Cancellation of SOCAR’s Urea Plant in Kulevi; Conflicting Narratives

This week, Azerbaijan state-owned oil and gas company SOCAR announced that it was cancelling its construction of a urea plant at its Kulevi Free Zone on the Georgian Black Sea coast. The cancellation of this $700 million project, agreed with the previous government in 2012, has come as a blow to investor sentiment.

SOCAR’s local management claim that the reasons for cancellation are complex,  but they have ruled out corruption as a factor in the cancellation. From Commersant.ge

A cancellation  of the construction of a carbamide plant in Georgia by SOCAR (State Oil Company of Azerbaijan) is associated in particular with fluctuations in the energy market, long-term gas supply and other issues, Vagif Aliyev,  head of Investments Department of  SOCAR, told Trend.

According to him, SOCAR with the full responsibility declares that ” no other subjective factors have effect  on the  adoption of this decision.”

Aliyev also says  that in recent days the media and social networks spread unjustified and  untrue speculative information about stopping the project.

As the head of the Investment Department at SOCAR adds, a  serious work has been carried out on this project for a considerable amount of time, but after these issues arose,  the project was revised which led to the project’s cancellation.

Meanwhile, the Georgian Ministry of Energy, has a different take on the issue;

In particular, the Georgian Energy Minister Kakha Kaladze said that the reason for the suspension of the project was the disadvantage of the project for the Georgian side, as well as for Azerbaijani.

Deputy Energy Minister Mariam Valishvili told  “Commersant” that negotiations are continuing at this stage, and the project is not derailed, but just delayed.

“We had to supply gas for the needs of the enterprise that we get at the social cost. It is a 20-30% increase in consumption, as the production of carbamide  is a  very energy-intensive project. We can assume that the problem is in the supply of gas – about 1 billion cubic meters per year, “- she notes.

According to her, this is due to the fact that the opening of the Kulevi free industrial zone was delayed which had to include a carbamide factory construction.

It is interesting that SOCAR declare the project to be cancelled, while the Ministry declare it to be simply postponed. Given that SOCAR supply the vast majority of Georgia’s gas for residential and industrial use, it seems odd that a lack of gas supply would cause the project to stumble; SOCAR’s gas pipelines have substantial capacity and are well engineered.

In exchange for gas transit through Georgian territory, SOCAR is obliged to provide gas to Georgia at a very concessional rate for domestic use. To what extent the Energy Ministry was concerned that a billion cubic metres of gas annually for urea manufacture would disrupt this concessional residential supply is not known to the public.

The implications for Georgia’s agricultural sector are significant. Around half of Georgian farmers use fertiliser presently. Of those, more than 90% solely use nitrogen fertiliser rather than blends such as NPK or other products. Currently, Rustavi Azot , owned by entrepreneur Roman Pipia, and supplied with gas from Russia, has a dominating position in the Georgian market, being the sole local manufacturer of nitrogenous fertiliser in the country. Rustavi Azot produces ammonium nitrate as well as anhydrous ammonia. While SOCAR’s urea plant at Kulevi was aimed largely at the export market, domestic sales would have stimulated some price competition in the market from which farmers could have benefited. Urea is more amenable to use in solution than ammonium nitrate and has fewer compatibility problems when mixing with other fertilisers.

It is to be hoped that this project can go ahead at some time in the future. Substantial construction projects like this one help stabilise the local currency and create rural jobs in an area where many IDP’s have been settled.

UPDATE:

SOCAR Georgia’s General Director confirms that the Kulevi urea plant project is postponed, not cancelled. From Commersant.ge

The carbamide plant project in Georgia was temporarily postponed, but not closed –  Director General  of SOCAR Petrolium Georgia Mahir Mammadov states.

According to him, various speculations appeared in the media in this regard  that do not correspond to reality – the factory cannot be built until the completion of the Shah Deniz project, which is why the project was simply postponed until the appropriate time.

“We had some problems in connection with the project due to the economic situation in Azerbaijan. Therefore, the construction of the plant has been delayed, but we will definitely return to this project. It was our decision and the government of Georgia agreed with it. So the project is postponed, but not cancelled, “- says  Mahir Mammadov.”

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