White Paper on Natural Gas Market Concept Design for Georgia

The wholesale supply of natural gas is deregulated by several types of contracts between suppliers, including long-term import contracts with fixed and variable volumes, as well as short-term contracts. Two state-owned companies, Georgian Oil and Gas Corporation and Georgian Gas Transportation Company (GGTC), import gas from Azerbaijan and Russia, respectively, satisfying around half of annual natural gas demand in Georgia. The rest of the gas supply is delivered mainly through the subsidiaries of the State Oil Company of Azerbaijan Republic (SOCAR). Shippers of the gas, distribution licensees, and suppliers report their anticipated gas supply/demand to the Ministry of Economy and Sustainable Development of Georgia (MoESD), who based on the provided information, approve the annual natural gas balance, broken up in monthly volumes. GGTC is a single licensed company for performing natural gas transportation through high-pressure (cross-border, transit, internal) network and for operation (dispatch) the network. GGTC is a state-owned company with 100% shares managed by the MoESD. The Georgian National Energy and Water Supply Regulatory Commission (GNERC) regulates GGTC's activities, sets tariffs, and defines its licensing conditions. GGTC operates and maintains the gas transmission network according to the leasing agreement with Georgian Oil and Gas Corporation (GOGC). The latter is owner of the main transmission infrastructure. GGTC does not own transmission infrastructure but operates it and ensures that adequate investments are sourced to upgrade/modify network to provide gas transmission services within predefined criteria. The MoESD defines natural gas policy directions (i.e., gasification of certain areas), approves natural gas market rules and natural gas annual balance. GNERC issues licenses and defines licensing conditions for natural gas transmission and distribution, performs gas market monitoring, sets tariffs for natural gas tariffs for transmission, distribution, supply, and consumption (only for regulated households). Currently, the Georgian gas market is highly concentrated with a supply mainly from Azerbaijan. According to the annual gas balance for year 2018, no natural gas will be imported from Russia in 2018. Instead, 99.7% of the 2.7 billion cubic meters (bcm) of natural gas will be imported from Azerbaijan. The Gas Target Model (GTM) presents the vision of the Government of Georgia (GoG) for the sector development in year 2026 and beyond through the Draft Energy Law as a general guidance for the market. The GTM considers the creation of a well-functioning gas balancing market, consisting of national entry-exit system with virtual trading point toward the implementation of an exchange platform for trading. The GTM endeavors to ensure security of natural gas supply for Georgia, increase liquidity in the wholesale market, remove barriers to cross-border trade, and create an efficient market delivering real choice to customers. The White Paper on Natural Gas Market Concept Design for Georgia aims to support these market activities and the GoG market vision through a suite of recommended directions toward its realization. The paper is scheduled to meet the impending gap between the overarching long-term natural gas market vision and the need to facilitate the scheduled infrastructure projects supported by legal and regulatory provisions. A sustainable natural gas market requires both structural and regulatory reforms through defining and implementing a set of rules and mechanisms that are crucial to its success. The White Paper proposes a three-stage approach to natural gas market development in Georgia. Stage 1 covers the period between year 2018 and year 2021, during which the unbundling of the network activities, development of a gas storage facility, creation of a Storage System Operator (SSO) and a Balancing Mechanism, and various regulatory frameworks and regulations will be implemented. Stage 2 considers the period between years 2021 and 2025, with the creation of a Virtual Trading Point (VTP), natural gas balancing and ancillary services markets, and a gas Market Operator (MO). These market implementations will be supplemented through necessary regulatory measures. Optional Scenario for Stage 2: This scenario envisages implementation of the so-called Gas Release Program (GRP) that is, in general, an obligation on the incumbent monopolistic supplier to sell certain portion of its gas on the organized market. Stage 3 defines the final step toward the GTM at year 2026 and beyond through the implementation of a gas exchange platform, offering multiple standardized trading products and including possibility of a daily market.