How Egypt will gain from private gas deal with Israel

28 Feb 2018

It was during the evening of an autumn night in 2013, in a hotel in the Egyptian capital Cairo, when I met Sherif Ismail, the Egyptian Minister of Petroleum at the time and the current Prime Minister, only four months after Egypt had toppled the Muslim Brotherhood. The country was experiencing a real energy crisis and it was the responsibility of Ismail to find a solution.
We discussed the possibility of solving a large part of the problem through the reverse use of the Egyptian gas pipeline that had been established about eight years earlier and caused a lot of controversy, resulting in the prosecution of a large number of officials in the wake of Hosni Mubarak’s 2011 ouster, including former Petroleum Minister Sameh Fahmi, who was charged with exporting gas to Israel at lower than market rates.
The other important point in our conversation was how reaching such an agreement, in addition to providing the energy needed by Egypt, would be one of the most important elements in solving the arbitration problem that the country was facing. In light of the unwise 2012 decision to stop exporting gas to Israel following terrorist attacks on the pipeline in Sinai, Egypt was eventually given a bill of $1.7 billion in arbitration. The understanding was that finding a way to import gas from Israel could help solve this issue.
The constraints for implementing this idea at the time, according to Ismail, lay in the legal aspects that did not protect officials if they took a decision deemed unsatisfactory at a later date. Then there were the trends of public opinion, while the third obstacle was senior executives, who would be afraid of adopting the procedures while they saw colleagues going to prison for exporting gas to Israel. Ismail concluded laughingly: “In this case, there would be a minister who was jailed for exporting gas to Israel, and I would be imprisoned for importing it.”

Nation’s liquefaction infrastructure likely to see it become a major export hub without the state having to spend a penny, and it may even see arbitration debt wiped out.

Abdellatif El-Menawy

This position explains the problematic nature of the current controversy in Egypt caused by the announcement by a private company that it had signed a $15 billion agreement to import gas from Israel. This news caused a wave of questions about the feasibility of such an agreement, especially in the light of recent government statements that Egypt would achieve self-sufficiency of natural gas by the end of this year — after the start of production in the Zohr field, the largest ever gas find in the Mediterranean.
What made matters worse was the statement of Israeli Prime Minister Benjamin Netanyahu, which confirmed that signing the agreement was a “joyous day,” without mentioning any facts about the deal.
There should be “points of order” to clarify the matter, which has caused confusion in Egyptian society. The first is that Egypt is the only country in the Eastern Mediterranean that has the infrastructure for liquefying natural gas, with two of the world’s largest liquefaction plants: SEGAS and Egyptian LNG, which were established 15 years ago at a cost of $3.2 billion but are now lying idle.
The new agreement has been signed by the Israeli group Delek, which owns the Leviathan and Tamar gas fields, and the Egyptian company Dolphinus Holdings, whereby the latter purchases the equivalent of $15 billion of Israeli gas over 10 years. This will be delivered to the liquefaction stations in Damietta and Edco, and the Egyptian company will then export the liquefied Israeli gas to Europe.
Several points should be noted here. First, the Egyptian government has not signed contracts with its Israeli counterpart. Second, the government will not import Israeli gas and will not pay a penny in the deal. Moreover, the imported gas is not for Egyptian consumption but for export to Europe. This attracted the interest of the international media, as it confirms Egypt has become a center for the marketing and distribution of liquefied natural gas (LNG) in the Eastern Mediterranean.
Egypt will certainly be self-sufficient in gas this year and what will happen with the Israeli gas will also happen with Cypriot, Greek and Lebanese gas, as these countries and others that have recently discovered gas in their territories suffer from a scarcity of liquefaction plants. Consequently, Egypt will be the main center for the export of gas to Europe, which ends the dreams of Qatar and Turkey in this regard. The Financial Times confirmed this agreement will be of particular interest to Europe given concerns over the decline in production from the North Sea and its great dependence on Russia.
President Abdel Fattah El-Sisi noted that Egypt seized this opportunity from other countries in the region, in reference to Turkey.
Another salient point is that the natural gas regulation law passed last year gave private sector companies the right to import gas from abroad for use in their own projects, in return for paying the gas transit fees on the Egyptian pipeline network.
In addition to the expected profit from the deal, the import of natural gas from both Israel and Cyprus will allow Egypt to establish new projects in the field of petrochemicals, which will bring great value to the natural gas industry.
However, the gains do not stop at this point, as Israel may waive the $1.7 billion arbitration fine imposed on Egypt for the suspension of its gas exports, plus $300 million in arbitration fees.
The video broadcast by Netanyahu, meanwhile, had a purely political purpose as he is facing corruption charges and was trying to distract public attention.
It is now incumbent on Egypt to consider the issues surrounding this agreement and deal with it as a direct Egyptian interest that does not detract from the rights of any other party and, in essence, constitutes a purely non-political trade agreement.


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