Gas subsidies stress the Sinai. Energy analysis by Mary E. Stonaker

Violence plagues the Sinai Peninsula, a strategic triangle of Egyptian land bordering Gaza and Israel which serves as the cross-roads of lucrative weapons smuggling operations. Recent attacks targeted natural gas infrastructure on the Sinai in protest against Hosni Mubarak’s corrupt energy deals, which are still being honored months after his departure. Gas volumes flowing from Egypt have not reached contract agreement levels due to domestic shortages.

Egypt is reported to be losing billions of US dollars from these artificially low export prices.

The new government faces a hard road ahead – economic reform will likely be painful and require deft navigation of governance practices both domestically and regionally.

The exit of former President Mubarak has created a power vacuum on the Sinai. Peace treaties and energy deals signed between Mubarak’s Egypt and Israel are unstable after new leadership assumed power in Cairo in February.

Domestic natural gas prices hover between $1.25 and $3 per million British thermal units (mbtu) for industrial consumption. Compared with prices of $7 and $10 per mbtu, as reportedly paid by Italy and Spain, it is clear that subsidies exist in Egypt. Such subsidies must be gradually eliminated as Egypt privatizes its operations.

Citizens protest artificially low prices of $4 and $6 per mbtu ($1.27 and $3 per mbtu from 2005-2009) offered to Israel based on domestic shortages. The range exists because these prices were agreed upon in secret deals. Egyptians must be ready to accept price hikes at home as it detangles the energy sector.

Preferential rates to Israel continue after the re-opening of the Arab Gas Pipeline (AGP). Gas flow was interrupted last month after the second major attack this year on the exporting energy infrastructure of the Sinai, a clear sign of protest by Egyptians unhappy with the status-quo.

Continued export of Egyptian gas despite the prolonged shortage evoke feelings of corruption that linger from the ousted Mubarak regime.

Another neighbor receiving preferential rates, Jordan originally signed to buy Egyptian gas at $1.27 to $3 per mbtu and recently agreed to increase prices. This important agreement will give Egyptians the confidence to further renegotiate export deals.


Natural gas is an increasingly important fuel as a cleaner, cheaper alternative to petroleum products. Israel uses Egyptian gas to produce 40 percent of its electricity while about 80 percent of Jordan’s industry is fed by this controversial gas.

Under Mr. Mubarak, Egypt’s state-owned energy companies and associated officials took large commissions from corrupt deals. Currently being investigated for fraud concerning this particular gas deal with Israel, individuals include former Petroleum Minister Sameh Fahmy and two of Mr. Mubarak’s sons.

The sons, Alaa and Gamal Mubarak were reported to have received a combined $187 million from the deal with Israel alone.

Citizens expressed concerns over these deals through a lawsuit in 2008, which was summarily dismissed by Mubarak’s courts.

Facing current lawsuit threats from Israel if terms are altered, Egypt’s new leaders, guided by Prime Minister Essam Sharaf, are aiming to reform their energy markets which calls for the rewriting or cancelling of such disproportionate gas deals.

Egyptian Finance Minister Samir Radwan recently announced the review of all current exporting deals.

Domestically, oil and gas companies as well as electric utility providers must be privatized to allow for competition to drive fair and sustainable prices. Energy market reform is a necessary but painful process in Egypt after President Mubarak.

Leaders must work quickly to bring Bedouins and local Sinai populations into the national fold. Since the ouster, Bedouin tribes have refused to let police into select areas of the Sinai with some calling for separation of the Sinai from the government in Cairo. Empowering and effectively engaging them will stabilize the region. Otherwise, this political vacuum will continue to weaken this critical energy bridge.

The status of Palestinians in their homeland, and the treatment of Palestinian visitors through Egyptian border crossings cannot be ignored in this equation, as weapons smuggling will continue across the Sinai.

The Arab Awakening has swept the region, challenging numerous oppressive governments. Following suit, new leaders must work quickly to reform complicated and corrupt systems to ensure the past months of protests have not been in vain.

(Mary E. Stonaker is an independent scholar, most recently with the Middle East Institute, National University of Singapore. She can be contacted at [email protected])