Backdoor battle

Israel is locked in a 27 year-old, 3 billion-dollar, oil-supply arbitration dispute with Iran

By YOSSI MELMAN
An oil platform at Iran's Soroush oil fields 390 (photo credit: REUTERS/Raheb Homavand)
An oil platform at Iran's Soroush oil fields 390
(photo credit: REUTERS/Raheb Homavand)
Two or three times a year, in what has become an annual routine over the past 11 years, Attorney Avigdor (Dori) Klagsbald packs his briefcase with documents and balance sheets and flies to Paris. There, he represents the Government of Israel in one of its most guarded secrets – arbitration with Iranian lawyers.
Yes, you haven’t just misread that. Lawyers of the two arch rivals are talking to each other, exchanging documents and accusations. Despite the animosity and the inflammatory rhetoric between the two governments, when it comes to money and property, they are ready to engage with each other. One of the arbitration sites is the International Court of Arbitration (ICC) in Paris and revolves around a Switzerland-based holding company called the Trans-Asiatic Oil Company (TAOC) and its Israeli subsidiary, the Eilat-Ashkelon Pipeline Company (EAPC).
In fact, two arbitrations have been underway now for some 27 years.
The second one takes place in Switzerland, where the arbitrator is a Swiss lawyer and the two governments are represented by local lawyers; the other is at the ICC, where Israel is represented by Klagsbald. At stake are up to three billion disputed dollars.
In order to comprehend the convoluted arbitrations, it is imperative to know the history of the mysterious companies. In 2006, Prof. Uri Bialer of the Hebrew University in Jerusalem shed some light on them in a study entitled “Fuel Bridge across the Middle East – Israel, Iran and the Eilat- Ashkelon Oil Pipeline,” based on declassified documents from the Israel State Archives and the British National Archives, as well as interviews with leading figures involved in the issue.
Up until the mid-1950s, Israel received its oil from the Soviet Union, Kuwait (under British rule) and international oil companies. But in 1955- 1956, these ties were severed, and Israel was forced to find new oil sources.
Israel already maintained secret ties with Tehran and wanted Iran to become its principal supplier. Fearing a backlash from the Arab world, however, Iran’s pro-Western monarch Shah Reza Pahlavi hesitated. Israel’s victory in the 1956 Sinai Campaign changed things; the Iranians were impressed and agreed to supply oil to Israel.
With the help of pumps and pipes “confiscated” from Italian and Belgian firms operating an oilfield in Sinai, Israel built a pipeline, 16 inches in diameter, from Eilat to Ashkelon, paid for by Baron Edmund de Rothschild.
The initiative was called Tri-Continental. At the insistence of the Iranians, who wanted to conceal their involvement in selling oil to Israel and the joint company, the parties established a secret partnership called Fimarco, which was registered in July 1959 in the tax shelter of Lichtenstein. Iran owned 10 percent of the partnership. Tankers transported the oil from Iran to Eilat, and from there it was sent to Ashkelon through the pipeline.
Over the years, however, Israel’s needs increased, and the Finance Ministry formulated a plan to replace the small pipeline with a large 40-inch one, and to set up a genuine partnership with Iran. Thenforeign minister Golda Meir, who secretly visited Tehran in August 1965, raised the issue with the shah and the directors of the state-owned National Iranian Oil Company (NIOC). But the negotiations conducted in Israel, Iran and Switzerland progressed slowly and seemed to be leading nowhere.
According to Bialer’s study, the turning point in the talks came after Israel’s victory in the 1967 Six Day War and the closing of the Suez Canal. The shah, who was referred to by the code name, Landlord, in Israeli correspondence, was even more impressed by the latest Israeli victory over the Arab nations, which he loathed, and ordered a deepening of ties between the two countries in the fields of intelligence, joint military research and development, and exchanges of information on nuclear issues, essentially creating a strategic axis between Tehran and Jerusalem.
The shah also agreed to establish a 50-50 partnership between the Israeli government and NIOC. The company was called Trans- Asiatic Oil and was registered in Canada and Switzerland, at Iran’s request, in order to conceal the Israeli partner and to make it appear to be a foreign entity.
After the shah gave his consent, the main problem was finding funding for the initiative, which was expected to cost $85 million, a huge sum in those days.
