US embassy cable - 05YEREVAN1095

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) 
 
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SUMMARY 
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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. 
 
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CURRENT PIPELINE PROJECT IS AN INCOMPLETE SOLUTION 
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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. 
 
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BOTH IRAN, RUSSIA, WANT ROLE IN PIPELINE 
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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. 
 
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LARGE-SCALE TRANSIT OF IRANIAN GAS RULED OUT 
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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. 
 
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ARMENIA IS BUYING CHOICE 
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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. 
 
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COMMENT:  TRADING DEPENDENCIES? 
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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