What will higher gas tariffs bring us?
12 February, 2015
What will higher gas tariffs bring us?
Utility Costs Must be Affordable – Why Should People Overpay?

Will the government manage to avoid increasing the cost of natural gas for different commercial organizations? This question will presumably be answered in two weeks; during that time, negotiations with different distribution companies are being held.


“There is no economic ground for a natural gas price hike”

Very recently, KazTransGaz informed different commercial organizations that from March 1st, the cost of one cubic meter of natural gas will increase from
0.75 to 0.90. It is also noteworthy that SOCAR Gas, which mainly serves the regions, also plans to increase its prices.
According to representatives of different gas distribution companies, the volatility of the lari is what might result in a natural gas cost increas. As you know, our companies buy natural gas in USD while people pay in GEL.
From the very beginning, they made it clear that the cost of natural gas would increase for commercial firms, while gas prices for the public would be left unchanged. However, after this information was released, a logical question should instantly emerge: will an increase in the price of gas for them result in higher prices for us? 
Allegedly, in order to avoid raising the price of bread, bread factories will not be obliged to pay more for gas. However, with the GEL steadily losing its value against the USD, no one knows how long the situation will remain stable. It does not matter how hard our government tries, it will most likely fail to change the situation for the better if the GEL does not rebound soon.geotv.ge
There are also other side-effects: cheap energy resources are beneficial for our people; however, when the government starts to interfere with the tariff policy, problems instantly surface. Obviously, if the price of gas ratchets up in the future, our people will find themselves in a very tough situation.

Revaz Arveladze, President of Georgia’s Energy Academy:
“Distribution companies have signed contracts with their commercial customers declaring that if the GEL exchange rate changes by at least 10 percent against USD, they will be entitled to raise the price of natural gas.
Georgia is completely dependent on imported gas and consequently, it buys this resource in USD, which is why the gas distribution companies were expected to raise the issue of increasing gas tariffs.
Thermal power plants also buy natural gas in USD while delivering electricity to people in GEL and consequently, they have also raised the issue of the gas price. Thermal power plants produce 20 percent of electricity delivered to the country, therefore if they increase electricity tariffs, overall electricity price will increase as well.”

Vakhtang Lomjaria, Advisor on Economic and Development Issues for the Georgian Progressive Forum:
“In order to more accurately define the gas tariff situation in Georgia, we need to take a look at global statistics. That way, one can easily see that for the last three years, there is a trend of a decrease in natural gas prices. This process is partially connected to fluctuations in the price of oil as well. In comparison with the last year’s mageotv.geximum, today the price has dropped by 42 percent.
Therefore, the effects of the dollar’s strengthening are wholly counterbalanced by the reduction of gas prices in the international market. Moreover, today we should be paying less lari per cubic meter of natural gas than we paid at the beginning of 2014, when 1 USD was equal to 1.7266 GEL. One should explain the real reason for the natural gas price increase not in economic terms, but in legal terms and the conditions of contracts signed between the state and the resource providers and distributors.
By that, I specifically mean the edict issued by the Ministry of Energy in 2007-2008, which gives natural gas distributors a legal excuse to raise the price of their product if the dollar’s exchange rate grows by a significant margin (namely, by more than 10 percent). Contracts signed with such distributors are long-term as a rule, and their review can occur only if both parties agree to it. However, I want to once again emphasize that there currently are no economic grounds to warrant the increase of prices of natural gas in Georgia.”
When asked if the price hike promised by KazTransGaz will affect the cost of goods that require natural gas for their manufacturing, Vakhtang Lomjaria answers succinctly:
“This is unlikely. Allow me to give you an example to prove my point: Two years ago, the price of wheat dropped by 30 percent on the global market, but the bakeries did not reduce the price of bread. Usage of natural gas in the products you mentioned comprises only 1-2 percent of their net cost. Therefore, there is no threat of a “price hike epidemic” looming ahead. KazTransGaz’s price increase will not have any significant influence on the Georgian market.”

Where Georgia gets its natural gas

geotv.geGeorgia consumes 1.9-2 billion cubic meters of natural gas annually. The country receives it from several sources, one of which is the Baku-Tbilisi- Erzurum pipeline. Under the agreement signed with the owners of this pipeline, Georgia annually gets 700 million cubic meters of gas. 
International Consortium BP is in charge of this pipeline. Natural gas from Azerbaijan is exported to Turkey, and within the framework of this agreement, Georgia also gets cheap natural gas, 100 cubic meter of which cost around 65 USD.
Another source that provides Georgia with natural gas is the northeastern pipeline. 10 percent of natural gas (approximately 200 million cubic meters) provided to Armenia by Russia goes to Georgia as a transit cost.
The price of natural gas which Georgia buys from SOCAR is split into two categories: one established for the so-called social gas, which is delivered to citizens and the other is meant for thermal power plants. However, the term “social gas” is incorrect, since cheap gas cannot resolve social issues. Plus, it is also worth noting that the owner of these power plants is a Russian Company “RAO EES.”
The price of 1000 cubic meters of social gas is around 143 USD, while the price of commercial gas is approximately 750 GEL.

Author: Rusa Shelia

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GEL Exchange
USD
1
USD
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EUR
1
EUR
3.0359
GBP
1
GBP
3.4298
RUB
100
RUB
4.0034
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