests?

"The United States doesn't hold Itera in too high regard," said Robert Ebel, a director of the Energy Program at the Washington-based Center for Strategic and International Studies. "There are too many questions about its makeup and how it acquired such a prominent position in the natural gas industry."

Itera's campaign to "lock up" Georgia's gas market would not threaten plans to build pipelines across the Caspian region, so the United States -- always looking out for ways to reduce reliance on Persian Gulf oil -- has little reason to worry, Ebel said.

Itera might even be a harbinger of the future. As more independent gas producers enter the market, the politics of gas supply will step aside to make room for the economics of the business.

"But America will continue to keep close watch on the region," he said.

Sharon Hudson-Dan, a spokeswoman at the U.S. Embassy in Tbilisi, declined to comment on the impending Itera deal, saying the matter is something to be worked out between the two former Soviet republics.

Shevardnadze has repeatedly tried to sell off Tbilisi's state-owned gas distributor, which local media say is a corrupt organization run by Georgia's "energy mafia" who siphon off the money Tbilisi residents pay for their gas.

The latest contender was Israel's Tahal, but negotiations broke off just as Itera shut off the gas in June.

If the deal with Itera goes through, the firm would command a vertically integrated system of gas transportation right up to delivery to homes and factories.

Itera first approached the Georgian government about consolidating the gas network two years ago but was refused, Semenenko said. "They said at the time that they weren't ready."

Many government officials still are not, although Shevardnadze has told them there is no alternative. This disagreement underscores the atmosphere of instability that has worked its way into Georgia's government.

"The leadership is thinking short term," said Pavel Bayev, a senior researcher at Norway's International Peace Research Institute. "It's not that they are short sighted by definition. It's the pressure of today and tomorrow. The system of supply is tied to the pipeline, and it points very clearly in the direction of Russia."

Mikhail Saakashvili, leader of the National Movement party, disagreed, saying Turkmenistan and Kazakhstan could become alternative suppliers.

"According to Shevardnadze, either Georgia receives gas but will have to face the prospect of economic slavery, or it doesn't receives gas but remains free," Saakashvili said this week. "It isn't like that. There exist many options of buying natural gas and remaining a free and independent country at the same time."

Georgia had pinned its hopes on a planned pipeline running from Azerbaijan's Shah Deniz natural gas field through Georgia to the Turkish city of Erzurum, which was originally slated for completion by 2004 at an initial capacity of 22 bcm per year.

As part of the deal, Georgia was to receive 5 percent of transported gas, or 1.1 bcm, as payment. But Turkey has recently signaled that it will need less gas than it originally expected and will focus on Russian gas that will be supplied via the Blue Stream pipeline.

The pipeline consortium, led by multinational oil major BP, still has not resolved questions of volume or timing with the Turkish government, so the first gas will not flow through Georgia before 2006.

Shevardnadze needs it now. Even if someone like the United States could throw billions of dollars at Georgia's energy problems, it would not be enough to help, Iskandaryan said.

"For all its minuses, Georgia has one plus: its geographical location," he said. "In this case, that's not enough."