US embassy cable - 04YEREVAN816

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). 
 
------- 
SUMMARY 
------- 
 
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. 
 
------------------------------ 
STILL NO MONEY TO CONSTRUCT... 
------------------------------ 
 
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. 
 
------------------------- 
...AND STILL BAD BUSINESS 
------------------------- 
 
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. 
 
------------------------------ 
COMMENT: TILTING AT WINDMILLS? 
------------------------------ 
 
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