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Egyptian Gas to Israel: Plugging the Leak

The provision of under-priced natural gas to Israel under the Mubarak government has long been fuel for public anger, but critics predict that the current powers will not be willing to permanently sever the old deals.

By Rana Mamdouh | Al Akhbar | April 24, 2012

Cairo – The Egyptian General Petroleum Corporation’s decision to halt natural gas supplies to Israel – not in order to end the squandering of public funds, but due to overdue Israeli payments – has failed to impress campaigners who have long demanded the scrapping of the deal under which Israel has imported 1.7 million cubic meters of Egyptian gas annually since 2008.

The arrangement, which provides Israel with 40 percent of its gas needs, has been a subject of public anger for the past five years. Over that time, experts estimate that Egypt sustained losses amounting to Egyptian pounds (LE) 28 million (US$4.6 million) per day, as a result of exporting gas to a number of states such as Turkey, Spain, Jordan, and Israel at a price of US$0.705 per million British Thermal Units (MMBtu) at a time when world prices were fluctuating between US$2 and US$6 per MMBtu. The gas is exported through a 100 kilometer-long pipeline from Sinai to Asqalan on the Mediterranean coast.

The gas was supplied under the terms of an agreement signed by the Egyptian government and Israel in 2005, brokered by businessman Hussein Salem, a friend of deposed former President Hosni Mubarak. It guarantees nearly 2 billion cubic meters of Egyptian gas being exported annually to Israel for a 20-year period from the Eastern Mediterranean Gas (EMG) Company – a partnership involving Salem, the Israeli Merhav group, the Ampal American Israel Corporation, the Thai firm PTT, and American businessman Sam Zell – at a price below half the cost of extracting and transporting it.

Despite objections raised by some Egyptian MPs at the time, the agreement was rubber stamped by parliament, thanks both to the dominance of the then-ruling National Democratic Party (NDP) and the fact that a presidential confidant was involved (Mubarak’s sons Gamal and Alaa were also rumored to have been paid commissions by Salem for facilitating the deal). EMG was also granted a three-year tax exemption from 2005 to 2008 by the government.

Public opposition to the deal persisted, however. Political groups held demonstrations against it, legal challenges were mounted in the courts, and campaigning organizations were set up to stop it. But the regime was undeterred, even when geologists joined political activists in opposing the agreement, warning that Egypt’s gas reserves were being depleted to dangerously low levels. Jurists, too, opined that the agreement encroached on Egypt’s sovereignty and control over an important national resource.

A later bid by the Egyptian government to improve the terms of the deal was snubbed by the Israelis, according to Judge Adel Ferghalli, former head of the Administrative Courts division. He told Al-Akhbar that in 2008, the government referred seven agreements related to the export of gas to Israel to the Council of State’s legislation department, the judicial authority which reviews agreements and bills before they are put to parliament. The government requested that the accords be reviewed with a view to raising the export price from US$.705 to US$3.65 per MMBtu. This was duly done, but the Israeli side refused to agree to the higher price and insisted that the Israeli importing companies were bound by the 2005 agreement which set prices from US$.705 to a maximum of US$1.75.

This did not prevent Mubarak’s government from concluding further agreements with Israel in late 2010 to increase the quantity of gas supplied from 1.7 to 2.9 billion cubic meters, for a 20-year period starting in 2010 and at the old prices. This was claimed by a number of Israeli companies about two months before Mubarak was ousted from office, and not denied by the Egyptian government at the time.

With the outbreak of the January 2011 revolution and the assumption of power by the Supreme Council of the Armed Forces (SCAF), demands for an end to gas sales to Israel became more vociferous. In response, former prime minister Essam Sharaf indicated shortly after he was appointed in early April last year that while Egypt could not breach contractual obligations to export gas to Israel it could review the terms, and promised to do that so as to raise Egypt’s yearly revenues from its gas deals by US$4 billion.

But time went by and nothing was done. So Egyptians took things into their own hands, as Ibrahim Yousri, a former ambassador and coordinator of the pressure group No Gas Sales to the Zionist Entity, put it. “They started relying on themselves to express their rejection of the squandering of public funds and the export of Egyptian gas at below world prices to a number of countries, especially Israel, which they consider their enemy,” he said. The pipeline supplying the gas to Israel has been bombed on 13 occasions in the year since Mubarak was ousted.

Yousri was dismissive of the decision to halt exports, suspecting it will prove temporary.

“If the military had wanted to salvage their reputation and avoid the accusation of squandering national resources, the agreement would have been scrapped completely,” he remarked.

He said the reason exports were halted was that the Israeli company importing the gas had withheld Egypt’s dues since 2010. Otherwise, SCAF had been doing exactly what Mubarak had done since 2008, effectively donating some US$10 million dollars daily to the Israeli treasury – the value of the gas supplied by Egypt. “That is not going to make them cancel the agreement outright, but just temporarily halt exports,” he said.

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SCAF’s Image Vis a Vis Israel

By Bisan Kassab

Cairo – The decision to halt Egyptian gas exports to Israel cannot be seen in isolation from the impending end of the transitional period in Egypt, or the apparent falling out between the Muslim Brotherhood and the SCAF.

The ruling generals are badly in need of an “image boost,” according to Hassan Nafaa, professor of political science at Cairo University and a former member of the SCAF’s civilian advisory council.

While Cairo, represented by the head of the Egyptian Natural Gas Holding Company (EGAS) Muhamad Shuaib, officially attributed the move to the Israeli side’s failure to comply with its contractual obligations, the decision “is in essence political and not commercial,” Nafaa remarked.

He said the SCAF would certainly use the announcement, which was bound to receive wide public acclaim, to try to bolster its political standing. But he judged that any additional popularity it gained would be fleeting, and would not give it a political edge over its critics – especially in light of the recent legislation proposing the disqualification from politics of senior figures in the Mubarak regime, which has narrowed the SCAF’s room to maneuver.

He added that the dispute over late payments by the Israeli side provided the SCAF with a convenient means of acting without inviting undue pressure from the United States and Israel.

Nafaa’s skepticism seems well placed.

Minister of Planning and International Cooperation Fayza Abul-Naga – the Mubarak-era holdover who spearheaded the recent campaign against NGOs that receive foreign funding – has said that EGAS informed the Israelis that “the Egyptian side had no objections to reaching a new contract with new conditions and a new price.”

She stressed that the decision to halt exports was not taken suddenly, but after Israel had been notified five times that it was not meeting its financial obligations under the old contract, adding that the last deadline it was given for making its overdue payments was March 31.

Husam Issa, a professor of international law and member of a group seeking to recover public funds embezzled during the Mubarak years, remarked that the Israelis had no grounds for objecting. Non-payment was clearly a sufficient reason for terminating a contract without being accused of acting out of political motives or under public pressure, he said.

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April 25, 2012 - Posted by aletho | Economics, Timeless or most popular | Ampal American Israel Corporation, EGAS, Egypt, Egyptian General Petroleum Corporation, Hosni Mubarak, Israel