Last week it was announced that as of October 13th Iran would be supplying gas to Armenia and that in treturn Armenia would supply electricity to Iran.

(As it turns out, as of October 13th, the transfer of Iranian gas to Armenia has been indefinetely postponed. Lusineh Harutyunyan, the spokesperson for Armenia’s  Ministry of Energy and Natural Resources announced that Russian gas flowing to Armenia via Georgia presently meets the country’s demands. She noted that Armenia will start to import gas from Iran when the need arises.)

As stated by Rasul Salmani, Director of Iran’s National Gas Company, Iran envisages piping 1.1 billion cubic meters of the blue fuel yearly in the first stage and 2.3 billion as of 2009. Armenia will be supplying Iran with 3.3 billion kilowatt/hours of electricity.

The Iran-Armenia gas pipeline was officially opened on March 19, 2007 when the presidents of the two countries declared the Armenian section completed in a ceremony that took place in the village of Agarak near the Iranian border.

The inter-governmental agreement to begin construction of the gas pipeline was signed back in 1992. In 1995 another agreement was signed as to the route of the pipeline. The final pipeline related document was signed in May of 2004. 41 kilometers of the 141 kilometer pipeline winds its way through Armenia. The entire cost of the project is estimated to be $210-220 million, of which Iran invested a total of $120 million. For the Armenian stretch of the pipeline Iran granted Yerevan a $30 million loan which Armenia will pay back by the way of electricity transfers. The pipeline will also allow for the transfer of gas from Turkmenistan, which is cheaper than the Iranian variant.

The construction of the pipeline however was delayed and completed after the envisaged deadline. Initially, the diameter of the pipeline was projected to be 1,400 millimeters, allowing for the transfer of 30 billion cubic meters of gas yearly. It was assumed that in the future the route would continue on to Georgia, the Black Sea, Ukraine and then to the countries of the European Union; similar to Gazprom’s “Blue Stream” project.  In 2001 the European Union even granted permission for the Iran-Armenia pipeline to be integrated into the INOGATE program (Interstate Oil and Gas Transport to Europe).

Such an ambitious project, if realized, was also viewed as an alternative to the Baku-Tbilisi-Erzeroum and Baku-Tbilisi-Ceyhan projects that by-pass Armenia. This is particularly the case given that the Azeri “Shah-Deniz” gas field can’t compare to Iranian gas reserves.
However, as claimed by the analysts, the final diameter of the pipeline was reduced to 710 millimeters, or 50% of the original size, under Russian pressure. Analysts state that Russia agreed to the pipeline concept, in principle, with this condition and also that it would pass under Russian supervision in the future. Thus, Armenia agreed to hand over its portion of the pipeline to Gazprom via the HayRusGazArd Company. The pipeline currently linked to the latter’s distribution system.

The HayRusGazArd Company has the sole right to supply and distribute Russian gas to the Armenia’s domestic market. The major shareholders of the company are Gazprom, with 57.59%; Armenia’s Ministry of Energy, 34.7% and Itera  with 7.71%. In addition, by 2009 Gazprom looks to increase its share to 80%.

In the opinion of political scientist Sevak Sarukhanyan, Deputy Director of the “Noravank” Scientific-Educational Foundation, the role of the Russian factor in the pipeline issue is exaggerated. He believes that the reduction of the pipeline’s diameter was used as anti-Russian propaganda in Armenia and to spread speculation. “If our objective is to serve as a transit nation for gas to the European Union we must build larger pipelines and not just one but three or four, each with a 1,400 millimeter diameter. We must have the capacity to export some 15-20 billion cubic meters of gas annually.” states Mr. Sarukhanyan.

The political analyst notes that presently the possibility to extend the pipeline to Europe exists given that the essential distribution structure has been created and which can serve as the basis on which to construct a larger pipe. However he believes that today there are more serious obstacles in the way for this to be realized.

Mr. Sarukhanyan points out that, “In the first place, the European Union, which is assumed to be the end consumer of Iranian gas, isn’t in a hurry to enter into an agreement with Iran on any gas purchase. Then, it is hard to picture the possibility of Georgia as a transit point for the pipeline against the backdrop of increased tensions in Iranian-American relations. Finally, there’s another possible alternative for exporting Iranian gas to Europe - through Turkey. The Tabriz-Erzeroum pipeline has the capacity to carry about 20 billion cubic meters.”

Today, Iran already exports 6.2 billion cubic meters of gas to Turkey. Apparently due to United States pressure, Iranian President Mahmoud Ahmadinejad wasn’t able to close an expected deal during his August visit to Turkey that would have allowed for Iranian natural gas to reach Europe and to also transport gas from Turkmenistan via Iran and Turkey.

It must be noted however that after the Georgian-Russian war alternate scenarios of exporting gas to Europe have once again been put on the drawing board. One of these is the well-known Nabucco project. 

An agreement to construct the Nabucco project was reached in 2002 by five European companies (Austria, Hungary, Rumania, Bulgaria and Turkey). They were joined by a German firm in February, 2008. The initial phase of the pipeline begins in Erzeroum, Turkey, and then traverses Bulgaria, Rumania and Hungary until it reaches Baumgarten an der March, a major gas hub inAustria, some 3,300 kilometers away. From there the gas will be distributed to other European nations. In Erzeroum it can be linked to the Tabriz-Erzeroum and Baku-Tbilisi-Erzeroum gas pipelines. The latter would connect Nabucco to the projected Trans-Caspian gas pipeline running across the floor of the Caspian Sea linking Turkmenistan and Azerbaijan. It is projected that Nabucco will begin operation by 2013.

