Monday, April 30, 2012

Egypt and Israel: Just Rising Gas Tensions or Something More?

 April 30, 2012

On April 22, 2012, the state-owned Egyptian Natural Gas Holding Company (EGAS) announced that it had scrapped its gas deal with Israel. The reason for canceling the deal was linked to complaints that EGAS had not received the gas payments due (related to a four-month period) by the Israeli-Egyptian firm that currently purchases natural gas in Egypt and then resells it to Israel. The involved gas deal supplies Israel with around 40 percent of its gas needs (or one-third of its overall fuel) at below-the-market gas prices.

The twenty-year gas deal between the two countries was signed in 2005 under the Hosni Mubarak presidency, which strongly supported this contract also as a means for expanding the relationship between Egypt and Israel. The two countries signed a peace treaty in 1979. Since the resignation of President Mubarak the gas deal has come under legal scrutiny and criminal investigations have accused Mr. Mubarak and his close associates of selling gas to Israel at a much discounted price and subsequently of reducing Egypt's state revenues.

The parameters of the deal were never disclosed publicly, but according to some Egyptian sources, gas was sold to the East Mediterranean Gas Company (E.M.G.), which was the company operating the cross-border gas pipeline at around $1.25 per British thermal unit (Btu). This price augmented to $4 per Btu in 2008. Both prices are indeed very convenient. In fact, similar deals involving Greece, Italy or Turkey have shown prices ranging from $7 to $10 per Btu. In addition to this, the gas pipeline since February 2011 has been attacked at least 14 times and consequently, supplies have been reduced. The target of these attacks was to disrupt the flow of gas to Israel.

According to the Ampal-American Israel Corporation  — a stakeholder within E.M.G. — in 2011, gas deliveries to Israel did not occur for more that 200 days, while in 2012 until the end of March gas delivery did not occur for more than 60 days. As a consequence, a strong debate emerged again within Israel with reference to energy independence for the Israeli state. Apart from this political debate, the immediate consequence in Israel has been the increase in electricity prices and the warning that next summer there could be blackouts. Immediately after the announcement from EGAS, E.M.G. stated that it was considering possible legal remedies in order to revert the shut-off. It should be noted that the Ampal-American Israel Corporation already started utilizing international arbitration with the aim of getting compensation for the shortages it has undergone since the beginning of the Egyptian uprisings last year.

The real and important question is now to understand whether this deal cancellation is just a commercial dispute or something more is boiling between Egypt and Israel. Both countries are for the moment trying to define the deal scrapping as only a business dispute. "I think that to turn a business dispute into a diplomatic dispute would be a mistake. Israel is interested into maintaining the peace treaty and we think this is also a supreme interest of Egypt" affirmed Foreign Minister Avigdor Lieberman of Israel lowering the tone after some initial scaremongering declarations. And "We don't see this cut-off of the gas as something that is born out of political developments" added similarly Israel's prime minister Benjamin Netanyahu. On the Egyptian side, Amr Moussa, former Arab League secretary-general and now presidential candidate, welcomed the deal scrapping on the grounds that the deal was stained with corruption. Other Egyptian commentators underlined that Egypt needed the gas in order to face its internal gas shortages. According to Egyptian Planning and International Cooperation Minister, Fayza Aboulnaga, Egypt is willing to negotiate a new agreement under modified terms, i.e., new conditions and new prices.

It's regretful  although in a certain way understandable why the Egyptian military chose not to intervene in order to defend the gas deal. In fact, with Egypt's presidential elections scheduled in just one month and a rising anti-Israeli tide, it would have been extremely complicate to assert immediately the call for an improved and partially revised gas deal, if not the integral legal validity of the gas deal, without compromising the power held by the military. Already this April, the military have disqualified several candidates to the presidency and an intervention in favor of the gas deal would have been very difficult to digest for the Egyptian public opinion. Anyway, it should be noted that the main presidential candidates are all basically only requesting to renegotiate the gas deal according to fairer commercial terms.

The real game changer for gas supply will be for Israel the development of the Tamar Field located in waters deep 5,600 feet in the Mediterranean Sea, roughly 50 miles off the coast of Haifa. Estimates talk of probable 250 billion cubic meters of gas capable of covering Israel's needs for the next 20 to 25 years. Production is supposed to start in 2013. Moreover, in 2004 when the gas deal with Egypt was impending it would have been very advisable also to develop a small gas field off the Gaza shore under the control of the Palestinian Authority. The latter gas field would have easily serviced the Gaza Strip's gas needs.

Depending on a single provider, in this case Egypt, for around 40 percent of the required gas demand is too big a risk (Egypt also supplies 80 percent of Jordan's natural gas demand). In fact, apart from possible political reasons, Egypt has already quite a lot of problems with its natural gas production, which is declining while domestic demand is rising. Every year the quantity of gas available for export is diminishing. Given the current situation, the Israel Electric Corporation (I.E.C.) is feverishly looking for a new gas provider and it plans to buy $850 million's worth of natural gas during the remaining months of 2012.

Notwithstanding these authoritative statements, like Lieberman's and Netanyahu's, in Israel there is a clear interest to understand what the future of the 1979 peace treaty with Egypt will be. In fact, since Tahrir's Square events the relations between Egypt and Israel have worsened consistently for several reasons. Among them:

  • First, last August some militants crossed the border and attacked an Israeli bus killing eight people, while Israeli forces pursuing these militants killed five Egyptian soldiers.
  • Second, in September, thousands of mobsters assaulted Israel's embassy in Cairo and, consequently, the ambassador was forced to leave the country.
  • Third, as mentioned above, the gas pipeline connecting Egypt to Israel has been blown up at least 14 times since February 2011.
  • Fourth, on April 18, 2012, the visit of the Gran Mufti of Egypt, Ali Gomaa to the Al Aqsa Mosque in Jerusalem sparked a lot of criticism in Egypt.
  •  Fifth, the deal cancellation as it has been explained above.

There is fear that the Islamist parties, which have a majority in the Egyptian Parliament, will implement actions aimed at abrogating the 1979 peace treaty, which at least guaranteed a cold peace between the two countries.

In other words, given Israel's domestic eventual gas supplies, Egypt's' deal cancellation is only the straw that broke the camel's back after several months of already strained relations. There is hope in Israel that all the political discussions about scrapping the gas deal in Egypt are just the consequence of the presidential campaign — a bashing-Israel policy brings in votes and that once a new president will be sworn in the relations between Egypt and Israel will again move back to the normal cold peace. Many Israeli officials privately admit that if it weren't for the elections, Egypt's behavior would be different. For Rob Malley, program director for the Middle East and North Africa at the International Crisis Group, the relations between Egypt and Israel are not going to change for the worse soon because good relations are of critical importance for both countries. The problem is that the MENA region is experiencing a profound transformation with changes also in Egypt, which could implement a shift in its foreign policy. "But deep down, neither Israel nor the Egyptian military, nor even the Egyptian Muslim Brotherhood has an interest in undermining relations with Israel, relations with the United States because all prefer stability" added Mr. Malley in an interview with National Public Radio (NPR) last week.