Egypt terminates deal to supply Israel with natural gas

Cancellation of the commercial deal between private Egyptian and Israeli entities has more to do with Egypt’s own internal confrontation with corporate governance and transparency than with the peace treaty with Israel.

According to several news reports, Egypt has terminated a deal to supply Israel with natural gas. Egyptian sources say that the deal was canceled over a legal dispute, as well as Israel’s failure to pay for the gas over the past four months; Israeli government sources, meanwhile, insist they have paid all the money they owe. Several Israeli officials, including Kadima leader Shaul Mofaz and Finance Minister Yuval Steinitz, have expressed deep concern, with Mofaz calling the unilateral termination of the gas supply a “blatant violation of the peace treaty” that “requires an American response,” and Steinitz saying it was a dangerous precedent that threatens bilateral ties between Egypt and Israel.

The gas deal in fact has nothing to do with the Israel-Egypt peace treaty of 1979. It is a commercial deal that was negotiated between private Egyptian and Israeli business concerns in 2005; the deal was renegotiated in 2009, in the most opaque manner imaginable. No tenders were issued and the terms of the deal were not made public. The Egypt-Israel natural gas deal is resented by most Egyptians, who view it as a sleazy arrangement that allowed Hosni Mubarak, his sons and their cronies to pocket billions of dollars by selling one of Egypt’s most valuable natural resources at a price that is now well below market value – and to Israel, which is deeply unpopular in Egypt.

Egypt’s natural gas pipeline has been sabotaged 14 times since Hosni Mubarak was deposed in February 2011.

Egyptian economist Mohamed El Dahshan does an impressive job of armchair investigative journalism in this blog post, in which he demonstrates the extent to which the natural gas deal was, as he puts it, “a barely concealed cesspool of clientelism, personal relationships and private interests, breaches of government procedure, of transparency rules, and of corporate governance.”

The name Hussein Salem appears several times in El Dahshan’s investigative piece about the gas deal. Salem, 77, is a wealthy businessman who was close to Hosni Mubarak; he was also one of the main Egyptian players in the negotiation of the gas deal with Israel. A few days before Mubarak was forced to resign, Salem fled Egypt for Spain. A month later, he was arrested by the Spanish authorities, who froze assets that included $47 million in cash – this does not include his real estate assets, and this is only the money he kept in Spain. Bloomberg reports that Salem’s son has about $4 billion in hidden assets, according to an Egyptian judicial committee. Salem was held in custody for 11 months, pending a court decision regarding Egypt’s request for extradition. Last month Spain’s National Court ruled that Salem was to be extradited. He has already been tried and convicted in absentia on corruption charges, and sentenced to 15 years in prison. He is believed to have siphoned off $714 million in public money.

Israel currently relies on Egypt for about 40 percent of its natural gas needs. But this situation was set to change, whether or not Egypt terminated its supply of gas. In December 2010, the Israeli government announced the discovery of a huge natural gas field off the Mediterranean coast, named Leviathan; Infrastructure Minister Uzi Landau (Yisrael Beiteinu) called it “the most important energy news since the founding of the state [of Israel].”  The field is so big that Israel is now poised to become an exporter of natural gas within about four years. The biggest financial beneficiary of this discovery will be private interests – specifically Yitzhak Tshuva, an immensely rich Israeli businessman who is a controlling shareholder in Delek Group, which has a 22.67 percent drilling interest in the oil field. Tshuva’s international real estate investments include New York’s Plaza Hotel. According to the Israeli financial newspaper Globes, Tshuva and several other companies are currently negotiating a $4 billion deal to supply natural gas to power plants and other companies. Drilling, which commenced in January 2012, is expected to yield 600 million barrels of oil.

Meanwhile, the government-appointed Sheshinski Committee recently recommended a very substantial tax increase on profits from offshore drilling, from 30 percent to between 52 and 60 percent. This, naturally, upset Tshuva and the other investors in the Leviathan natural gas field. No wonder Yuval Steinitz, the finance minister who supported the Sheshinski Committee and approved of its recommendations, is rather concerned at Egypt terminating its supply of natural gas to Israel – at a price that is below market value.

It is convenient for Israeli government officials to respond to Egypt’s termination of the natural gas supply by bringing up the peace treaty and making dark comments about harm to bilateral relations. This sort of thing is easy to sell to the Israeli public, with its fears of the post-Mubarak Islamist parliament and its anti-Israel rhetoric. But Yuval Steinitz and Shaul Mofaz know very well that the gas deal has nothing to do with the peace treaty. Finance Minister Steinitz is probably well aware, too, that without competition from Egypt, the Israeli companies that own the drilling rights to Leviathan have a lot more bargaining power.