Both the European Union and the United States are providing assistance to get the project up and running. While it is true that the United States will not directly benefit from Nabucco, Washington is interested in seeing the completion of another such energy project that will by-pass Russia.

IIn 2006, Gazprom proposed an alternative project competing with the Nabucco Pipeline by constructing a second section of the Blue Stream pipeline beneath the Black Sea to Turkey, and extending this up through Bulgaria, Serbia and Croatia to western Hungary. In 2007, the South Stream project through Bulgaria, Serbia and Hungary to Austria was proposed. It is seen as a rival to the Nabucco pipeline.

Will Nabucco Bypass Armenia?

The implementation of the Nabucco Project is being delayed however by a set of objective and subjective factors. First, projected cost estimates of $7 billion have shot up to $12 billion. Then too, United States Vice-President Dick Cheney wasn’t able to sell the idea of constructing a gas pipeline bypassing Russia to Azeri President Ilham Aliyev during his visit to Baku in early September. “The Azeri President indicated to Cheney during talks in Baku on Wednesday that he did not want to anger Russia in the wake of its invasion of neighboring Georgia”, Kommersant reported, citing an official in Aliyev\'s administration.

There is another problem regarding the Azeri matter. The Azeris themselves have confessed that their reserves alone aren’t sufficient to utilize the gas pipeline to capacity. Thus, they have proposed searching for additional reserve sources. Turkmenistan can serve as such a site and that’s why the projected pipeline stretches across the Caspian from Turkmenistan to Azerbaijan. The question is will Turkmenistan agree to participate in such a project? Ashkhabad already has agreed to export gas to Russia and China.
 
The other problem arose after the Georgian-Russian war. “The Russia-Georgia conflict has raised fears that oil and gas producers from the Caspian region, including Azerbaijan, could turn their backs on Georgia as a route for exporting to the West.” writes the Turkish Daily News and quotes energy analyst Recdet Pamir who states that, “Moscow did not attack the existing energy projects, including Baku-Tbilisi-Ceyhan oil and Baku-Tbilisi-Erzeroum gas pipelines, in the war with Tbilisi but international investors would think 30 times now before considering Georgia as a route to pump Azerbaijani gas into the Nabucco pipeline."

At one time press reports also speculated that the Nabucco Pipeline might traverse Armenia and that an agreement had been reached between Turkey and Armenia for such an eventuality. Such a theory falls within the context of recent Georgian developments and the much awaited thaw in Turkish-Armenian relations. Azeri politicians were quick to refute such speculation by declaring that since Armenians haven’t pulled out of “occupied Azeri territory” any talk of such cooperation is impossible.

Iran is the other potential candidate to be drawn into the Nabucco Project. Iranian participation would allow for the solution of two problems at once - transit (we have noted that the Tabriz-Erzeroum pipeline is already in operation) and supply (contrary to Azerbaijan, Iran, which has the world’s second largest gas reserves, can guarantee vital gas flows via the pipeline).

Here again the American factor comes into play. However, the European allies of the United States, who are directly impacted by a dependency on Russian gas supplies and the problems this presents, this time around are apparently intent on overlooking the interests of the United States. This is all the more probable given changing conditions in the relationship of forces in the region.

Thus, it was Hungary who took the initiative. It is preparing to invite the six participating Nabucco nations, potential supplier and transit nations and representatives of the European Union and the United States to participate in a summit meeting to be held in Budapest on January 26-27, 2009. In addition, all are included in the initiative; the government, the parliamentary opposition as well as the MOL Company, Nubacco’s Hungarian shareholder.

MOL’s president and CEO, Zsolt Hernadi noted during a Vienna press interview this September that Nabucco could be realized if Iran were to be drawn into the project. Stressing that the main problem is a source of gas, Mr. Hernadi stated that, “An empty pipeline is too expensive… Nabucco could be financed and built quickly if the gas supply source were clearly identified…perhaps we need another shock, like that of January 2006 [Russia-Ukraine gas crisis], to tackle the risks involved.”

The Eurasia Daily Monitor followed up by commenting that “…considering Iran’s potential as a balancer to Gazprom in the European and Eurasian gas trade, Hernadi’s cautious argument breaks new ground in a European debate that has long been inhibited by U.S. dilemmas” and noted that - U.S. policy for European energy security through diversification conflicts with the U.S. policy to penalize Iran. The article’s author went on to predict that, “Most likely, the change of administrations in Washington will recast the terms of debate on energy security, including the issue of Iranian oil and gas development in a wider context”.

Will Europe display the determination and adopt a decision to utilize the potential of Iranian gas reserves? Only time will tell. Armenia is one of those “fortunate” nations that have the opportunity to directly import Iranian gas. In addition, in a set of conditions favorable to it, Armenia possesses the possibility to produce quantities of electricity to the extent that it will sell the resource to Turkey beginning in 2009. 

However, to state that the gas pipeline somehow provides diversification to Armenia’s gas supply and is an essential factor of Armenia’s energy security, when the pipeline is to be handed over to Russian supervision, sounds naive at best. Armenia will remain dependent on Moscow, regardless of whether the blue fuel flows from the north or from the south.

Otherwise, supplies of Iranian gas to Armenia provide Russia with additional levers to close the pipe entering the South Caucasus in the event of consecutive Georgian-Russian crises, without causing damage to its military partner. Paying heed to the “exhortations” of its partner, Armenia not only has forfeited the possibility of becoming a transit country but also hasn’t been able to even create a real alternative to Russian supplies.