Identifier
Created
Classification
Origin
05YEREVAN1095
2005-06-23 12:27:00
CONFIDENTIAL
Embassy Yerevan
Cable title:  

ARMENIA CHOOSING BETWEEN IRANIAN AND RUSSIAN ROLE

Tags:  ENRG ECON EPET AM IR RU 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 001095 

SIPDIS

DEPT FOR EUR/CACEN, EUR/ACE, EB/ESC
DEPT PLEASE PASS TO USAID EGAT FOR WALTER HALL
DOE FOR CHARLES WASHINGTON

E.O. 12958: DECL: 06/21/2015
TAGS: ENRG ECON EPET AM IR RU
SUBJECT: ARMENIA CHOOSING BETWEEN IRANIAN AND RUSSIAN ROLE
IN NEW PIPELINE

REF: A. 04 YEREVAN 2019 B. YEREVAN 391

Classified By: DCM A.F. Godfrey for reasons 1.4 (b, d)

-------
SUMMARY
-------

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 001095

SIPDIS

DEPT FOR EUR/CACEN, EUR/ACE, EB/ESC
DEPT PLEASE PASS TO USAID EGAT FOR WALTER HALL
DOE FOR CHARLES WASHINGTON

E.O. 12958: DECL: 06/21/2015
TAGS: ENRG ECON EPET AM IR RU
SUBJECT: ARMENIA CHOOSING BETWEEN IRANIAN AND RUSSIAN ROLE
IN NEW PIPELINE

REF: A. 04 YEREVAN 2019 B. YEREVAN 391

Classified By: DCM A.F. Godfrey for reasons 1.4 (b, d)

--------------
SUMMARY
--------------


1. (C) As work begins on the first 42 km segment of the
Iran-Armenia gas pipeline, Armenia is engaged in shuttle
negotiations with both the Russian and Iranian governments
about financing and, ultimately, control of the onward
portions of the gas pipeline through Armenian territory.
Deputy Minister of Energy, Areg Galstyan, told us on June 21
that an Armenian delegation had just returned from Iran and
that a soft deal has been drawn up, but further negotiation
is on hold pending a possible shuffle of positions following
elections in Iran. Galstyan added that the GOAM is also
negotiating with Russian Gazprom, although Gazprom has yet to
give Armenia a deal they can live with. Looking forward,
Galstyan suggested that the Ministry expects to depend on
Iran, not Russia for gas supplies, and is taking that into
consideration during the current negotiations. End Summary.

-------------- --------------
CURRENT PIPELINE PROJECT IS AN INCOMPLETE SOLUTION
-------------- --------------


2. (C) The current gas pipeline under construction (ref A)
will extend only 42 kilometers into Armenian territory, to
the town of Kajaran, where it will join Armenia's existing
gas network. Although the new Iran - Armenia pipeline will
have a diameter of 0.72 meters, the existing Armenian
infrastructure after Kajaran includes segments only 0.5
meters and 0.3 meters in diameter. If Armenia is to rely on
Iran as an alternative source of gas, it must replace
segments of the existing network with larger pipeline to
bring the full capacity of natural gas to Armenia's thermal
plants in and around Yerevan. This project, according to
Galstyan, would cost USD 100 million.

--------------
BOTH IRAN, RUSSIA, WANT ROLE IN PIPELINE
--------------


3. (C) Galstyan told us that GOAM officials are quietly
negotiating with both Iranian and Russian officials over the

extension of the Iran-Armenia pipeline. Russian state-owned
Gazprom, said Galstyan, is proposing a deal whereby they
would finance, but then own fifty percent of the pipeline and
maintain physical and operational control of it, a solution
that the Ministry doesn't like on economic or political
grounds. The Minister and Galstyan have told us on prior
occasions that significant Russian control of the pipeline
would somewhat defeat its primary purpose of reducing
dependence on Russia. Galstyan added, however, that Russian
authorities are linking the gas pipeline deal to other deals
that Armenia's Ministry of Energy wants to secure in the
sector, specifically involving the construction of new
thermal generation on the site of Hrazdan thermal plant,
currently owned and operated by Russian RAO-UES. (Note:
This plant would have to share basic infrastructure with
existing units operated by RAO-UES. End Note.)


4. (C) For its part, Iran is offering to finance the
construction of the pipeline by an Iranian contractor.
Armenia would have to pay Iran back over time but will keep
control and ownership of the pipeline. Galstyan suggested
that, although the Ministry would in many ways prefer Iranian
financing for the pipeline, they are holding off further
negotiations until after Iranian elections, on the theory
that their counterparts on the Iranian side may change.

--------------
LARGE-SCALE TRANSIT OF IRANIAN GAS RULED OUT
--------------


5. (C) Asked about transiting Iranian gas, Galstyan told us
that Iran has never approached Armenian with such a proposal,
although he has heard about such ideas "from the press from
the Ukraine and Georgia." He reiterated the Ministry's
previous statements that the current gas pipeline under
construction had too small a diameter (as a direct result of
Russian pressure - ref B) to efficiently serve large onward
markets. Speaking of smaller onward sales to Georgia, he
said that, once built, the Iran-Armenia pipeline would give
Armenia the infrastructure to supply Georgia with gas,
although Georgia has not made a serious overture in this
respect. He said he believed the Georgians were seeking a
gas pipeline to Iran, but hinted that they prefer a route
through Azerbaijan relying on existing infrastructure.

--------------
ARMENIA IS BUYING CHOICE
--------------


6. (C) For the long term, Galstyan heavily implied that
within three-to-five years he expects Armenia to move away
from Russian supplies of gas in favor of Iranian sources. He
cited several threats to Armenia's current gas supply via the
Valdikavkaz pipeline from Russian via Georgia, including
long-standing concerns about the pipeline's physical security
and deferred maintenance. The Ministry also fears that
Georgia's efforts to find alternative sources of gas
(including the soon-to-open gas pipeline from Baku) could
make the current Valdikavkaz line uneconomical for serving
Armenia alone, that the relationship between Russia and
Georgia could deteriorate and Russia could decide to cut
supplies to Georgia (and thus to Armenia),and that Russia
could cease to give Armenia a preferential rate on gas as
part of its WTO accession. While there is not enough
domestic demand to run both pipelines to Armenia, Galstyan
said that a second pipeline will give Armenia security
against possible threats to the Russian line, and the power
to choose its source.

--------------
COMMENT: TRADING DEPENDENCIES?
--------------


7. (C) Having lobbied hard to constrain the size of the
Iran-Armenia pipeline, Gazprom now wants control over the
northern segment of the pipeline, and will probably leverage
other energy deals to get it. Nevertheless, if Armenia fails
to keep Russia out of the pipeline, Russian ownership of a
second pipeline through Armenia is still more secure than
sole reliance on the Russian pipeline through Chechnya and
Georgia. Armenia faces a more complicated choice in the
future if both pipelines are operational at the same time.
Ministry officials admit that without domestic need for gas
from both Iran and Russia, and with its aging thermal
generation capacity deteriorating and inefficient, Armenia
has little use for two pipelines. It is hard to imagine
Armenia refusing Russian gas (especially if it is subsidized)
for fear of losing the option in the long-term. On the other
hand, can Armenia not take gas through the pipeline that it
has just built at significant expense and with international
development financing? Officially, the Ministry intends to
import Iranian gas to its currently idle and inefficient
thermal plants and re-export the excess electricity to Iran.
More candidly, Galstyan admitted, "It is a good question. It
may be that Armenia is exchanging dependence on one single
source for dependence on another."
EVANS