Israeli Regulator Approves Sharply Reduced Compensation in Egypt Natural Gas Dispute

Israel Electric will get just $500 million, to be passed on to customers, for Egypt’s cutting off exports in 2012

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Foundation platform for the Leviathan natural gas field in the Mediterranean Sea, January 31, 2019.
Foundation platform for the Leviathan natural gas field in the Mediterranean Sea, January 31, 2019.Credit: Marc Israel SELLEM / POOL / AFP

Israel’s Electricity Authority said on Sunday it had approved a compromise agreement on compensating Israel after Egypt cut off supplies of natural gas eight years ago, forcing Israel to scramble for substitute energy supplies and sending electricity rates higher.

The compromise, which was originally agreed upon between Israel Electric Corporation and the Egyptian General Petroleum Corporation and Egyptian Natural Gas Holding Company – all of them state-owned companies – will be only a fraction of what IEC had originally sought.

The utility had wanted to get $2.4 billion. An international arbitration panel awarded it $1.76 billion and in the end Cairo bargained it down to just $500 million. The amount will be paid over eight-and-a-half years, thus the Electricity Authority estimated the real value of the payment will be $350 million.

IEC raised rates after Egypt ended gas exports, so the money will not go to the company but to its customers – after it subtracts 51 million shekels ($14.6 million) for legal fees it ran up in eight years of negotiations and arbitration.

Israel had been counting on Egyptian gas to provide a good part if its energy needs, but in 2011 Egypt was racked by mass protests that eventually led to the ouster of President Hosni Mubarak. The pipeline delivering the gas to Israel across the Sinai desert was repeatedly attacked, disrupting supplies, and finally Egypt announced ion 2012 it was ending the contract, citing a dispute over terms.

There has been speculation about why Israel agreed to accept far less compensation that it sought or was awarded. However, a report published on Friday in Al-Monitor, a website covering the Middle East, linked it to a deal for Israel to export natural gas to Egypt.

“Egypt agreed to import gas from Israel in exchange for Israel reducing the compensation amount due by approximately $1.3 billion,” Ayman Samir, an international relations researcher at Al-Ahram newspaper, was quoted as telling Al-Monitor.

Al-Ahram is regarded as a mouthpiece for the Egyptian government, so the report give strong backing to speculation that IEC was under considerable pressure to compromise to clear the way for a much bigger transaction.

Samir was referring to an agreement that, since it was upgraded in October, calls for Egypt to import 85 billion cubic meters (3 trillion cubic feet) of gas from Israel worth about $20 billion over 15 years.

The gas will come from Israel’s Leviathan and Tamar offshore fields in the Mediterranean, which are substantially owned by Noble Energy of the U.S. and Israel’s Delek Drilling. The buyer is the Egyptian company Dolphinus Holdings

In addition, the export deal includes a side transaction involving buying a stake in 90-kilometer (56-mile) subsea pipeline that had previously been used to deliver Egyptian gas to Israel that will be now be used to deliver Israeli gas to Egypt.

Under that deal, which was completed last month, Noble, Delek and Egypt’s East Gas Company acquired a 39% stake in the pipeline’s owner, East Mediterranean Gas Company.

In both deals, Egyptian intelligence is believed to have played a major role, confirming speculation about the strategic dimension to the entire affair.

Egypt has since 2011 found considerably new gas reserves, most notably at the offshore Zohr field. Samir said Israeli gas would be used domestically and for re-export to third countries via liquefaction plants now standing idle.

Egypt aims to become a regional energy hub, he said, but added: “The Zohr field will not allow [for] dispensing with Israeli gas imports in the coming years, to meet the needs of the local market and power stations.”