PIPE DREAMS: IRAN-ARMENIA GAS PIPELINE DOESN'T

UNCLAS YEREVAN 000457

SIPDIS

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TAGS: ECON ENRG EPET AM
SUBJECT: PIPE DREAMS: IRAN-ARMENIA GAS PIPELINE DOESN'T
PENCIL OUT



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SUMMARY
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2. (SBU) Armenian officials have again proposed a gas
pipeline from Iran to Armenia as a way to alleviate
Armenia's concerns about the future diversity of energy
sources. According to the Armenian Minister of Energy,
speaking at a February 10th meeting, Armenia may at
some point sign an agreement with the Iranian Oil and
Gas Minister to purchase one billion cubic meters of
gas two years from now. Other key factors, however,
including the price of gas and the size of the
pipeline, do not figure into the proposed deal,
indicating that there is significantly less to the
agreement than it appears and that the pipeline is
still more a farfetched desire of the government than a
realizable goal. End Summary.

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HOPE DIES LAST: A PIPELINE IS STILL BAD BUSINESS
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3. (SBU) Armenia has long seen a potential gas pipeline
from Iran as way to guarantee their energy supply after
the inevitable nuclear power plant (ANPP). (Note: A
gas pipeline through Georgia currently provides fuel to
all of Armenia's thermal power plants, generating 45
percent of Armenia's electricity, 85 percent of all non-
nuclear energy. End Note.) But after ten years of
discussions the pipeline project is going nowhere:
Armenia's demand for gas from Iran is not, in itself,
strong enough to justify the expense of building a
pipeline. A pipeline only makes sense if the donor
community would pay for it (perhaps in exchange for
closing ANPP),or if the price of gas from Russia were
to rise to such levels that a pipeline would become
competitive for private investment.

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UNCERTAINTIES CAST DOUBT ON A QUICK DEAL
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4. (SBU) Although the Iranian Oil and Gas Minister is
planning to visit Armenia to consider an agreement on
the purchase of gas in the future, the uncertainty of
terms suggests that the Armenians do not have a
workable plan. Most importantly, the price of the gas
remains unspecified. Besides casting a shadow on the
validity of the deal, it casts too much doubt on the
financial feasibility to justify the large capital
outlay (USD 120 million) to build the pipeline. When
discussing the pipeline at the recent EU-Armenia
Metzamor Working Group (septel),the Minister of Energy
expounded on two other possibilities for the pipeline:
a larger-diameter 550 km-long pipe up to Georgian
border with a yearly capacity of 4.5 billion cubic
meters, or another pipeline from Yerevan to Eastern
Turkey. Because each these plans would require very
different pipelines, in terms of diameter and through-
put, and the financial terms would vary widely in each
scenario, it is clear that those who are proposing the
pipeline are still very much in the ideas stage and are
not yet ready to commit resources to the project. When
we spoke February 23 with Deputy Minister of Energy
Areg Galstyan, in charge of development of the Armenian
Energy Sector, he commented that he was not familiar
with the details about the proposed pipeline project.

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Comments: Exploring Options
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5. (SBU) Anticipating the inevitable closure of ANPP,
Armenia expects to pursue some strategy that reduces
its reliance on the gas pipeline through Georgia.
While an Iran-Armenia pipeline would be more expensive
than buying Russian gas, it may well be the cheapest
among Armenia's other options. But as long as the GOAM
is unwilling to pass the extra costs of diverse
sourcing on to consumers, and no international donors
are forthcoming, there is little or no possibility of
an Armenian-Iranian gas pipeline project getting off
the ground.
ORDWAY