Why is gas-rich Egypt importing fuel from Israel?

Egypt-Israeli cooperation got a major boost this month as the Jewish state began exporting natural gas to its Arab neighbour in a sharp reversal of roles. 

Just a decade back, Israel was dependent on Egyptian gas to meet up to 40 percent of its requirements. But after the discovery of large reserves in the offshore fields of Leviathan and Tamar, Tel Aviv has embarked on a journey to become an international player.  

The Cairo-Tel Aviv energy deal follows drawn-out negotiations, which included political and financial considerations and resolution of issues such as a multi-billion dollar international arbitration. 

It also involves a host of shadow companies registered in tax havens that are linked with Egypt’s dreaded military intelligence. 

Within Egypt and the Arab-speaking countries in the region, the arrangement faces criticism. Egypt itself is sitting atop the Zohr gas field — the biggest find so far in the Eastern Mediterranean with 30 trillion cubic feet (TCF) of reserves.

“Egypt linked final approval of the deal to finding a solution to the over $2 billion in compensation that it was required to pay to Israeli companies following the halt of supplies in 2012 and Cairo was able to sharply reduce that amount [with the deal],” Mona Sukkarieh, Co-Founder of Beirut-based Middle East Strategic Perspectives, told TRT World. 

The arbitration stems from Egypt’s failure to supply the contracted gas quantity following multiple insurgent attacks on its pipeline infrastructure in 2011. 

A complicated backstory 

Egypt, one of the largest gas producers in Africa, entered the export market in the early 2000s after a spate of offshore hydrocarbon discoveries. Under the then-regime of Hosni Mubarak, it invested heavily in transnational pipelines and liquified natural gas (LNG) terminals. 

In 2003, Egypt began exporting gas to Jordan via the 1,200 kilometre-long Arab Gas Pipeline. Later, the pipeline was extended to Israel. This latter 100km-long subsea section connects Ashkelon in Israel to Arish in Egypt. 

Between 2008 and 2011, Egypt exported substantial quantities to Israel but in the mayhem that followed the removed Mubarak regime, insurgents bombed the infrastructure relentlessly, suspending the supply. 

Israel’s power companies and the operator of the Arish-Ashkelon pipeline took Egypt to international arbitration courts for reneging on the contract. 

Partly to settle these disputes and bring down the arbitration penalties, Egypt pushed ahead with the proposed plan to import gas from Israel, which was looking for a convenient way to sell its excessive gas. 

 But the handling of the project has raised many questions. A company controlled by Egypt’s General Intelligence Service has a substantial stake in the pipeline operator, the East Mediterranean Gas (EMG).  

The Netherlands-registered EMED has bought a 39 percent stake in EMG.

“There are so many front companies working here,” said Dr Sujata Ashwarya, the author of Israel’s Mediterranean Gas: Domestic Governance, Economic Impact and Strategic Implications. 

“A 50 percent stake in EMED is owned by Sphinx. And you know Sphinx is a front company of East Gas, which is in turn owned by Egyptian General Intelligence.” 

The remaining half ownership is split between Israel's Delek Drilling and Texas-based Noble Energy, which are among the principal shareholders of Leviathan and Tamar gas fields. 

In 2018, an Egyptian news organisation, Mada, revealed the connections between different companies in a detailed investigation. 

What’s in it for Egypt? 

Cairo insists that the $19.5 billion deal that envisages import of 85 BCM of gas over a period of 15 years is between private companies involving the Virgin Islands-based Dolphinus Holdings.

“Most of the gas will be re-exported from Egypt through LNG which is very flexible. You can send LNG tanker anywhere. It is a smart move from all sides,” said John V. Bowlus, Editor-in-Chief of Energy-reporters.com. 

Israel, a new player in the gas market, doesn’t have LNG liquefaction terminals. Now it aims to use Egypt’s LNG terminals in Idku and Damietta. 

But as Mada pointed out, the price of Israeli gas would be more than Egypt’s domestically produced gas. 

The question over gas prices have been raised in the past too. 

The post-Mubarak Egyptian government investigated the deal in which Cairo was selling gas to Israel and charged senior officials with corruption. 

Authorities at the time said gas was sold cheaply to Israel, which was paying $4 per million British thermal units (MMBTU) when Turkey, Greece and Italy were buying it for between $7 and $10.

Notwithstanding the issues involved in the deal with Israel, Egypt is aiming to become an important energy transit hub and wouldn't mind paying above-market price to secure supplies. 

"Egypt sees itself as the gas centerpiece in the Eastern Mediterranean. Its infrastructure, two liquefaction facilities and good relations with its neighbors allow it to position itself as a regional gas export hub and as a prime option to transport East Med gas out of the region," said MESP's Sukkarieh.