Egyptian gas: Facts and theories

In canceling agreement with Israel, Egypt disregarded peace treaty, economic interests.

By ZVI MAZEL
Egyptian gas pipeline 311 (photo credit: REUTERS)
Egyptian gas pipeline 311
(photo credit: REUTERS)
Official declarations on both sides of the border tend to play down the impact of the cancellation of the sale of Egyptian gas to Israel. However what happened cannot be simply the result of a conflict between business partners.  The contract to supply gas to Israel was signed in 2005 and was followed immediately by a memorandum of understanding in which the Egyptian government was guaranteeing “the continuous and uninterrupted supply of the Natural Gas contracted or to be contracted”. Therefore the cancellation of the deal can only be seen as a further deterioration of the relations between the two countries.
In today’s world, the supply of natural gas is a strategic issue for a number of reasons. Significant investments are needed; while the selling country enjoys substantial revenues, the buyer and its economy become dependent on a continuing supply. In the present case, the deal was advantageous for both sides.  The natural gas from the offshore fields of Port Said had a mere hundred miles to go to El Arish and from there to Ashkelon, thus greatly reducing the cost of the infrastructure needed. (Turkmenistan’s planned contract to  supply gas to Western Europe will entail a pipeline two thousands mile long, and enormous sums will be needed to build and maintain it).
Israel was counting on that gas to produce cheaper and cleaner electricity, thus benefiting its economy and the environment. It had eyed Egyptian gas since the mid-Nineties; the relatively low cost of the infrastructures involved contrasted with the heavy equipments necessary to import and transform liquefied natural gas (LNG). At the time, Qatar had declared its willingness to sell gas to Israel, but Jerusalem had preferred to buy gas from Egypt, in order to further strengthen the links between the two countries. Mubarak had been of the same mind.
However Egypt wanted to entrust the deal to a private international consortium in order to distance itself and not be accused of “normalizing” its relations with Israel.  But that country,  wary of possible future political fluctuations,   made the sale conditional on a formal agreement between the two countries. Hence the lengthy negotiations ending in the memorandum of understanding signed on June 30, 2005: in its preamble, the parties, “Recalling the Treaty of peace between the State of Israel and the Arab Republic of Egypt of 26 March 1979…..reaffirm their willingness to develop bilateral economic cooperation in all fields including the gas sector, emphasizing that the supply of natural gas from Egypt to Israel will contribute to enhancing peace and stability in the Middle East…”. 
Article II of that memorandum is even more explicit: “The government of the Arab Republic of Egypt guarantees the continuous and uninterrupted supply of the Natural Gas contracted and/or to be contracted  such as between EMG [Eastern Mediterranean Gas] and IEC [Israel electric company] for the initial 15 years as well as for any extended period……. The same guarantee shall apply to any other entity importing gas from Egypt to Israel.”
Obviously the unilateral cancellation of the contract cannot be said to be a purely commercial matter since it is a clear violation of an international agreement as well as being in direct contradiction to the peace agreement.
The Eastern Mediterranean Gas company – EMG –  which was supplying gas to Israel was buying it directly from the Egyptian national gas company, which, together with the National Egyptian Petrol Authority, was  liaising between EMG and the Egyptian government. It is therefore not conceivable that their decision could have been taken without prior consultation with the Egyptian ministry of energy and the Supreme Council of the Armed Forces ruling the country. It could have been expected that the SCAF would do its utmost to preserve one of the most tangible expression of the peace treaty. A treaty which gave Egypt 33 years of quiet and stability which should have made it possible to develop the country’s economy.
Unfortunately, it did not happen.
Since the revolution the pipeline crossing Sinai has been the target of no less than 14 successful sabotage operations; Egypt has thus been unable to fulfill its contractual obligations, supplying less than 20% of the gas in 2011 and even less in the first quarter of 2012. This was highly damaging to the economy of Israel, which lost an estimated 1.5 percent of its GNP according to the Israeli Finance ministry due to the need to turn to more expensive and more polluting energy sources   raising consumer prices.   By reneging on the agreement Egypt is in fact admitting that it has no intention of taking the necessary steps to protect the pipeline and renew supply and that it is not concerned by the damage caused to the economy of Israel.
The SCAF has surely weighed the impact of a move which runs contrary to its own interest and is going to deprive the country of a significant source of revenues at a time when its own economy is spiraling down, tourism is failing, currency reserves are dwindling, investors are scarce and unemployment on the rise. It has been suggested that there was a misunderstanding between the Egyptian Gas Company  and the army,  which found itself blindsided.
The fact is that on April 22nd, immediately after the Egyptian Gas company announced that it was cancelling the contract, the Egyptian ministry for energy denied the news. A denial which was of no consequence, since, confronted with a wave of enthusiastic public support for the move,  the government found itself unable to reverse the decision.
So what really happened?  Did the SCAF come to the conclusion that it could not cope with the attacks on the pipeline? That the Egyptian army was unable to safeguard the part of the pipeline on Sinai soil?  Hard to believe.  Or is it that with the confrontation between the army and the Brotherhood reaching boiling point ahead of the drafting of the constitution and the presidential election, the SCAF decided to jettison some ballast by endorsing a decision which is wildly popular?
One thing is sure. There is a price to pay.  Not only will the move further frighten foreign investors, but Egypt is likely to incur heavy penalties for the unilateral cancellation of the contract.  Egyptian lawyers are the first to admit that Egypt is unlikely to win the legal battle.  The arguments presented  by the Egyptian side are dubious: allegedly the Israelis did not fulfill their own obligations and did not pay all they owed.
Considering the small amount of gas actually supplied, it does not seem very credible; furthermore, why not first involve the Israeli government, a signatory to the memorandum of understanding, and demand its intervention?
But there must be a logical explanation, people say. Well, the story which is circulating among so-called informed sources goes thus:  Israeli shareholders recently sued their Egyptian supplier for breach of its engagements in not supplying the agreed amount of natural gas, demanding hefty penalties. On the Egyptian side, cancelling the deal may have been conceived as an effective move to pressure the Israelis into withdrawing their case. If  such is the situation, one can only say that it badly misfired.
The writer is the former Israeli ambassador to Egypt.