IRAN-ARMENIA PIPELINE: IRAN TO FINANCE PIPELINE

C O N F I D E N T I A L YEREVAN 002019 SIPDIS DEPT FOR EUR/CACEN, EUR/ACE, EB/ESC, NEA/ARP E.O. 12958: DECL: 09/10/2014 TAGS: ECON ENRG EPET AM IR SUBJECT: IRAN-ARMENIA PIPELINE: IRAN TO FINANCE PIPELINE REF: A) YEREVAN 1240 B) YEREVAN 816 C) YEREVAN 698 D) YEREVAN 382 Classified By: DCM A.F. Godfrey for reasons 1.4 (b) and (d). -------------- SUMMARY -------------- ¶1. (SBU) During Iranian President Mohammad Khatami's visit to Yerevan September 8-9, the Armenian and Iranian governments signed a deal to finance the Armenia-Iran gas pipeline as far as Kajaran, 41 kilometers into Armenia. In May the governments had signed an agreement providing for the construction of the pipeline and a swap of natural gas from Iran for electricity produced in Armenia (ref A). But it was never clear how Armenia was going to pay for its portion of the pipeline; the government had been unsuccessfully seeking private investment. While the economics of the project still don't pencil out, both governments view the pipeline as an important part of their energy strategy: Iran as a step towards exporting to new markets and Armenia as a necessary measure to ensure its energy security and diversity of supply. End Summary. -------------- IRANIAN EXPORT BANK TO FINANCE PIPELINE -------------- ¶2. (SBU) Since Armenia and Iran signed a 20-year gas for electricity swap deal in May 2004, it has been unclear how Armenia intended to finance its portion of the pipeline. The Iranian Bank for Export and Development has agreed to finance a USD 30 million segment of the pipeline from the border of Iran to Kajaran, Armenia, 41 kilometers north. The Armenian Ministry of Energy will pay back the loan over 7 years at 5 percent annual interest. In a shift from prior announcements, the GOAM has forgone its search for private investors for the pipeline and has decided to bear the debt burden itself. -------------- BAD FOR BUSINESS, BUT GOOD ENERGY POLICY -------------- ¶3. (SBU) The pipeline's lack of private investors is no surprise: the deal has never made economic sense (ref B). Armenian officials have nevertheless made the pipeline the number one energy priority. Facing the closure of the Armenian Nuclear Power Plant (ANPP) as early as 2015, Armenia wants to reduce its long-term reliance on the single gas pipeline through Georgia that accounts for 80 percent of Armenia's non-nuclear energy supply (refs C and D). Memory of the energy crisis following the temporary closure of ANPP in the early 1990s still stings, and Armenia is unlikely to waver in its ambitions to diversify its energy sources. For its part, Iranian officials reportedly told the IMF Resident Representative in Yerevan that they viewed the pipeline as part of a larger strategy to export gas to new markets in hope of someday reaching Europe. -------------- COMMENT: AMERICAN POLICY LEAVES NO OPTIONS -------------- ¶4. (C) The GOAM is aware of U. S. opposition to gas pipelines from Iran, and say that they have looked carefully at ILSA (ref A). But they are caught in a three-way Catch 22: --We oppose any pipeline through Iran, whether it carries Iranian or Turkmen gas; --We oppose the continued operation (not to mention the probable extended operation -- ref D) of ANPP; and --We oppose Armenia's complete energy dependence on Russia and Russian investment to upgrade and expand the gas pipeline through Georgia. While the GOAM is aware of our policy rationales for each objection, taken together their effect is to remove us from the debate on all these topics as we fail to offer any sustainable solution to Armenia's energy concerns. EVANS