VZCZCXRO6452
RR RUEHBC RUEHDBU RUEHDE RUEHDIR RUEHKUK
DE RUEHYE #1537/01 3051520
ZNY CCCCC ZZH
R 011520Z NOV 06
FM AMEMBASSY YEREVAN
TO RUEHC/SECSTATE WASHDC 4303
INFO RUCNCIS/CIS COLLECTIVE
RUCNIRA/IRAN COLLECTIVE
RHMFISS/DEPT OF ENERGY WASHINGTON DC

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 001537 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 11/01/2016 
TAGS: ENRG EPET PREL AM
SUBJECT: GAZPROM MOVING TO TAKE CONTROL OF IRAN-ARMENIA 
PIPELINE 
 
REF: A. YEREVAN 492 
     ¶B. YEREVAN 631 
     ¶C. YEREVAN 900 
     ¶D. TBILISI 2850 
     ¶E. TBILISI 2746 
 
Classified By: EconOff E. Pelletreau for reasons 1.4 (b,d). 
 
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SUMMARY 
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¶1. (C) Russian energy giant Gazprom strengthened its hold 
over the Armenian energy sector yesterday when it purchased 
all of the additional shares ArmRosGazprom (ARGP) issued to 
raise capital for the purchase of the Fifth Unit of the 
Hrazdan Thermal Power Plant (Hrazdan 5).  With the share 
purchase, Gazprom's stake in ARGP increased from 45 percent 
to 58 percent.  Even prior to the sale, Russian interests 
held a controlling stake in ARGP with Gazprom and Itera 
jointly holding 55 percent of the shares.  The remaining 45 
percent was owned by the Armenian Ministry of Energy. 
Despite official denials, it is likely that in the coming 
days control of the Armenian portion of the Iran-Armenia gas 
pipeline will be turned over the ARGP, further solidifying 
Russian control over the Armenian energy sector. END SUMMARY 
 
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SEALING THE DEAL ON HRAZDAN 5 
----------------------------- 
 
¶2. (C) Gazprom's recently announced decision to purchase the 
additional ARGP shares is the final step in the 
long-anticipated sale of Hrazdan 5 (refs A, B and C).  The 
deal, which has been in the works since April, leaves Gazprom 
with a controlling stake of 58 percent of ARGP.  Armen 
Arzumanyan, an Armenian energy expert who is chief of party 
for USAID contractor PA Consulting told us that the proceeds 
from the sale would likely be used to fund a gas subsidy for 
consumers which the GOAM has pledged to maintain until 
January 1, 2009. (NOTE: Armenia parliamentary and 
presidential elections are scheduled for 2007 and 2008.  END 
NOTE.) 
 
--------------------------------- 
IS THE PIPELINE PART OF THE DEAL? 
--------------------------------- 
 
¶3. (C) Armenian media reports suggest that Gazprom plans to 
purchase the Iran-Armenia gas pipeline (now under 
construction) as well.  These rumors have circulated since 
June, when Gazprom Deputy Chairman Alexander Ryanazov 
informed shareholders that the company planned to acquire the 
pipeline (ref C).  Armenia's Prime Minister and Defense 
Minister have both publicly denied that there is an agreement 
to sell the pipeline directly to the Russians, while leaving 
open the possibility of some other sort of transfer.  Last 
week, Director of ARGP Karen Karapetian told the press that 
he had asked the GOAM to consider granting ARGP a management 
contract for the pipeline, which he argued made sense 
because, as it is currently designed, the pipeline must 
connect to the ARGP distribution network.  Armenia's Prime 
Minister seems to support this proposal and has been quoted 
in the press as saying it would be "illogical to have two gas 
distribution networks in Armenia."  Arzumanyan theorized that 
the GOAM had agreed to transfer control of the 40 km 
Meghri-Kajaran section of the Iran-Armenia pipeline to ARGP 
in April as a (heretofore undisclosed) part of the Hrazdan 5 
agreement.  That would explain Gazprom's willingness to pay 
USD 250 million for the plant and agree to invest an 
additional USD 180 million in upgrades when construction of a 
similar plant from scratch would cost approximately USD 220 
million. 
 
--------------------------------------------- ------------- 
IRAN PIPELINE FALLS SHORT OF REPLACEMENT CAPACITY, FOR NOW 
--------------------------------------------- ------------- 
 
¶4. (C) The first leg of the Iran-Armenia pipeline, 40 km from 
the border town of Meghri to Kajaran, is expected to become 
operational on December 20.  Arzumanyan gave us a general 
overview of how the Meghri-Kajaran pipeline will integrate 
with the rest of Armenia's energy network.  The pipeline has 
a 700 millimeter diameter and, given current capacity in 
Iran, will carry approximately 1.1 billion cubic meters (BCM) 
annually once completed.  If Iran upgrades its capacity, the 
Meghri-Kajaran line could potentially carry as much as 6 BCM. 
 Total annual gas consumption in Armenia is 1.7 BCM.  In 
order for Armenia to benefit from the full capacity of the 
Meghri-Karjaran pipeline, Arzumanyan explained, it will need 
 
YEREVAN 00001537  002 OF 002 
 
 
to upgrade the pipeline from Kajaran to Ararat to link up to 
the rest of the ARGP national distribution network.  The 
Kajaran-Ararat pipeline is in disrepair and can only carry 
300 million cubic meters annually (less than 1 million cubic 
meters a day).  Given that average consumption in Armenia 
during winter months is 7-8 million cubic meters per day, 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.  Under 
Armenia's April 2006 deal with Russia for Hrazdan 5, the 
Russians were also given authority to upgrade the 
Kajaran-Ararat pipeline, but it is not yet clear that the 
Russians are willing to make the necessary USD 120 million 
investment to do so. 
 
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COMMENT 
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¶5. (C) While Gazprom's increased holding in ARGP certainly 
made headlines, energy sector insiders already considered 
ARGP to be Russian controlled and believe the share purchase 
was merely the mechanism for implementing the sale of Hrazdan 
¶5.  The bigger story will be if and when the GOAM transfers 
the Mehgri-Kajaran pipeline to ARGP, effectively giving 
control to the Russians while remaining true to earlier 
statements that there would be no direct sale.  Russian 
ownership of the Iran-Armenia pipeline would diminish the 
project's value for energy diversification, in that it leaves 
Russia in control of Armenia's gas supplies.  However, the 
Iran-Armenia pipeline, even if it is owned by Russian 
interests, could help to mitigate the impact on Armenia if 
Russia decides to cut off gas exports to Georgia, as it has 
before (refs D and E), which currently would leave Armenia 
out in the cold. 
GODFREY