Last Updated: Mon Feb 21, 2011 11:01 am (KSA) 08:01 am (GMT)

Egyptian gas exports to Israel

Walid Khadduri

The issue of exporting Egyptian gas to Israel has been one of controversy in Egyptian circles ever since the idea was first proposed in the nineties, knowing that it was opposed by many Egyptian energy experts and opposition parties.

In fact, the objection to exporting gas to Israel revolved around both the principle itself and the issue of prices. After the Egyptian authorities agreed to export gas, opponents of this move resorted to Egyptian courts to get an injunction against the execution of the contract. At first, the court overturned the government’s decision. However, a ruling on appeal has subsequently permitted the principle behind this export, while taking into account Egypt’s domestic natural gas requirements, and a sale price that is proportionate relative to global prices. Then recently, the youths of Egypt’s revolution handed over a petition to military officials, demanding a halt of gas exports to Israel.

Egypt started exporting gas to Israel back in 2008, acting on a 20 year agreement reached with the Israeli government in 2005. The agreement stipulates that the East Mediterranean Gas Company (a private Egyptian-Israeli company) export up to seven billion cubic meters of gas annually. Initially, the price agreed upon was three to 3.5 dollars per million British thermal units; however, the price was adjusted to four to 4.5 dollars in August, 2009, when the Israel Electric Corporation (the primary consumer of the exported gas) approved the adjustment.

In truth, many Israeli politicians initially objected to the reliance on Egyptian gas exports as well. A wide debate ensued under the government of Ariel Sharon regarding this issue, as some government officials rejected in the beginning the principle of relying on gas imports from one single Arab country, or even relying on gas imports from non-Arab countries, but which transit through an Arab country, citing security concerns, naturally. But prior to the significant gas discoveries made in Israel recently, the National Infrastructure Minister (who is responsible for energy affairs) decided to switch the fuel used in power plants from coal to natural gas for environmental purposes. Since no gas reserves were found until the end of last decade, the principle of importing gas was adopted, even if exclusively from Egypt in the beginning. However, lengthy negotiations were also held with Russian and Azerbaijani companies to obtain additional supplies through Turkey, but all these attempts failed.

The fundamental question here is: What is the legal/political point of reference that governs Egyptian gas exports to Israel? Is there an international treaty in place, like the Camp David Treaty, for example? The answer is simply no. The Camp David Treaty, signed in 1979, stipulated that Egypt provide Israel with crude oil. In the event it is unable to do so, and an energy shortage ensues in Israel, the United States bears this responsibility and exports oil to Israel, in Egypt’s place. But the treaty did not mention the issue of gas exports. The reason for this is simple. In 1979, Egypt was not a gas-exporting country yet, and had ever modest reserves of gas at the time. Hence, it is very likely that it was U.S. pressure on Cairo that pushed Egypt to export gas to Israel, through the free trade agreement between the U.S., Egypt and Israel. It also likely that pressure had been exerted by threatening to cut annual U.S. aid to Egypt.

What benefit does Egypt incur from the agreement? Despite the large gas reserves discovered in Egypt in the Gulf of Suez, the Western Sahara, the area north of Alexandria and the Nile Delta on the Mediterranean Sea during the past decade, Egypt continues to witness growing demand for natural gas for domestic consumption. In parallel, there are many projects to export Egyptian gas, either as liquefied natural gas to Europe, or as natural gas through the Arab Gas Pipeline. This pipeline supplies Jordan, Syria and Lebanon, and extends to Turkey where it is hooked up to the Nabucco pipeline that supplies European markets; this is in addition to the pipeline extending to Israel of course. In view of these domestic and external commitments, Egypt has entered negotiations with some Arab countries to supply them with natural gas and help them fill any supply shortage that they may suffer in the future. In other words, Egypt did not need to export additional quantities to Israel, especially at prices significantly lower than the international rates at which gas is currently traded.

Gas prices differ from one region to another. However, it is possible to say that prices in recent years have ranged between five and seven dollars per million British thermal units, or seven and nine dollars. As such, the extent of the large amount of the discounts granted by the Egyptian government to Israel in terms of its gas sales to Israel becomes clear, especially when the price initially adopted is considered.

However, even the new price is lower than the lowest level of global prices. Adding to the uncertainty regarding this deal is the fact that it was implemented after Israel insisted on being supplied with Palestinian gas at quantities that Israel determines, and at discounted prices. This was rejected by the consortium conducting exploration in the Gaza Marine field, led by British Gas. Subsequently, Israel decided to prevent the development of the field located in Palestinian territorial waters throughout the past decade, ever since its discovery in 2000.

This begs the following question: How will the new Egyptian authorities deal with this issue, and what reaction will Israel and the United States have, should these gas exports be suspended? This is especially valid given the fact that Israel will continue to somewhat rely on Egyptian gas imports until early 2013, when production from the Tamar field is set to begin, production that will meet the requirements of Israeli domestic consumption.

*Published in the London-based AL-HAYAT on Feb. 20, 2011. Mr. Khadduri is an energy expert

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