De Rothschild refused to fund the project, claiming that it would not be profitable; but the Iranians thought that he said no because he was insulted by the fact that Israeli representatives had kept him in the dark about two years of contacts with Iran.
An Israeli attempt to interest American oil billionaire David Rockefeller, the Chase Manhattan Bank president at the time, also failed.
In the end, Israel played its trump card – the Holocaust and Germany’s guilt feelings – and the funding was obtained from the German Deutsche Bank, The bank’s thenchairman, Hermann Josef Abs, had a Nazi past. He was responsible for the bank’s foreign operations from 1938, and after World War II he had been imprisoned for several months. Apparently, however, this did not prevent Israeli representatives from enjoying close ties with him.
The German bank agreed to give a lowinterest, $22 million loan to finance the project. On February 29, 1968, a contract establishing the company was signed; its exact details are still considered a state secret. A year later, the pipeline between Eilat and Ashkelon was completed, and huge tankers were purchased to transport the oil. In December 1969, Iranian oil began being shipped from the port of Bandar Abbas, via the Indian Ocean and Red Sea, to Eilat. From there, the oil made its way through the new pipeline to the Mediterranean port of Ashkelon.
A sma ll percentage of the oil was earmarked for Israel. Most of it, however, was loaded onto tankers at the Ashkelon terminal and sent to consumers in Europe, mainly Romania, the only then-Soviet bloc country to continue maintaining diplomatic ties with Israel. In 1970, 162 tankers brought 10 million tons of oil to the pipeline. That was the pipeline’s peak year, but the ambitious goal of 50 million tons a year was never achieved.
At the end of 1978, with the fall of the shah, the oil stopped flowing. Ruhollah Khomeini created the Islamic Republic of Iran, became its supreme leader, and declared Israel as the “small Satan.” The ties between the two countries were severed and gradually deteriorated into the hostility that characterizes them to this day. Israel was left alone with the two companies and without their only product, oil.
The huge tankers became redundant and were cheaply sold or scrapped Letters and messages from the Israeli managers of the joint company to their Iranian counterparts were ignored and not answered for seven years. Iran did not want to have anything in common with Israel, although it did buy Israeli weapons during its bloody war with Iraq.
And then, out of the blue, the Iranians demanded, via their Swiss lawyers, that TAOC and EAPC pay a sum of over $1 billion for the oil sent by NIOC. The Israeli government, which owns EAPC, refused and countered with claims that the Iranian side had unilaterally breached the contract and caused tremendous financial and strategic damages. Israel also argued that other Israeli companies were expelled from Iran and, as a result, had suffered financial losses and had property confiscated by the Iranians.
Thus, the two arbitrations were born.
Israel was initially represented by Attorney Haim Tsadok, a former justice minister from the Labor Party. In 2003, he was replaced by Klagsbald. In Switzerland, the Iranians are demanding payment for oil supplied – and the $1 billion has grown over the years to more than $2 billion. In Paris, they are demanding compensation for being the former partners in the two companies.
Iran also is suing Israel’s three leading oil companies, Paz, Delek and Sonol, which also purchased oil from Iran. At the time, the companies were government-owned, but now they are in private hands.
Since the arbitrations began, the Israeli tactic has been to delay the process. “As far as we are concerned,” a government source told me, “we hope that the arbitrations will continue forever.” Indeed the original Swiss arbitrator died during the ongoing saga and was replaced by a new lawyer.
Israel fears that it may lose and be ordered to compensate Iran. A few years ago, the ICC arbitrator ruled in an interim judgment that Israel was required to pay a token sum of $150,000. Israel obeyed the ruling simply to allow the arbitration process to continue. EAPC has also paid out during the 27 years of arbitration a few million dollars in legal fees and expenses for its team of international and Israeli lawyers.
In recent years, EAPC has been enjoying profits emanating from skyrocketing oil prices. It is a thriving company with big plans and ambitions; and just to be on the safe side, it has no assets, neither bank accounts nor property, abroad which Iran could freeze. It is hard to believe that Israel will ever agree to the Iranian demands. 
Yossi Melman, a commentator on security and intelligence matters, is a senior contributor to www.thetower.org