IRAN-ARMENIA PIPELINE: DEAL SIGNED ON FUTURE SWAP

UNCLAS SECTION 01 OF 02 YEREVAN 001240

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ECON ENRG EPET ARMENIA'>AM
SUBJECT: IRAN-ARMENIA PIPELINE: DEAL SIGNED ON FUTURE SWAP

Ref: A) YEREVAN 382 B) YEREVAN 698 C) YEREVAN 816 D) Yerevan

966


1. This cable is sensitive but unclassified. Please
protect accordingly.

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SUMMARY
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2. (SBU) On May 19, 2004, Garnik Badalian, Head of the Iran
desk at the Ministry of Foreign Affairs, briefed us about a
recent agreement on the Iran - ARMENIA pipeline. Badalian
said that on May 12, 2004, the Iranian Oil Minister signed
an agreement with the Yerevan Thermal Power Plant to
exchange Iranian gas for electricity produced from that gas.
The agreement provides for the exchange of 36 billion cubic
meters of gas over a period of 20 years, from 2007 to 2027,
in consideration for 3 kWhs of electricity for each cubic
meter of gas. End Summary.

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CONTRACT ENVISAGES SWAP OF GAS FOR ELECTRICITY, NO SALE
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3. (SBU) According to Badalian, the parties signed a 20-year
agreement providing for the exchange of 36 billion cubic
meters of gas with an option to extend five years (and
another 9 million cubic meters of gas). The contract
provides for the provision of gas beginning in 2007, and
that construction should start within the next six months.
But Badalian believed that due to financing issues and what
he called the "Iranian habit" of delaying projects, actual
construction would not start for at least 12 months.
According to public statements by Deputy Minister of Finance
Areg Galstyan (who has not proved to be a reliable source in
the past),the contract includes no provisions for the sale
of gas, but once built the pipeline could be used for gas
sales from Iran or Turkmenistan.

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NO ONWARD SALE ENVISAGED
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4. (SBU) Badalian explained that the ARMENIAn government
(GOAM) has scotched the idea of onward sales to Georgia or
Europe, due to lack of resources and investment. He said
that the diameter of the planned pipeline would be about 700
millimeters, enough to satisfy ARMENIA's domestic gas needs
but too little to justify building a continuation of the
line for onward sales to the North. He added that such a
pipeline would have to be at least 1000 to 1500 millimeters
in diameter, and would cost nearly USD 4 million per
kilometer to build in the hills of southern ARMENIA. An
investment of this size, says Badalian, seems out of the
question.

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STILL NO MONEY TO BUILD
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5. (SBU) Badalian emphasized that financing the pipeline is
still a big problem and hoped that this could be partly
solved through international investment. He explained that
there was no specific line item in Iran's budget for this
project, but he believed that the Iranian government has
access to multiple funds that could easily pay for the
pipeline. GAOM has still not identified any funds to pay
for the construction. (Comment: We believe that it is
possible that the GOAM may be able to pay for the pipeline
construction in ARMENIA through proceeds from scheduled
privatizations in 2004, although we have no evidence to
support this. End Comment.)

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MFA CONSIDERS ILSA SANCTIONS
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6. (SBU) Badalian raised the issue of the Iran-Libya
Sanctions Act and American opposition to the pipeline. He
emphasized that one hundred thousand ARMENIAn expatriates
currently live in Iran, and that it would be impossible for
ARMENIA not to have relations with Iran. He noted that the
pipeline would actually be in the USG's interest, as it
would promote stability in the region. He explained that
the pipeline would be insurance against gas supplies being
cut off by an unstable Georgia or by a fickle Russian
government. He added that Iran already sells large
quantities of gas to Turkey, an ally of the US; he hoped
there would be no great protests from the USG if a fraction
of that amount were sold to ARMENIA.

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COMMENT: HAVEN'T GOT IT ALL FIGURED OUT JUST YET
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7. (SBU) There are still a lot of problems with the plan
proposed by GOAM. While at times it appears that the GOAM
is unwilling to share its ultimate plan for the pipeline, we
believe it is more likely that they just haven't figured out
exactly how to go forward. According to technical data
obtained from PA Consulting, the Yerevan Thermal Power Plant
(YTPP) is unable to translate 1.5 billion cubic meters of
gas into 171 megawatts of electricity due to its poor
condition and the inability to transmit the 171 megawatts
over its existing transmission system to Iran while meeting
other user requirements. The GOAM plan to construct a new,
more efficient gas fired plant at YTPP by 2009 could help
solve this by producing the agreed kWh for Iran with 20 to
30 percent less gas, permitting the GOAM to use or sell that
volume of gas for other purposes.


8. (SBU) From the GOAM perspective, the pipeline could be
profitable if the new gas plant was constructed on time or
if nuclear or hydro production was above average. From the
Iranian perspective, if ARMENIA uses the gas for other
purposes, Iran could receive cash payments as opposed to
electricity. Iran also may believe that with this pipeline,
they could have access to ARMENIAn, Georgian and even
Russian markets and reduce its isolation in the
international community. Regardless of the uncertain
economic benefits this gas pipeline would give to both
countries, it is increasingly clear that this does not
appear to preclude the political will for the pipeline or,
ultimately, its realization.
ORDWAY