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Frontera Case
Photo byGetty Images | Christopher Furlong

Frontera Case

By Gela Vasadze | Edited by Veronika Malinboym #INVESTMENTS

A popular historical anecdote, “Pecunia non olet” – or “money doesn’t stink” did not always have a negative connotation. At least when Vespasian responded to his son’s rebuke about the tax on public restrooms he didn’t mean it in a negative sense. Quite the contrary, according to Suetonius, Vespasian explained to his son that money is odorless, and the money’s main purpose is to benefit the society. 
In speaking about the misadventures of American business in Georgia, we will not bother with the fact that the money of American companies has a better odor than the money of any other foreign investors in Georgia. It is indeed not the case, money doesn’t really smell, and investments in Georgia from both American companies and elsewhere are equally important and interesting. But it is not a matter of smell, a much more important question is whether this money will serve the cause of developing and strengthening the country's security. And here, Frontera’s case is especially interesting.

On 4th of July Georgian Prime Minister Giorgi Gakharia congratulated the American people on the Independence Day. Many words were spoken about the importance of the strategic partnership, desire to improve relationships between the countries and the role that the United States continues to play in the making of the modern history of Georgia. The importance of American investments was especially highlighted by Minister Gakharia, and later restated by President Salome Zurabishvili, who also emphasized the special role that Lugar’s laboratory played in countering the outbreak of COVID-19 in Georgia. But as Goethe rightfully said: “All theory, dear friend, is gray, but the golden tree of life springs ever green”. So, let us analyze what is really happening here.

What is Frontera?

Until recently, only a few people had ever heard about the company, despite it being currently the biggest American investor in Georgia. Frontera was founded thirty years ago in Houston, Texas. The company is actively engaged in the oil and gas business around the world, including Latin America, Eastern Europe and post-Soviet space. In the 1990s, Frontera was the largest operator of onshore oil production in Azerbaijan.

The company came to Georgia in 1997, when the contract on geological exploration and extraction of energy resources between Georgia’s government and Frontera was signed. All Frontera’s working conditions in Georgia were spelled out in detail. Before signing, this document passed the readings in all profiled parliamentary committees and also in corresponding ministries and departments. The timing of the signing of the contract is also interesting from a political point of view. By 1995, Georgia began to come out from Russia’s sphere of influence (which has originally came about as the result of the catastrophe of Autumn 1993).  After the violation of Moscow’s guaranteed truce and ethnic cleansing of the Georgian population of Abkhazia, military formations of supporters of Georgia’s former president Zviad Gamsakhurdia were ready to march on Tbilisi. According to the evidence of many participants of those events, Moscow had plans to split Georgia into 5 parts – Abkhazia, Ajaria, South Osetia and Western Georgia under the leadership of Zviad Gamsakhurdia and Eastern Georgia under the leadership of Eduard Shevardnadze.  This scenario was avoided largely due to Shevardnadze’s international authority. He had until very recently been the USSR’s Minister of Foreign Affairs, the architect of Perestroika and new thinking in international relations, and he made a great contribution to unification of Germany and liberation of Eastern Europe. But Shevardnadze had to agree to Georgia’s entry into the CIS and appoint Moscow’s people as directors of power structures. Igor Giorgadze became the Minister of State Security, and Vardiko Nadibaidze became the Minister of Defence.

In 1995 after a failed assassination attempt on Shevardnadze, Igor Giorgadze was forced to flee the country to Moscow. In Tbilisi people were confident that Moscow was behind the attempt. After the second failed attempt on Shevardnadze in February 1998, Vardiko Nadibaidze was also dismissed. This period is noted for the revitalization of Georgian-American connections, the “contract of the century” was being prepared – the Baku-Tbilisi-Ceyhan oil pipeline. Georgia began to negotiate the withdrawal of Russian military bases from it’s territory. It was at this time that Frontera first came into Georgia.

During its activity, the company invested more than $560 million. One part of this money was spent on geological exploration, the other directly on oil and gas mining.

