News that two state-run Egyptian companies decided to terminate the supply of gas to Israel took everyone by surprise. But the fact is that the deal has faced many reservations ever since it was signed in 2005, and even court verdicts were issued to try and annul it under former president Hosni Mubarak, who was friendly to Israel.
Business tycoon and Mubarak confidante Hussein Salem, alongside former Minister of Petroleum Sameh Fahmi and some of his aides, have been convicted for squandering public funds by selling Egyptian gas at low prices to Israel.
Still, bringing the deal to a total halt was unexpected, given the sensitive nature of Cairo-Tel Aviv relations. While the heads of both the Egyptian General Petroleum Corporation (EGPC) and the Egyptian Natural Gas company (EGAS) -- which supply local gas to the East Mediterranean Gas (EMG) company, the operating exporter founded by Hussein Salem -- insisted that the move is due to the EMG's failure to meet its financial obligations, commentators from both the Egyptian and Israeli sides believe it is a politically motivated move.
"Of course the move was made following the Supreme Council of the Armed Forces's [SCAF] green light. It seems to be trying to flirt with people in Tahrir Square by making a nationalistic move against Israel," said Ibrahim Zahran, oil expert and member of the group that filed a suit against the deal in 2009. Discontent with the ruling SCAF has been on the rise in Egypt, as proven by multiple million-man marches organised through the past year, demanding the end of military rule.
EGAS media officer Inas El-Sheikh told Al-Ahram Weekly that the decision was taken after EMG's reluctance to pay for the value of exports through several months. The money owed amounts to around $100 million. Both EGAS and EGPC notified EMG about unpaid dues five times, the last being on 31 March, before deciding to end the agreement. According to the terms of the deal, the seller has the right to annul the deal if the buyer stops paying for four consecutive months.
El-Sheikh explains that the dues are related to a period preceding the revolution, as almost no gas has been exported since then. The supply of gas to the pipeline linking Arish from the Egyptian side to the Israeli Ashkelon sea port has been blocked several times since the revolution, as it has been sabotaged 14 times. The last such incident was in early April. The Israeli side reacted by resorting to arbitration, seeking $8 billion in compensation.
The two Egyptian companies said on Tuesday that they hired an international law firm after Israel Electric corporation, the main buyer of Egyptian gas from EMG, threatened to resort to international arbitration.
A report published in Israeli daily Haaretz earlier on the same day -- two days after the deal was terminated -- hinted that with no official comment so far from the ruling SCAF, the aim of the move might be "to pressure Israel into calling off the lawsuit for the $8 billion compensation."
Zahran does not rule out this possibility. "If it is only a business dispute, why did the Egyptian companies wait for more than a year to terminate the deal?" wondered Zahran. He went on to ponder why the companies suddenly became aware of the losses, and why they became keen to raise the cost of an unfairly priced deal that both experts and regular Egyptians have openly resisted for years.
While the government was tight-lipped on exported gas prices, leaked reports said the deal stated that Egypt would provide Israel with 1.7 billion cubic metres of gas annually for 20 years, at $0.75 per million metric British thermal units (MMBTU). This was compared to international prices which at the time the deal stood at $6 per MMBTU. Pressure from the Egyptian side in 2009 to raise the price was coldly received by the Israelis, who unwillingly agreed to increase the price to $1.25 per MMBTU, for exports exceeding the 1.7 billion cubic metres quota.
And while exports to Israel were the cheapest of all, pricing of all Egypt's gas exports has been subject to criticism. Most of exports took place either through EMG or through companies related to the intelligence apparatus, and both have vested interests in the deals as they get commission for any reduction in prices or increase in quotas, explained Zahran.
In January 2012, the minister of petroleum and mineral resources announced that Egypt had reached an agreement on its gas exports tariffs with all countries except Israel, stipulating that prices would be set at $5 to $10 per MMBTU. Zahran ruled out that the decision might affect gas supplies to countries on the Arab gas pipeline, including Jordan, Syria and Lebanon, as the operating exporters for these countries are different. However, they might be indirectly affected as the Jordanian authorities said on Tuesday they would increase their power rates to cover power companies' debts, since the bombings of the Arab pipeline have slowed down gas supplies to their country. Jordan's Egyptian gas imports reached 78 billion cubic metres last year, compared to 220 million and 300 million in 2009 and 2010 respectively.
Meanwhile, an Egyptian Ministry of Energy spokesperson told the local media that the country would benefit from the increased availability of gas by increasing dependence of local power generators on it to 90 percent, up from the current 76 percent. People should use gas instead of more expensive and less environmentally friendly sources of fuel.
In 2010, Egypt exported close to 15.17 billion cubic metres of natural gas. Natural gas exports to Israel reached 2.10 billion cubic metres, accounting for 38 percent and 14 percent of total pipeline and natural gas exports respectively.
Forty percent of Israel's power needs are covered by Egyptian gas, which means that the latest move may lead to both an increase in prices and to a power shortage. But a Haaretz report on Tuesday noted that the termination of the agreement is not expected to raise Israel's electricity prices, at least in the short term. This is "because the recent price hike of nine percent was made while taking into account that no gas would be delivered from Egypt," the paper read.
According to Haaretz, Israel's newly discovered reserves from huge offshore gas fields will secure Israel's energy needs for decades, and may even turn it into an exporter. But the first field, Tamar, will only come online around April 2013. The even larger Leviathan project is due to begin production around 2017. For many commentators, what was ironic in that deal is that Israel is in a much better position than Egypt, when it comes to the ratio of its proven reserves to the size of its population.
The unprecedented anti-Israel move was applauded by the public and media. The stock market reacted positively to it, gaining 2.4 percent in the first session following the announcement that the deal was over. Tel Aviv's main index -- TA 25 -- lost 1.4 percent on the same day, while Ampal-American Israel Corporation, which owns 12.5 percent of EMG, lost 21 percent of its share value.
In the first government comment on the move, Minister of International Cooperation Faiza Abul-Naga said on Monday that Egypt is prepared to resume gas exports to Israel, but at new rates. According to Reuters news agency, two Israeli officials made a brief trip to Cairo on Monday for talks on the gas deal.
But Zahran ruled out the possibility of a resumption of gas exports, as the political pressure against such a step would be high especially given that the termination of the deal and EMG's resorting to arbitration does not put any obligations on the Egyptian government. "It is a deal between individual companies, so the harm is limited," he said.
According to Haaretz, the move might be a dangerous precedent that indicates other agreements between Egypt and Israel may also come to an end. Indeed, lawyer and MP Hamdy El-Fakharani said in a television interview that the gas deal cancellation should be followed by steps towards ending all kinds of economic cooperation between Egypt and Israel, including the Qualified Industrial Zones (QIZ) agreement.
An Egyptian businessman whose textile business is included in the QIZ noted that such a demand is totally ignorant of the nature of the QIZ agreement. "It is a protocol that gives Egyptian textiles the advantage of entering the American market customs free, provided that it involve 10 percent Israeli product," said the businessman, who spoke to Al-Ahram Weekly on condition of anonymity.
"The Egyptian side is the main beneficiary from this agreement. We would be unjustifiably punishing ourselves if we gave in to any pressures to change this protocol or end it," he added. Moreover, the businessman said that the authorities -- be they the SCAF or the government -- should not heed street pressure in a way that would put emotions before strategy.
The businessman also pointed out that a recent visit by Miriam Sapiro, US deputy trade representative, to Egypt to try and include Upper Egypt in the QIZ zones bore no fruit, despite all the benefits it carries with regards to job creation and investments. The failure came on the back of the government's fear the move might cause public uproar.
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