DAS BRYZA: BALANCING ENERGY INTERESTS IN THE

C O N F I D E N T I A L SECTION 01 OF 03 YEREVAN 000393 SIPDIS SIPDIS DEPT FOR EUR/FO, EUR/CARC DEPT ALSO FOR EUR/PRA, ISN/RA AND NEA/ARPI E.O. 12958: DECL: 03/15/2016 TAGS: KNNP ENRG PARM PREL IR RS AM SUBJECT: DAS BRYZA: BALANCING ENERGY INTERESTS IN THE CAUCASUS A PRIORITY REF: YEREVAN 312 YEREVAN 00000393 001.2 OF 003 Classified By: Amb. John M. Evans for reasons 1.4 (b, d). -------------- SUMMARY -------------- ¶1. (C) During March 7-8 meetings in Yerevan, DAS Bryza found broad consensus for the need to diversify Armenia's sources of energy and general concern about GazProm's overwhelming influence in the sector. Bryza urged support for regional solutions to energy issues, including increased electricity export to Georgia and joint Georgian and Armenian development of a gas storage facility outside of Yerevan. Bryza's interlocutors asked for U.S. support for discussions about a replacement for Armenia's aging, unsafe nuclear power plant; they saw nuclear power as the only real option for improved energy security for the South Caucasus. Bryza agreed to consider the idea, but also urged Armenia to consider how resolution of the NK conflict would increase options to diversify energy supply. End Summary. -------------- ENERGY ISSUES TOP POLICY AGENDA -------------- ¶2. (C) Armenia's near miss during January's gas crisis has clearly motivated all of Armenia's leaders to search for energy supply options other than Russia's Gazprom. In meetings with President Kocharian, FM Oskanian, Defense Minister Sargsyan and at a luncheon of top energy policymakers, Bryza explained his view that Gazprom would not change its monopolistic behavior until it was forced to do so. States of the South Caucasus should seek regional solutions to diversify energy supply to reduce their dependence. Unchecked by free market competition, Russian energy monopolies and Russia's acquisition of energy infrastructures throughout the South Caucasus threatened the stability of supplies for the entire region, Bryza said. -------------- -------------- ONE SOLUTION: PROSPECTS FOR GAS STORAGE PARTNERSHIP -------------- -------------- ¶3. (C) The GOAM is interested in rehabilitating Armenia's aging underground natural gas storage facility in Abovian (twenty kilometers outside of Yerevan),Minister of Energy Armen Movsisyan told Bryza. Though built with a design capacity of 220 million cubic meters (mcm),enough reserves to supply Armenia for about a month at normal consumption rates, deterioration has reduced the facility to a storage capacity of less than 90 mcm. Useful volume for the facility, which requires at least 35 mcm to maintain internal pressure for structural integrity, is even less -- about 10 days of supplies. ¶4. (C) A feasibility study conducted by ArmRosGazProm from 2002-2003 estimated that returning the facility to its design capacity (220 mcm) would total approximately USD 28 million, according to ArmRosGazProm Direct Karen Karapetyan. The facility, constructed in four stages from the early 1960s to 1980, consists of 19 wells (3 operate at full capacity, 6 operate at much less than full capacity, 8 are not operational, and 2 are used to hold waste water). An additional 9 wells drilled in the 1980s were never commissioned. ArmRosGazProm recently announced an ongoing tender for a detailed feasibility study of the facility. DAS Bryza suggested, and his interlocutors unanimously agreed, that a joint Armenian-Georgian project could renovate the storage facility to establish and provide a substantial natural gas reserve with potential for regional distribution. -------------- -------------- KOCHARIAN: THE GAZPROM "MONSTER" HAS TIGHT GRIP ON ENERGY -------------- -------------- ¶5. (C) President Kocharian told DAS Bryza that he still held out hope that Russia would make the rise in gas prices more gradual, but said that his meetings with the Russians were "tough." Despite his reticence to speak out publicly on the subject, Kocharian was harshly critical of the "monster" GazProm had become and said that many Russians mistakenly associated the strength of GazProm as Russia's strength. He agreed strongly with Bryza's view that GazProm's focus on YEREVAN 00000393 002.2 OF 003 distribution was short sighted; the transportation portion of the firm should become a properly-regulated utility and the company's energies should be more appropriately directed toward production. "Then the President of