ARMENIA'S CONTINGENCY PLAN FOR IF-AND-WHEN RUSSIA

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 001687

SIPDIS

SIPDIS

DEPT FOR EUR/CARC, EUR/ACE

E.O. 12958: DECL: 12/07/2016
TAGS: ECON ENRG PREL RS GA AJ AM
SUBJECT: ARMENIA'S CONTINGENCY PLAN FOR IF-AND-WHEN RUSSIA
CUTS THE GAS

REF: A) YEREVAN 127 B) YEREVAN 1537 C) BAKU 1771

Classified By: EconOff E. Pelletreau for reasons 1.4 (b,d).

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SUMMARY
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1. (C) As winter approaches and tensions continue between
Georgia and Russia, Armenians are increasingly concerned that
Russian gas, shipped to Armenia through Georgia, will be cut
off as happened in January 2006 (ref A). According to a
USAID-funded expert, Armen Arzumanyan, if Russian gas is cut
off, Armenia's existing natural gas reserves could last for
15 to 20 days at current consumption levels. If the GOAM
takes steps to limit consumption, the reserves might last as
long as 30 days. Deputy Energy Minister Iosif Isayan gave us
more conservative estimates, saying that Armenia could
continue with current rates of consumption if the cutoff were
expected to last 12 days or less, but that if the GOAM
thought the cutoff would last for a longer period, it would
begin limiting consumption immediately. Isayan estimated
that, even with radical steps to limit consumption, the GOAM
could not shield residential consumers from the effects of a
gas cutoff for more than 30 days. He said the GOAM's first
reaction to a cutoff would be to limit industrial gas use.
He noted, however, that limiting industrial access to gas
might have a long-term negative economic impact, even if
residential customers are not directly affected. END
SUMMARY.


2. (C) Annual gas consumption in Armenia is estimated to be
1.7 billion cubic meters (BCM). Of this, 619 million cubic
meters (MCM) serves to power Armenia's thermal power plants
which generate approximately 30 percent of Armenia's
electricity. Local industry uses approximately 770 MCM
annually and residential use accounts for 310 MCM. In early
2006, the pipeline which transports Russian gas through
Georgia to Armenia was damaged, halting gas exports to both
Georgia and Armenia (ref A). Armenia was able to reduce
consumption and rely on existing natural gas reserves to
weather the 8-day cutoff. Given the deteriorating state of
Russian-Georgian relations, many Armenians consider it
probable that Russian gas exports to Armenia will be
disrupted again this year or in early 2007.

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RESIDENTIAL CONSUMERS WILL COME FIRST
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3. (C) According to Arzumanyan, Armenia's current gas reserve
storage of 110 MCM is sufficient to cover local demand for
15-20 days depending on local consumption and weather
conditions. If the GOAM instructs the country's two largest
cement factories to suspend operations, the life of the
reserve could be extended for an additional five days. The
GOAM could also limit operations at the Hrazdan Thermal Power
Plant, as it did earlier this year, potentially extending
reserves for five more days, for a total of roughly 30 days
reserve supply. Armenian Deputy Energy Minister Iosif Isayan
gave us more conservative estimates. While he declined to
speculate directly on the life of the reserve, he said if the
GOAM believes the cutoff will be for 12 to 15 days, it will
not need to take steps to limit consumption. If, however, it
appears that the cutoff will last for a longer period, the
GOAM will take steps to limit consumption immediately. The
GOAM's priority would be residential users, Isayan told us,
therefore the GOAM would seek to limit industrial gas use
first. The GOAM could also limit operations at Armenia's
thermal power plants, but eventually this would impacQ
residential electricity consumers. He estimated that, if
radical steps are taken to limit industrial consumption,
residential consumers could be shielded from the affects of a
gas cutoff for approximately 30 days. Even if residential
consumers are not affected, there could be potentially
devastating effects on Armenia's business reputation and
future business development, Isayan cautioned.

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LAKE SEVAN: A STRATEGIC RESERVE?
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4. (C) Another option would be for the GOAM to resume full
operations at the Sevan Hydro Power Plant (HPP). According
to Arzumanyan, the Sevan HPP is capable of generating enough
energy to replace the thermal power plants for a limited
time, but the environmental cost would be severe. (NOTE:
Since 1995, the GOAM has been working to restore the lake's

YEREVAN 00001687 002 OF 002


water level which fell 19 meters in the 1960s and 1970s as a
result of excessive irrigation and power generation, causing
serious problems for fishing and tourism and also threatening
Armenia's drinking water supply. Full-scale operation of the
Sevan HPP would likely undermine much of the painstaking
progress which has been made on these issues. END NOTE.)
Furthermore, if consumers who currently rely on gas heat are
forced to use electric heat instead, the increased pressure
on the electrical distribution network may lead to network
failures. Isayan dismissed the possibility of resuming full
operations at the Sevan HPP. He said the GOAM had witnessed
the devastating impact of full-scale operations at Sevan in
the early 1990s and that "everyone" knows Lake Sevan is a
nonrenewable resource that would take decades to replenish.
"It is possible to experience cold, but no one would want to
risk the potential catastrophe of that (i.e. of full-scale
operations at Sevan)" he added.

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IRANIAN GAS MAY HELP, BUT WILL NOT REPLACE RUSSIAN GAS
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5. (C) Armenia's new gas pipeline with Iran may serve to
mitigate the impact of a gas cutoff from Russia, but the
pipeline is not yet operational. The GOAM has announced that
the pipeline will be completed by December 20, but Arzumanyan
told us that gas will not flow until mid-January at the
earliest. Even once the pipeline is up and running, the
second leg of the pipeline, needed to transport gas from the
southern city of Kajaran to the Ararat Valley and Yerevan,
has limited capacity (less than 1 MCM per day). Given that
average consumption in Armenia during winter months is 7-8
MCM daily, the gas imported through the pipeline with Iran
will not be sufficient to fully replace Russian gas imports
unless and until the Kajaran-Ararat pipeline is upgraded (ref
B).

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COMMENT:
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6. (C) Estimating how long Armenian gas reserves will last if
Russian gas is cut off is a complicated business which
depends on temperature, local consumption and steps the GOAM
may take to limit consumption. It seems reasonably safe to
say that the impact of a short-term 10-15 day disruption
would be relatively limited. A longer-term disruption would
be much more serious. Armenia, however, has very little
capacity to influence the situation. In January 2006, the
dire situation in Georgia was one reason why there was such
significant pressure on Russia to restore the pipeline. If
Georgia is able to secure alternate sources of gas (ref C),
Armenia may be lobbying alone for restoration of the pipeline
in the event of a cutoff. Some local analysts fear that
Georgia's success in identifying alternatives to Russian gas
may actually increase the risk for Armenia--which lacks
Georgia's access to Caspian Sea gas--by emboldening Georgian
leaders to take a harder line with Russia. While it seems
unlikely that Russia will want to leave Armenia out in the
cold, other factors, including sending a strong message to
Georgia, may take higher precedence, leaving Armenia in very
dire straits indeed.
GODFREY