CAPITAL: Tbilisi

MONETARY UNIT: Lari

REFINING CAPACITY: 106,436 b/cd

OIL PRODUCTION: 2,000 b/d

OIL RESERVES: 35 million bbl

GAS RESERVES: 300 bcf

Western Hemisphere companies in 1998 reported progress with oil and gas operations in the Kura basin of eastern Georgia.

CanArgo Energy Corp., Calgary, drilled Georgia`s first horizontal well, N97. It is near Tbilisi in Ninotsminda field, which was producing about 1,700 b/d of light crude. As 1999 approached, CanArgo was preparing to test the N98 vertical well, at 3,013 m total depth, in the same field.

The company planned to drill at least three development wells and rework five wells at Ninotsminda in 1999, possibly boosting production to 5,000 b/d by year-end 1999.

CanArgo held a 13.3% interest in Georgian American Oil Refinery at Sartichala, 30 km east of Tbilisi. GAOR, Georgia`s only refinery with western technology, started up in July 1998 producing naphtha, diesel, and fuel oil. Ninotsminda crude was processed in a plant adjacent to the refinery.

The company planned to participate in a capacity expansion and diversification of the product stream to include kerosine and jet fuel, eventually boosting its interest to 24%.

CanArgo intended to become a private power producer in Georgia. It set up CanArgo Power Corp., which planned to install a 3 MW generator fueled by gas from Ninotsminda field. The company would use the electricity for drilling and producing operations and sell excess power to the state grid.

CanArgo and local partners won a tender for Blocks 1 and 3 in the Caspian Sea off Dagestan, Russia. The company was negotiating for the licenses and approaching partners.

Frontera Resources Corp., Houston, sold the first shipment of crude oil from a rehabilitated field on 1.3 million acre Block 12 in southeastern Georgia.

The oil was to be shipped by rail westward to Batumi. The crude is light, high gravity, low sulfur, and uncontaminated by heavy metals. Frontera expected to have the option of selling future loads of crude oil at Batumi, other Black Sea ports, and in the Mediterranean.

Strategic location

Georgia`s importance stems not from its own oil resources but from its location as a potential oil transit center.

In 1998 it was one of several contenders for the 1 million b/d main export route for oil from Azerbaijan International Operating Co. (AIOC), the international consortium developing Caspian Sea oil off Azerbaijan. The World Bank had provided $1.4 million for a feasibility study of routing the main export pipeline through Georgia to the Black Sea. An alternative route for the main export pipeline to the Turkish port of Ceyhan could also cross Georgia.

In 1996, the presidents of Georgia and Azerbaijan agreed to a 30 year deal to move part of AIOC`s "early oil" along the western route to the Georgian Black Sea port of Supsa. Georgian International Oil Co., a unit of AIOC, figured to have facilities ready to open 1999 and was to spend $200 million for repair, expansion, and modernization of pipeline and port facilities.

Chevron Corp. also signed a protocol of intent with Georgia for expanding the shipment of oil from the Tengizchevroil joint venture in Kazakhstan across Georgia to the port of Batumi. In 1998, deliveries were running at about 25,000 b/d via a complicated system of barges, pipeline, and rail. Under the new agreement, the oil would be shipped to Georgia via barge and then by pipeline to Batumi. If a final agreement was reached, Tengizchevroil would receive the exclusive right to transport oil through the Khashuri-Batumi oil pipeline for 25 years. When rebuilt, the 180-mile pipeline could carry 140,000-160,000 b/d.

Ukraine had also shown interest in a project to transport Azeri oil across Georgia to Ukraine. Ukraine set up a pilot project to ship oil via rail across Georgia to Poti and then to the Ukrainian port of Odessa, where an oil terminal was under construction. If the pilot project succeeded, Georgia would transport about 20,000 b/d to Ukraine.

Georgia`s plans to become a transit center were conditional not only on its ability to maintain friendly relations with its neighbors but also on its internal politics. Azerbaijan complained that oil products exported from Baku were being illegally diverted to Armenia, which was under an economic blockade by Azerbaijan and Turkey. In addition, the proposed pipeline routes passed within a few miles of the separatist regions of South Ossetia and Abkhazia.

Despite limited oil resources, Georgia was taking steps to increase domestic production. It negotiated several production-sharing agreements and joint ventures in the Kura basin east of Tbilisi, as well as in the Black Sea region in western Georgia.

Georgia`s refinery at Batumi had been running at less than capacity because of a lack of crude oil supplies. This situation was expected to change with the completion of the pipeline carrying crude oil from Azerbaijan through Georgia to the Black Sea. Georgia was modernizing its Batumi refinery, and it let a $250 million contract to Japan`s Marubeni Corp. and JGC Corp. to expand and modernize the plant. Georgia also awarded Frontera the right to construct a new refinery near Tbilisi as part of its production-sharing agreement.

Natural gas

With small, undeveloped gas resources, Georgia relies on imported gas; however, its only suppliers, Russia and Turkmenistan, cut off supplies in 1997 for lack of payment. Gas supplies from Turkmenistan had been received via a North Caucasus-Transcaucasian pipeline through Russia.

As it did with oil, Georgia was positioning itself as a transit point for gas shipments. It agreed to a natural gas pipeline to be built across its territory to carry Russian gas to Armenia and Turkey. Georgian International Gas Co., incorporated in July 1997, was to spend up to $500 million to upgrade pipelines that would eventually carry 300 bcf/year of gas. Part of this gas would go to Georgia for payment.