Egypt Freezes Energy Talks After Ordered to Pay Israel Electric $1.8 Billion

International panel awards utility three years after Cairo rescinded long-term contract to sell Israel gas amid political upheavals.

AP

Egypt said on Sunday it had ordered two state-owned companies to freeze talks on importing Israeli gas and would issue no import permits after international arbitrators ordered the companies to pay $1.76 billion compensation to Israel Electric Corporation for halting gas supplies three years ago.

The announcement came hours after state-owned IEC said a panel of arbitrators from the Paris-based International Chamber of Commerce had decided Egyptian Natural Gas Holding Company and the Egyptian General Petroleum Corporation were liable for the payments.

“Israel Electric will act to implement the arbitration ruling through dialogue with the gas companies,” IEC said.

But Cairo said it planned to appeal the order until the legal status of the arbitration was settled and all EGAS and EGPC dealings with Israel were suspended. Egyptian Prime Minister Sherif Ismail said on Sunday an appeal would be filed within six weeks.

The Egyptian move threatens a major blow to Israel economically and politically. The partners controlling Israel’s Tamar and Leviathan gas fields had been counting on Egypt as a major market, while Prime Minister Benjamin Netanyahu is counting on energy exports strengthening Israel’s relations with its neighbors.

At Knesset hearings over the gas framework agreement, Yossi Cohen, the head of the prime minister’s National Security Council, declined to comment on the Egyptian announcement directly but said he hoped the arbitration would not upset bilateral relations. Cohen said the government must move forward with the controversial framework agreement in any case.

“What is the alternative? Not to take the gas out of the ground? To keep delaying the framework? To change laws and regulations? To drive away investors?” he asked.

However, Yesh Atid lawmaker Jacob Perry, a former Shin Bet security service chief, sounded a more pessimistic note.

“My sources are telling me that the Egyptians won’t do any deals with Israel if the arbitration isn’t settled as they want. They all say that Israel has to intervene and cancel the arbitration,” Perry said at the hearings.

The ICC ruling comes after Egypt reneged in 2012 on a 20-year agreement to sell Israel natural gas to be delivered through a pipeline running through the northern Sinai Peninsula. In the months before that, amid political upheavals in Egypt as President Hosni Mubarak was ousted, terrorists in Sinai repeatedly attacked the pipeline and put it out of action.

As a result, IEC was forced to turn to more expensive fuels to generate electricity and electricity rates to consumers were raised by as much as 30% to cover the cost. Israel’s government estimated the damage between 2011 and 2013 at between 10 billion and 15 billion shekels ($2.6 – 3.9 billion) before Israel’s Tamar field could be brought into production.

The utility took the issue to ICC, demanding $4 billion from the suppliers EGAS and EGPC, as well as from the Egyptian-Israeli company operating the pipeline, Eastern Mediterranean Gas.

IEC said on Sunday that arbitrators had ordered EGPC and EGAS to pay compensation of $1.76 billion plus interest and legal expenses. If IEC receives the compensation it will ultimately go back into the pockets of Israeli households and businesses, who had paid the cost of the lost Egyptian gas in higher power rates, and IEC is committed to reducing them as compensation.

EGPC and EGAS said in a statement that the arbitrator had also ordered them to pay $288 million to EMG and that they would appeal that award, too. They said the compensation awarded to EMG amounted to about 19% of the $1.5 billion it had sued for, while the award to Israel Electric amounted to under 40% of the total it was seeking.

The two Egyptian companies said they had “received instructions from the Egyptian government to freeze negotiations between companies to import gas from Israeli fields or to award import approvals until the legal position regarding the arbitration ruling and the results of the appeal are clear.”

The ruling looks likely to sour recent talks by private companies to import Israeli gas via the EMG pipeline. On November 25, developers of Israel’s Leviathan field announced a preliminary deal to pump natural gas to Egypt for up to 15 years.

The plan called for Leviathan, which is expected to begin production in 2019 or 2020, to supply Egypt’s Dolphinus Holdings, which supplies non-governmental, industrial and commercial consumers in Egypt, with up to 4 billion cubic meters of gas a year for 10 to 15 years. Earlier this year Dolphinus also agreed a seven-year deal to buy at least $1.2 billion of gas from Israel’s Tamar field, near Leviathan.

In August, the Italian energy company ENI announced it had discovered a huge gas field off Egypt’s coast with enough reserves to supply Egypt’s needs for decades. Nevertheless, Egyptian officials, as well as European companies with liquefied natural gas plants in Egypt used to export gas to Europe, have expressed a continued interest in Israeli gas.