IRAN-ARMENIA PIPELINE: WHAT IF THEY HAVE THE MONEY?

UNCLAS SECTION 01 OF 02 YEREVAN 000966

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ECON ENRG EPET AM
SUBJECT: IRAN-ARMENIA PIPELINE: WHAT IF THEY HAVE THE MONEY?

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


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

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SUMMARY
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2. (SBU) Post has consistently discredited recent media
reports about the ten-year-old proposal to build a pipeline
from Iran to Armenia on the grounds that there has been no
indication of a source for the USD 120 million to build the
Armenian portion of the pipeline. Although we still believe
that the Armenian government has no money for the project,
recent comments made by the Foreign Minister, the Iran desk
officer and the Ministry of Energy suggest that officials
in the government are themselves convinced that they will
find funding. Suggestions of an electricity for gas swap
persist despite denials by the Ministry of Energy. So for
argument's sake we will assume that the government is able
and willing to spend USD 120 million to build its portion of
the pipeline--What then? End Summary.

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STILL LOOKING FOR MONEY...
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3. (SBU) On April 22, 2004, a resident Amcit who represents
a U.S.-based foundation, called on the Ambassador to discuss
the potential pipeline deal. According to the American, the
Foreign Minister asked him for technical and financial
advice in connection with GOAM efforts to raise the money to
pay for a pipeline bringing Turkmen gas through Iran to
Armenia. He noted that the Government of Armenia was
searching for help and advice on how to finance the proposed
pipeline. (Note: The Amcit was concerned about U.S. policy
and law and indicated after our conversation he would not be
engaging in this area. End Note.)

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...BUT OPTIMISTIC
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4. (SBU) High-level Armenian officials are more and more
confident that they will somehow find the money to pay for
the Iran-Armenia pipeline. In a recent interview, President
Kocharian acknowledged a preliminary deal with Iran on the
pipeline. Just back from a state visit to Iran, the Foreign
Minister, Vartan Oskanian, told the Ambassador that the
Iranian Minister of Oil would visit Yerevan May to sign a
final deal. Asked about the money to build the pipeline, "I
think the money will appear somewhere," he said. Similarly,
Garnik Badalian, Iran Desk Officer at the MFA, told us that
after the Iranian Minister's visit, the government was
planning to launch a feasibility study on the pipeline.
According to Badalian, the discussion so far has included
"no specific financial negotiations" and it has just been
assumed that each side will build its own part.

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ELECTRICITY FOR GAS SWAP?
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5. (SBU) Reports that Iran and Armenia intend to sign a deal
to swap electricity for gas are persistent. Both the
Foreign Minister and the MFA's Iran desk officer raised the
idea, saying that both sides agree in principle to such an
arrangement. "Bull****," said Deputy Minister of Energy
Areg Galstyan when we called to confirm the report. (Note:
Galstyan insists that he is one of three people privy to the
details of the negotiations. End Note.) Badalian added
that there would be a lot of problems to be worked out in
any swap deal. Not least must be the fact that the
Government of Armenia doesn't own the electricity and the
Government of Iran doesn't own the gas. The GOAM has
privatized the lion's share of Armenia's electricity
generation resources, and RAO UES, a Russian energy company,
controls 80 percent of it. Those assets remaining in the
government's control, notably the Vorotan Cascade hydro
plant, generate too little electricity (between 700 and 1300
GWh per year, depending on water levels) to exchange for
substantial amounts of gas. If Iran were to purchase gas
from Turkmenistan to exchange with Armenia at a set rate for
electricity, it would expose itself to risk based on the
fluctuations in the gas market. Ultimately, any swap would
have to involve private actors on both ends.

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WHAT IF RAO IS INVOLVED?
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6. (SBU) Assuming RAO UES and the gas supplier could be
involved, would the swap reasonable? Iran and Armenia have
been swapping electricity for years, with Armenia sending
excess electricity to Iran during Iran's peak usage in
summer in exchange for electricity in winter, Armenia's peak
usage time. Armenia's excess generating capacity during
summer, Iran's peak usage time, is roughly 200 MW, enough
for considerable electricity transfers abroad. It is gas-
fired energy (which is more expensive than nuclear or hydro-
electricity) that composes any margin of extra electricity
that Armenia produces, thus any export of electricity
necessarily involves burning gas to generate that extra
electricity. In order for this to justify the expense of
building the pipeline, Armenia would have to receive
significantly more gas than is necessary to produce the
electricity it exchanges, an unlikely long-term deal.

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IRAN COULD BE CHEAPER WAY TO GET TURKMEN GAS
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7. (SBU) Nonetheless, once built the pipeline could be a
cheaper way to get gas from Turkmenistan. The gas that
Armenia currently receives through the pipeline from Russia
through Georgia is also from Turkmenistan. Its price at the
Armenian border is USD 55.00 per thousand cubic meters; the
wellhead price is USD 42.50. Assuming that the transit this
way could capture USD 10 per thousand cubic meters, gas
could arrive more cheaply than from the current pipeline.
At the full capacity of 1.5 billion cubic meters per year,
there could be USD 15 million per year in transit revenue--
arguably enough to justify the USD 100 million to build the
Iranian side of the pipeline.

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COMMENT
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8. (SBU) While it is clear that the Armenians want the
pipeline, it is equally clear that many of the important
details, such as paying for the pipeline and for the gas
after that, have yet to be worked out. In one step towards
reality the President has scotched all talk of the pipeline
continuing through Armenia to serve Georgia and Europe.
While reports of a swap of gas for electricity appear to be
not entirely credible, it is possible that the governments
will add, as part of the contract, terms of trade for swaps
of small amounts to cover Iran's energy shortages in the
summer. Whether or not Armenia manages to find the money to
begin construction on a pipeline this year, its long-term
strategy must include some diversified energy sources.
Looking forward to the inevitable, if deferred, closure of
the Armenia Nuclear Power Plant, the GOAM remains unwilling
to depend on the single gas pipeline through Georgia for 80
percent of its energy needs.
ORDWAY