Armenia has suffered severe energy shortages since 1991 and has long been looking to Iran to relieve its energy needs. Last year the European Commission decided to back a project for construction of a pipeline from Iran into Armenia. Discussions have now begun with Ukraine concerning the possibility of Iranian natural gas transiting Armenia and Georgia, then travelling either overland through Russia or under the Black Sea into Ukraine and onward to European markets. However, it is unlikely that the gas will get any further than Armenia. Nevertheless, Turkmenistan's President Niyazov must now face Russia and Iran as potential competitors for the European market. Unless Niyazov decides to build the Trans-Caspian Gas Pipeline (TCGP), both Russia and Iran will have a stranglehold on Turkmenistan's gas and oil exports.
Iran and Armenia signed an intergovernmental agreement in 1992 (amended in 1995) to construct a 140-kilometer pipeline with a volume of one billion cubic meters (bcm) per year. This pipeline would straddle the two countries' short common border, crossing the Megri corridor that separates Azerbaijan proper from its exclave Nakhichevan. In mid-1999, Iran's foreign minister Kamal Kharrazi suggested constructing a gas pipeline to Ukraine via Armenia. The Ukrainian ambassador replied by proposing to connect the Iran-Armenia pipeline with a Turkmenistan-Ukraine pipeline. Ukraine?s newest former Deputy Prime Minister Yuliya Tymoshenko, who was recently forced to resign, had long propounded the idea for the Trans-Caspian Gas Pipeline (TCGP) to carry Ashgabat?s gas westward into Ukraine. Such a pipeline, after going under the Caspian Sea and through Azerbaijan, would continue westward under the Black Sea to join the pipeline system in Ukraine at Fedosiya. Ukraine has indicated its willingness to take gas from Turkmenistan piped through Iran via Armenia.
Financing even for the short pipeline from Iran to Armenia has been difficult to find under any plan. Gazprom expressed an interest in mid-1999 but then withdrew at about the same time that Gaz de France danced a similar hesitation-waltz. The joint venture Armrosgazprom held discussions with the Iranian National Gas Company (INGC) in mid-February 2000 and agreed on a price of US$ 90 per thousand cubic meters, but that is over a quarter again as expensive as the same quantity from Russia. The World Bank nevertheless expressed interest in the project and construction began only to be halted in mid-March once more for lack of funding. In April, the World Bank explicitly refused to subsidize the excessively high interest rate that China demanded for the US$ 80 million loan it had offered to Armenia for the project. In mid-July, after the project consortium was restructured to include Armrosgazprom, INGC, the National Gas Corporation of Greece (DEPA) as well as Gazprom, a significant trilateral meeting occurred in Yerevan among the European Commission, Iran and Armenia.
The European interest in the pipeline from Iran to Armenia stemmed originally from its nuclear safety program for the new post-Soviet states. It desired to shut down Armenia's Medzamor nuclear power plant, but Armenia refused to do this until an alternative source of energy was identified and made available. Iranian natural gas would satisfy that requirement. At the Yerevan meeting, however, the European Commission decided to sponsor the Iran-Armenia pipeline project under its INOGATE program. INOGATE, an important and comprehensive if little-known initiative to address questions of multi-modal transportation throughout the former Soviet area, stands for Interstate Oil and Gas Transportation to Europe. Iran, oddly, is the only participating country or observer country at INOGATE that has not signed the European Energy Charter Treaty (ECT) that forms the basis, in all of Europe and beyond the Urals, for non-discriminatory harmonization of national energy sectors. The current practices in the Iranian oil industry make Ukraine look like sparkling spring water.
Contacts among the European Commission's president Romano Prodi, Germany's Chancellor Gerhard Schroeder and Russia's President Vladimir Putin at the end of September 2000 initiated strategic discussions of the possibilities for long-term European participation in the development of the Russian energy industry, especially the natural gas sector. The EU intends to increase the proportion of natural gas in its fuel consumption mix over the long term, for environmental reasons. The European move on Iran is from one standpoint just a maneuver to pressure Russia on price. Yet Europe has declared itself willing to take from Iran whatever amounts of gas Russia is unable to sell. There are some problems with the idea of piping Iran's natural gas to Europe via Ukraine, whether the route goes overland through Russia or under the Black Sea. If the pipeline goes across Russian territory to Ukraine rather than under the Black Sea, then this would give Russia a still greater potential stranglehold upon the EU's natural gas supplies.
Ukraine and Russia have long been at odds over the question of Ukraine's alleged pilfering of natural gas exported across its territory from Russia to Europe. Such problems may be expected to continue so long as the Ukrainian energy sector remains fundamentally unreformed, and would certainly affect Iranian gas transiting the country as well. Indeed, in early 2000 Tymoshenko had accused the state oil and gas concern Naftogaz Ukrainy of siphoning gas out of Russian pipeline, and declared that the country's net debt for gas was US$1.7 billion, or twice what Naftogaz Ukrainy had claimed. Later that year, in mid-August, after continued denials of the pilfering, President Leonid Kuchma created a sensation when he told the German magazine "Der Spiegel" that gas thefts were being carried out on the order of Ukraine's government. The Russian side thereupon claimed Ukraine was more than US$2 billion in arrears, including fines for late payments.
The same vested interests in the Ukrainian energy sector that did not favor Tymoshenko's policy of monetizing resource flows also oppose a TCGP to Ukraine, because this might mean leverage in favor of demands for greater transparency in accounting and business methods. One of the reasons for Tymoshenko's recent ouster was her insistence on implementing fundamental reform in Ukraine's energy sector. As far back as last August, Ukraine's prime minister Viktor Yushchenko suggested that parts of Ukraine's gas transportation network might be sold off or given to Russia as payment for the Ukrainian gas debt. Tymoshenko's recent forced departure may easily make it more likely that Gazprom and Itera will come to control, if not own outright, parts of Ukraine's gas transportation network.
The INOGATE program was originally established to promote cooperation between the EU and the newly independent states. A pipeline in the INOGATE framework has also been suggested from Turkey to Greece, channelling gas from the Caspian Basin, and Iran in particular, to Europe. Turkey is moving slowly on this idea because it still believes in the TCGP from Turkmenistan under the Caspian Sea. The disadvantage to Turkmenistan of going through Iran is precisely the same as going through Russia: the transit country with control over the taps is a competing gas supplier to the ultimate consumer. It is noteworthy that the definite moves by the European Commission to back the Iran-Armenia pipeline came only after the TCGP negotiations all but collapsed early last year.
In November last year, Turkmenistan's acting oil and gas industry minister stated that his country still gave priority to the TCGP project over the Iranian route for Ashgabat's gas to Europe. Delays in the Blue Stream project for Russian natural gas to go under the Black Sea to Turkey, and in the Shah-Deniz project for Azerbaijani gas to enter Turkey through Georgia, have both recently encountered delays for complicated technical and engineering reasons. This gives Niyazov an unexpected window, which was on the verge of closing, to make a deal for the TCGP.