The Arabist

The Arabist

By Issandr El Amrani and friends.

The impact of the end of the Egypt-Israel gas agreement

I don't have time to comment much on this, although it's a subject that has long fascinated me. Perhaps later. But the bottom line to yesterday's new that Egypt is canceling its deal with Eastern Mediterranean Gas (EMG), which supplied gas to the Israeli National Electricity Company, is minimal aside from coming lawsuits and efforts at international arbitration by EMG's shareholders.

It is certainly not a breach of the Egypt-Israel peace treaty, which does not guarantee Egyptian supply of natural gas to Israel, and only requires "normal" economic relations between the two countries. A dispute over a commercial deal is part of normal relations, although the Israelis might argue that there is not much normality about bilateral trade relations. 

Here's a business take from the newsletter of HC Brokerage, an Egyptian investment bank:

In our view, the potential implications of this development can be divided as follows: (1) Politically, the Egyptian-Israeli peace treaty stipulates that the 2 countries maintain normal economic relations; it does not make any specific requirements regarding Egyptian natural gas exports to Israel. (2) Legally, the natural gas agreement involves 3 parties – EGAS (an arm of the Egyptian government), East Mediterranean Gas Company (EMG, an Egyptian company subject to Egyptian commercial law), and Ampal-American (the Israeli counterpart) – according to the former head of EGAS, who, speaking yesterday on Al Youm TV, highlighted that EGAS has the right to terminate the supply of natural gas to EMG at any time, following which EMG would be entitled to file a lawsuit in the Egyptian courts, and added that any compensation on behalf of EGAS to EMG is limited to USD180m. Ampal-American previously filed a lawsuit against Egypt, demanding compensation of USD8bn due to damages Israel incurred on the back of recent supply disruptions, but, according to the agreement, EGAS is entitled to respond only to EMG’s allegations, not to Ampal-American’s. (3) Economically, Egypt does not import natural gas but does subsidize it domestically as the selling price is below cost. On our estimates, the cancellation should result in a cUSD260m decrease in exports. On the fiscal side, such excess supply could be channeled either to subsidized consumers or to nonsubsidized energy-intensive industries, or it could be reexported at a different price. On the Israeli side, Israel already raised domestic natural gas prices 9% to account for supply disruptions and priced in a complete cutoff of Egyptian natural gas supplies, according to Israeli newspaper Haaretz. Moreover, Israel’s Tamar natural gas reserve, which was discovered recently and is expected to begin operations by April 2013, should meet all of Israel’s domestic demand with the potential for a surplus that could be exported. The cancellation should therefore not affect Israel very much.

If the only legal recourse is suing in Egyptian courts, I doubt EMG will get very far — or only far enough to get at most $180m which is not much compared, say, to the $550m EMG says it invested in the infrastructure. In the meantime, any pressure Egypt faces over the deal is probably going to be a factor of how much this worries other international investors, especially in the hydrocarbons sector, and how much the United States in particular decides to make a big deal out of this on behalf of Israel. I would think the US should stick clear of this controversial issue, but it may be difficult to do so because some key EMG shareholders are US-registered companies. One of them, Sam Zell, a well-known American businessman who owns the Chicago Tribune and LA Times, is an active political donor in the US as well as longstanding supporter of Zionist causes.