Egypt Cancels Israel Gas Deal (WSJ) WALL STREET JOURNAL) By MATT BRADLEY in Cairo and JOSHUA MITNICK in Tel Aviv 04/23/12)
WALL STREET JOURNAL
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Egypt´s state-run gas company has terminated a controversial natural
gas deal with Israel, adding stress to the increasingly fragile
relationship between Israel and one of its only diplomatic partners
in the Arab world.
If upheld by Egypt´s military rulers, annulling the gas deal would
level a symbolic blow to peaceful ties that have underpinned regional
stability for more than three decades. Israel has said that the
cancellation of the gas deal puts Egypt in violation of an economic
annex of their 1979 treaty—the first between Israel and an Arab state.
The full impact of the decision was difficult to determine on Sunday
night, and Israeli foreign ministry officials said they were still
seeking clarification from Egyptian counterparts because they had not
been formally notified.
With only two months before Egypt´s military authorities are set to
turn over power to one of the first popularly elected presidents in
Egyptian history, the decision could augur the beginning of a steady
worsening in relations.
Israel´s Finance Minister Yuval Steinitz said his country viewed the
cancellation of the agreement "with great concern."
"This is a dangerous precedent that clouds the peace agreement
between Israel and Egypt," Mr. Steinitz said in a statement.
Sunday´s cancellation appeared to be a business gambit aimed at
securing a higher price and it remained unclear on Sunday night
whether Egypt´s interim ruling military leaders would intervene, said
business analysts. The council of generals could not be reached for
comment and they did not issue a statement on the matter.
Ampal-American Israel AMPL -3.70% Corporation—a stakeholder in the
pipeline joint venture, which transmits the gas between the countries—
reported on its website Sunday that two of Egypt´s state-owned
natural gas companies had severed the gas export contract. Ampal said
the Egyptian decision was "unlawful and in bad faith." The move ends
an export deal that had helped buttress Egypt´s nearly 33-year-old
peace treaty with Israel since it was signed in 2005.
The head of the state-owned Egyptian Natural Gas Holding Company, or
EGAS, Mohamed Shoeb, said Sunday evening that his company ended the
deal last Thursday for purely commercial reasons. "It is a commercial
contract between companies," Mr. Shoeb said.
He said East-Mediterranean Gas, the Israeli-Egyptian firm that buys
gas from the Egyptian state and sells it to Israel, has failed to pay
for the past several months—a claim that Israeli Foreign Ministry
spokesman Yigal Palmor denied, according to news reports. Ampal owns
a 12.5% stake in EMG.
The decision will not cause any serious economic damage for either
country, but it will likely pay huge political dividends for Egypt´s
embattled interim ruling military regime and its civilian-appointed
The gas deal was among the chief sources of popular rage against the
ousted regime of President Hosni Mubarak and one of Mr. Mubarak´s
most unpopular foreign policy positions.
Since Mr. Mubarak was ousted amid massive street protests last
February, militants have bombed the pipeline that delivers natural
gas from Egypt to Israel and Jordan at least 13 times, effectively
cutting off supply at normal levels ever since. Gas deliveries dried
up for a total of 225 days in 2011 and 66 days during the first three
months of 2012, according to Ampal´s website. Gas has not flowed to
Israel from Egypt since an explosion on March 5. The cutoff in gas
supply has caused a surge in fuel costs at Israel´s electric utility,
prompting rates to surge 33%.
EMG began international arbitration proceedings against EGAS in
October 2011 to potentially demand billions of dollars in
remuneration for the lost gas.
Mr. Mubarak now faces criminal charges for his role in the deal,
which is popularly believed to sell off Egyptian natural resources to
the despised Israeli government at below-market rates.
Hussein Salem, a co-owner of EGAS and close confidant of Mr. Mubarak,
was arrested last June in Spain where he faces a possible extradition
to Egypt and prosecution for his role in the gas deal.
Israeli officials have long maintained that the contract´s terms are
fair. But many Egyptians believe that the Mr. Salem benefited hugely
from his middle-man role.
EMG has not made its prices public, but some analysts and industry
experts suggest it could be about $2 to $3 per British thermal unit.
Egypt´s government sells natural gas to Egyptian companies for about
$4 per btu.
"The big saying here in Egypt is that we are subsidizing the Israeli
people while we are not subsidizing the Egyptians," said Tamer Abu
Bakr, the chairman of Genco Group, an Egyptian natural gas
Successive petrol and natural gas shortages throughout the past four
months have sharpened anxiety about the gas deal. Anti-Israel
rhetoric from presidential candidates vying in Egypt´s May elections
has also raised public anger over the gas exports.
The 2005 gas deal was a 20-year supply agreement that yielded about
$300 million for Egypt in 2010 and reduced Israel´s energy costs. The
supply agreement was included as an annex to the 1979 peace
agreement, highlighting its legal and symbolic significance to
But the arrangement has become a source of frustration and political
anger for both sides.
The contract calls for EMG to deliver 7 billion cubic meters, or BCM,
of Egyptian natural gas to Egypt every year, which would offer
Egyptian state-owned gas firms over $1 billion each year, according
to Ampal´s website.
By the end of 2010, EMG had only provided 2.5 BCM to Israeli
utilities company each year since the gas started flowing in June
A spokesman for Israel´s Infrastructure Ministry said the government
had not yet gotten an official announcement. A spokesman for the
prime minister´s office was also unaware of the development.
Despite government statements that Israel has prepared for the cutoff
of gas from Egypt, the loss of gas flow has been felt because it
accounted for 16% of the country´s power generating capacity.
Already in 2011, the supply cut from Egypt contributed to a rise in
electricity rates for Israeli consumers. Israel Electric Co., the
state-owned utility, is preparing for rolling black outs in the
summer, in part due to the shortfall of gas suppy from Egypt.
(Copyright © Dow Jones & Company, Inc.) 04/23/12)
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