Is there gas in Georgia?

In 2015 the media published the information that according to Frontera’s data there are large deposits of oil and gas within Georgia’s territory. However, the information had no further continuation. Only in the past year, when Frontera’s case became relevant in Georgian political life, did Georgia’s media begin to remember it. Moreover, the majority of publications were visibly negative – “oh, that’s the guys who told us that we have a lot of gas. And where is this gas? No, we cannot trust them”. Obviously, no one had bothered to ask themselves the simple question of why a private company would spend a huge amount of money on geological exploration and announce significant gas reserves if there were none. With a certain amount imagination you might actually find an “answer” to where this gas is currently located 

However, we were also interested – where was this gas? As it turned out, the gas was located where it belongs – in the bowels of the Earth. But then why was it not being extracted?  Firstly, according to the explanations of the president of Frontera Georgia, Zaza Mamulaishvili, by 2014 the company did in fact find large reserves of gas in Georgia. All materials on this case were sent for evaluation to independent experts that possessed according qualifications and international authority.  Gas reserves in Georgia amounting to more than 350 billion m3 were confirmed and oil reserves of around 1,000,000,000 barrels, exceeding Georgia’s annual gas consumption of around 2,500,000,000 cubic metre. The arguments that this gas is too hard to extract are devoid of any proof. Much of the existing reserves are 4000-5000 m deep and, if SOCAR extracts gas from the Shakhdeniz Gasfield 6000-6500 m deep in the sea, it is decidedly incomprehensible why it would be more expensive to do it on land. Also, there is no need to worry about the quality of the explored energy resources, this is the kind of ordinary, conventional gas which belongs to the basin of the Caspian-Black Sea region. The development of deposits in this basin began at the end of the last century at Apsheron. In the 1920s the development of deposits in the North Caucasus and Georgia began. However, in the second half of the twentieth century, work in Georgia was curtailed as the USSR began the development of Siberian deposits. The fact that this gas was previously successfully extracted and utilised should serve as proof that there are no questions in regards to quality.

It would seem that things are good – just extract and be happy, but nothing has changed. What happened? What happened is that as soon as confirmed reserves were announced, Frontera began to have problems, and these problems came from the authorities.

How authorities have Frontera

According to President of Frontera Georgia, Zaza Mamulaishvili, at first, these problems were not global in nature, the authorities simply ignored information about the need to continue work on developing new deposits. Later, the company faced overt sabotage by the authorities. One example is that it took the company more than a year and the intervention of influential American politicians to obtain permission to build a section of the gas pipeline connecting the fields with the main gas pipeline. But this story was not over. It took another year to get permission to transport gas through the already constructed gas pipeline. Again, without trans-Atlantic intervention, this would have hardly moved off the ground despite the fact that the possibility of building the appropriate infrastructure was described in detail in the current contract of 1997.

However, this did not seem enough to the government. The Georgian government appealed to the Arbitration Institute of the Stockholm Chamber of Commerce (SCC) with fourteen claims against Frontera, the main of which were the termination of the 1997 contract and a fine of one hundred million US dollars. Obviously, it did not go without an information attack on the company which was accused of all mortal sins in the best traditions of Soviet anti-imperialist propaganda. Only in 2019 was Frontera’s management forced to break the silence and answer all the accusations of the authorities. Then, “letters of happiness” began to come from the United States to our government, in which congressmen and senators sharply criticized both the actions of the Georgian authorities against US investment in Georgia in general, and the Frontera case in particular. The authorities did not find anything better than to try to explain all this with the machinations of the US oil lobby, which of course provoked retaliatory action. 
However, the most interesting twists of the story were still lying ahead. In April of this year, the Georgian government solemnly announced that they had won a trial in Stockholm. At the same time, how they won was, of course, not reported. Under the terms of the contract, Frontera is not entitled to make public documents containing confidential information. However, it was allowed to explain what exactly was the “win” of the authorities – this was necessary and it was done. So, out of 14 claims, the court granted 2. The company was ordered to return those areas where no work is being done, to which the company agreed without any trial, and to pay the difference in the collection for natural rent of $200,000, about which the company also had nothing against. The court refused the demands of the government of Georgia to break the contract and to impose a fine of $100 million, so it is up to the reader to decide, what is this win. A further important point to consider is the government spent more than $13 million, naturally of taxpayers' funds, on lobbying and courts against Frontera.

