FORTHCOMING AGREEMENT ON ARMENIA-IRAN PIPELINE

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 000816

SIPDIS

DEPT FOR EUR/CACEN; EB/ESC; EB/CBED FOR AMBASSADOR MANN

E.O. 12958: DECL: 04/06/2014
TAGS: ECON ENRG EPET PREL RS AM
SUBJECT: FORTHCOMING AGREEMENT ON ARMENIA-IRAN PIPELINE
MEANS LITTLE

REF: A) YEREVAN 382 B) YEREVAN 698

Classified By: DCM Vivian Walker for reasons 1.5 (b) and (d).

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SUMMARY
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1. (SBU) Post skepticism about the viability of the
Iran-Armenia pipeline project notwithstanding, two points
should be clear. One, the pipeline is the number one
priority for the Ministry of Energy. Two, the Iranian
Minister will come to Armenia in April and will sign
something: most probably an agreement on the future price of
gas. These two facts do not change the longstanding basis of
our skepticism: there is no money to build the pipeline, and
once built, it is unlikely to be a cost-efficient source of
energy. END SUMMARY.

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STILL NO MONEY TO CONSTRUCT...
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2. (SBU) While officials at the Ministry of Energy are trying
to move the pipeline forward with agreements specifying the
terms of a future deal, they have admitted to us that crucial
parts of the plan are still missing (reftels). Assuming that
Iran is willing to complete its portion of the pipeline (for
USD 100 million),Armenia still has not identified any money
to finance the construction of the line in Armenian territory
(another USD 100 million). (Note: According to a local
consultant and advisor to the Ministry of Energy, Armenia
just rejected a proposal by Iran to have Armenia finance its
portion of the pipeline to be paid back in gas. End Note.)
While government officials have hinted that they are looking
for foreign assistance for the project, the Deputy Minister
of Energy has told us that he does not have high expectations
(See ref B). Local delegates of both the EU and EBRD have
denied statements in the press that those organizations were
willing to finance the project.


3. (C) Although GOAM officials have told us that Russian
energy giant Gazprom is interested in financing the project,
Russian Political and Economic Affairs Counselor Oleg
Korobkov told us candidly that the Russian government will
never authorize any Gazprom investments in Armenia that would
limit Russia's current position as sole supplier of natural
gas for Armenia.

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...AND STILL BAD BUSINESS
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4. (SBU) Even if Armenia had the cash to build the pipeline,
the deal still does not pencil out as a cost-efficient source
of energy. (Note: Armenia could, of course, extract USD 100
million in rents from somewhere to finance the pipeline,
which would be roughly 15 percent of the government's annual
budget. End Note.) Because Armenia receives gas from Russia
at rates substantially below market value, Armenia's private
(and Russian) thermal power plants are unlikely to buy more
expensive gas from Iran. It is not clear that the Armenian
government could afford to pay the difference between the
Iranian contract price and the Russian price without
significantly raising the price of electricity, which the
Minister of Energy has consistently ruled out.

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COMMENT: TILTING AT WINDMILLS?
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5. (SBU) There is no better evidence that Armenian officials
are tilting at windmills than their persistent talk of
re-exporting gas through Georgia. Currently the Ministry is
talking about a pipeline with a capacity for 3 billion cubic
meters per year, far more than Armenia can use. But
opportunities for onward sales of gas look specious: Georgia
and Turkey have other supply options and foreign investors
(who are necessary for a project of this size) are unlikely
to support an Iran-Armenia-and-beyond pipeline given the
current situation. In order to realize this project without
foreign assistance, Armenia will have to divert substantial
resources from other government priorities in order to spend
them on an enterprise that is economically unjustifiable.
Nonetheless, the Minister of Energy and his deputy have been
clear that they would pursue the project anyway, if it were
their decision to take. Whether the sheer impracticality of
the plan will ultimately trump the government's ambitions
remains to be seen, but the recent spate of chatter about the
pipeline does not bring the project any closer to reality
than it was ten years ago.
ORDWAY