Armenia would not have to negotiate with the President of Russia about the price of gas," explained Kocharian. He was skeptical that GazProm would lessen its control over distribution and onward sale of gas from Central Asia. ¶6. (C) Kocharian explained that during Soviet times, Armenia served as a center for electricity production for the South Caucasus. Armenia's nuclear power plant, good thermal production capacity and strong distribution infrastructure were a legacy of this. Armenia's universities still have strong programs in the energy field. He hoped that, with development help from the international community, Armenia could regain this role. He welcomed the idea of developing jointly with Georgia the gas storage facility outside of Yerevan, but asked that DAS Bryza wait to develop the idea, at least in public, until he had come to an agreement on the price of gas with Russia. He asked that the international community take seriously the idea of replacing Armenia's nuclear power plant with a new facility, capable of exporting throughout the region. -------------- -------------- MOVSISYAN: DISRUPTIONS NOT THE FIRST, AND NOT THE LAST -------------- -------------- ¶7. (C) January 22 was not the first and will not be the last time Armenia suffers from disruptions in natural gas supplies, Energy Minister Movsisyan told Bryza during a lunch meeting that included ArmRosGazProm's Director Karen Karapetyan, Armenian Nuclear Power Plant Director Gagik Markosyan, and Presidential Chief of Staff Armen Gevorkian. (Note: The January 22 explosions along the Mozdok-Tbilisi pipeline cut Russian gas supplies for ten days. End Note.) "We cannot get gas from other countries, that's why we have reserves and that's why we use them," Movsisyan said. As a result, Armenia is eagerly awaiting the completion of the Armenia-Iran pipeline, though the pipeline capacity "will not be enough" to significantly offset Armenia's dependence on Russian supplies, according to Movsisyan. Armenia was currently exploring alternative energy sources which include additional hydro, thermal, geothermal, and wind capacity, none of which could make up for Armenia's energy gap. -------------- -------------- SARGSIAN: RUSSIANS CONTROL THE VALVE AND THE SOURCE -------------- -------------- ¶8. (C) Defense Minister Serzh Sargsian, who chairs Armenia's Security Council, proved to be well-briefed on energy security issues. He reiterated the need to diversify Armenia's energy supply, but lamented the fact that Russia, through ArmRosGazProm, already controlled the pipeline from Iran now under construction. The gas may come from two different sources, he explained, "but the handle on the shutoff valve is in one country." -------------- -------------- OSKANIAN: DIVERSIFICATION THE KEY TO STABILIZING SUPPLIES -------------- -------------- ¶9. (C) Minister of Foreign Affairs Vartan Oskanian told Bryza that the anticipated April 1 price hikes in GazProm's natural gas supplies were "a foregone conclusion." Though negotiations with Russia were "ongoing," Oskanian said, the best result Armenia could obtain would be "Russian compensation for the difference until 2008." Faced with limited options for energy self-sufficiency, multiple limitations on trade with Iran (reftel),and "differences with Azerbaijan," (septel) the only viable alternative, Oskanian said is "an 800 megawatt modern, safe nuclear power facility with double the capacity we already have." "Diversification is the key to security in the region," Oskanian told Bryza, though Armenia's geopolitical situation severely limited access to foreign markets other than Iran. Armenia's "nuclear culture" should make it the natural center of a regional energy strategy and a natural candidate for foreign assistance in this area. -------------- -------------- BAGHDASARIAN: PROHIBIT SALE OF STRATEGIC ENERGY ASSETS -------------- -------------- YEREVAN 00000393 003.2 OF 003 ¶10. (C) Agreeing with Bryza about the necessity of a regional approach to energy security in the Caucasus, National Assembly Speaker Artur Baghdasarian said Gazprom and RAO-UES monopolies threatened Armenia's energy security. Baghdasarian said he was considering legislation which would prohibit any further sale of strategic energy infrastructure, a move he claimed would allow Armenia to develop its own domestic supply and insulate the country against regional problems like the January 22 disruptions. ¶11. (U) DAS Bryza has cleared this cable. EVANS