So, what is the problem?

A simple comparison of the facts inevitably leads to the conclusion that someone was bothered by the Frontera business in Georgia. Under the active contract more than half of extracted resources belong to the government and the company had to bear all financial risks related to geological exploration and deposit development. However, this “insignificant” circumstance could hardly embarrass those who decided to squeeze the company out of Georgia. Apparently, the stakes in this game were too high.

After a triumphant announcement of its “victory”, Georgia’s Ministry of Economy publicly announced that it was ready to continue cooperation with the company Frontera and that they are in talks about it. But in real life the negotiations came down to one phone call with a promise to send proposals for further cooperation. Representatives of Frontera did not receive any proposals but news appeared in the media that the Austrian oil and gas company OMV will be engaged in the exploration of oil fields in the Black Sea shelf off the coast of Georgia. OMV member OMV PETROM S.A. received a general license to use oil and gas resources in the Black Sea shelf on a 5,300km2 area.

It is impossible to talk about OMV in detail within the scope of this material. Therefore, we must confine ourselves to the main point - this company has had strong business ties with Russia since the days of the Soviet Union. In order to understand the level of proximity of this company with Russian Gazprom, just type OMV in the search engine of the official Gazprom website. OMV is one of the key participants in all Russian projects in Europe, including Nord Stream 2. Is it possible under such circumstances to consider that the project for the exploration of oil deposits on the Black Sea shelf has nothing to do with the Kremlin? Judge for yourself. The fact that under the circumstances of occupation of two Georgian regions, economic influence is the main instrument of Moscow’s hold on Georgia is a textbook truth. It is also obvious that without the personal interest of those who make decisions, it is difficult to imagine such a state of affairs. OMV is one of the companies sanctioned under the US Congress legislation to stop the construction of the Nord Stream 2 – the initiative put forward by Senator Cruz, Senator Shaheen, Senator Barrasso and Senator Cotton. 

Some conclusions

So, what do we have in the bottom line? For more than 5 years, the American company, who invested more than $560 million into Georgia’s economy is being actively pushed out from the market. At the same time, the strategically important contract on the exploration of oil deposits on Black Sea is being given to a company that has old ties to Gazprom.

 American lawmakers have sent more than a dozen letters demanding an end to the infringement on the interests of American companies in Georgia. In a letter written May 15 of this year, signed by four US senators, including Ted Cruz, there is a whole paragraph dedicated to Frontera company. The authors of the letter write that they are concerned about governance problems in Georgia, in particular, “America’s competitors and enemies, including Georgia’s illegal financial ties with Iran,” which threatens US national security and the interests of American business. Nevertheless, an adequate reaction from the government did not follow. The government’s assertion that more than 300 American companies operate in Georgia does not stand up to criticism. In reality, the number of companies headquartered in the United States barely exceeds a dozen and at the same time, the presence of Russian business in the Georgian economy is many times greater. 

At the same time, we hear the constant incantations of the Georgian government on fidelity to the Euro-Atlantic course. There is a good Georgian saying about this - “I believe in vows, the result is surprising”. So, until the Georgian authorities stop squeezing American investments out of the country and creates an environment in which companies can operate normally in the market, not to mention attracting others, words about loyalty to the Euro-Atlantic course and the values of the Western world will remain only words. Any attempts to seize the property of Frontera and obstacles in their work are directed against the national interests, first of all, of Georgia. Therefore, the Frontera case is of principal importance for us, the citizens of this country.

Money, indeed is odorless, however, it is of the utmost importance to make sure that the money is used to benefit the society.

Original text here (Russian language)

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