US embassy cable - 04YEREVAN966

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