Flames rise from an Egyptian pipeline station after an attack in the Sinai July, 2011.
Flames rise from an Egyptian pipeline station after an attack in the Sinai July, 2011. Photo by Reuters
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Officially, the Israeli government has tried to minimize the diplomatic importance of last Sunday's announcement by Egypt's state-owned natural gas company that it was canceling its contract to Israel. Behind the scenes, however, the reality was somewhat different, belying the government's stance that the matter was simply a commercial dispute.

A day after last week's unilateral announcement by EGAS, a senior official from the Prime Minister's Office in Jerusalem was dispatched to Cairo. In the course of the visit, the Israeli official met with his Egyptian government counterparts and discussed the gas contract. He returned to Israel several hours later.

At the Foreign Ministry's request, Egypt's ambassador to Israel, Yasser Reda, also met with Israel's Deputy Foreign Minister, Daniel Ayalon, to clarify the situation. The Prime Minister's Office has declined to comment for this report.

Over the weekend, German Foreign Minister Guido Westerwelle called on the Egyptians to adhere to their peace agreement with Israel, asking that they refrain from turning the spat over gas supplies into a political issue.

Also over the weekend, shareholders in EMG (Eastern Mediterranean Gas ) - which had contracted for the supply of gas from Egypt to Israel - provided their initial reaction to the Egyptian account of the circumstances that led to the revocation of the supply contract.

Egypt's EGAS has claimed that EMG owes the Egyptian firm $56 million for the small quantities of gas that have been supplied over the past year. Supplies have been repeatedly disrupted by sabotage to the supply lines in Sinai.

In a statement, EMG's stockholders told Reuters that it was misleading to couch the disagreement between EMG and EGAS as purely a commercial dispute. The supply contract between the two entities had government backing, the statement said. EMG noted that the gas supply deal was the subject of a memorandum of understanding between the Egyptian and Israeli governments, which the partnership said links it specifically to the 1979 peace agreement between the two countries.

This reference is apparently to a 2005 Egyptian government commitment to guarantee the annual supply of 7 billion cubic meters of natural gas over a period of 20 years.

EMG also took issue with the Egyptian position that the partnership was in arrears in its payments to Egypt for the gas that has been supplied.

EMG pointed the finger at Egyptian natural gas companies for what it called a failure to protect the supply pipeline and to repair it immediately after it was damaged. Egypt has barely supplied any gas since February 2011, EMG said; as a result, it is actually EGAS that owes money to EMG rather than the other way around.

EMG said its shareholders around the world are considering legal action over the matter and will probably demand substantial damages from the Egyptians in the context of bilateral treaties between the two countries. EMG is also currently pursuing an arbitration action against the Egyptians in Switzerland, over its claim that the Egyptians have violated their obligation to supply gas.

EMG is owned by a consortium of shareholders, including a 10% stake held by EGAS itself. The Thai government gas company holds a 25% stake; Israeli businessman Yossi Maiman's companies - Ampal-American Israel Corp. and Merhav - own another 11%, with the remaining interests held by businessmen Sam Zell and David Fisher, and Israeli institutional investors.