pyramids - Reuters - February 1 2011
Soldiers atop an armored carrier guard the area near the Pyramids in Cairo yesterday. Photo by Reuters
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Tomer Appelbaum
Uzi Landau Photo by Tomer Appelbaum

Egypt is unlikely to halt the supply of natural gas to Israel for fear that it could constitute the end of the peace treaty between the two nations, say industry observers, including at the National Infrastructure Ministry - but it is preparing just in case.

Effectively terminating the peaceful ties by starving Israel of natural gas would have grave repercussions for Egypt economically and diplomatically, say the industry insiders. For one thing, Egypt would be losing about $4 billion a year in revenues from the direct sale of gas to Israel. Also, if relations between Cairo and Jerusalem turn hostile, the United States might decide to withhold aid, they say.

Meanwhile, National Infrastructure Minister Uzi Landau yesterday convened the heads of the firms developing the Tamar field of natural gas, to make sure they're on schedule. Officially the partners have not stated that they aren't on schedule to start production in 2013. In practice, the partners haven't even closed financing arrangements, let alone started the final phases of physical development.

Developing the Tamar field are the U.S. company Noble Energy, which will provide the operational knowhow; companies belonging to Yitzhak Tshuva's Delek group; and Isramco. The Israeli partners are still negotiating financing agreements. Delek Energy and Isramco need to raise about $2 billion together, to complete the exploration, to build pipelines from the field to the land, and more.

Isramco is negotiating on an exclusive basis to borrow the money from Deutsche Bank. Last night Isramco announced an extension of the deadline for the exclusive negotiations.

The partners blame the delay in closing loan agreements on the government changing the rules of the game, through the Sheshinski Committee's recommendations. They do admit there are other problems, and the latest uproar in the Middle East could be keeping foreign banks from pouring money into the Israeli exploration companies.

One problem unrelated to the committee, which recommended roughly doubling the state's take to 52%-60% of profits from the gas, is the Israel Electric Corporation and its rocky credit rating. The Israel Electric Corporation will be the biggest client for the Tamar gas, but S&P recently downgraded the mammoth utility to speculative grade BB +.

The foreign banks, say the partners, are demanding that the state provide guarantees to assure the IEC doesn't renege on its commitments.

Once production begins, Tamar will be competing with Egyptian company EMG to supply gas to Israel (see related story on page 11: Ampal downgrade looms ).

EMG has been supplying Egyptian gas to Israel since 2008. Israel also buys gas from the Tethys Sea group, owned by Delek Group and Noble, but the reserve there is running out.

For the time being, the gas has been reaching Israel as usual, but some fear the flow could halt. Sources in Merhav, the Israeli partner in EMG, have maintained a calm mien since the tumult erupted and insist that Egypt's own economic interest will prevail.

On Sunday, top officials at the National Infrastructure Ministry held meetings with representatives from the Israel Electric Corporation, the Public Utilities Board, Oil Refineries and other government energy bodies.

The general consensus was that Egypt was highly unlikely to disrupt the supply of gas to Israel, but Israel should be ready for the eventuality. The Tethys Sea field can suffice in a pinch, and if the Tamar development is on schedule, it can kick in just as the Tethys Sea reserve runs dry, the officials estimate. In any case, Israel would prefer to continue buying Egyptian gas as well to diversify sources, for the sake of competition and for the sake of continuity of supply in the event of disruption of one source.

Landau has argued that the Tamar field should be excluded from the scope of the Sheshinski recommendations, a position the cabinet has not supported. Now the minister is sticking to his guns. Evolving events have rendered the development of Tamar all the more crucial, Landau said yesterday. "Again we realize the Middle East is not a safe place," he said. "We must act to ensure our energy security, without need to rely on others. The businesses are responsible for working: The government is responsible for giving them the backing they need."