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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.

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  • COMMENTS

    1. A

      Unilateral cancellation of the deal is a business stunt. Relating it to political issues is also a business stunt. Both sides know it. The Egyptian government is playing with the public hostility to Israel, and the Israeli gov plays with the public fear of islamistic regime.

      Reply to Comment
    2. Your last paragraph shows how cynically fears of State security can be employed. Agnst over State existence is so powerful that it trumps fact. I guess all political systems do this, but Israel seem quite vulnerable to it, given its war history. Something for me to try and remember.

      Reply to Comment
    3. max

      How interesting, Lisa, that you pick up what suits you… The 2005 deal between the Israeli and Egyptian governments (!!!) was part of a political agreement with commercial undertaking.
      .
      But what’s more revealing is what has been said in Egypt just before, clearly setting the deal within the political, peace treaty context:

      .
      That some people prefer to talk about ‘finance’ may indicate that they’re not yet ready to openly cross the line, but pretending that the breach isn’t related to the treaty is nonsense.

      Reply to Comment
    4. XYZ

      I, for one, am glad. I recall various acolytes of Shimon Peres were involved in the deal, claiming it would “strengthen peace” while they were lining their pockets and we at the same time were transferring our hard-earned money to a hostile state. Well, so much for “strengthening peace”. This proves to everyone that Peres’ “New Middle East” is a delusion…the claim that “economic interests” would forced the Arabs to make peace with Israel. Egyptians feel that they have lost their place as the leading Middle East state, and they way to be the leading Middle East state is to confront Israel directly. Lately it is the Turks and Iranians who have been leading the propaganda war against Israel. This is viewed as a disgrace because both of them are non-Arab states and it should be the Arabs who are leading the confrontation. Thus, we will be seeing more examples of this Egyptian reassertion of national pride as they try to find how much is the bare minimum of relations with Israel that can be sustained without endangering the handouts the Americans are giving them
      BTW-the Nour-Salafist party is heaven-sent for the Muslim Brotherhood. Just as Mubarak used the MB as the red flag in front of the Americans saying “you have to support me no matter what I do, otherwise the MB will come to power and they will be worse”, now the MB-dominated gov’t will tell the same thing to the Americans using the Nour-Salafists as the great danger that the Americans will have to prevent coming to power by supporting the MB.
      Things will prove to me interesting in Egypt in the coming years. Stay tuned…at least Israelis now see clearly where we stand regarding the fraudulent “peace process”…i.e. nowhere.

      Reply to Comment
    5. max

      Altogether, I think it’s a great day when Lisa and Lieberman agree!
      And yet, the statement “The gas deal in fact has nothing to do with the Israel-Egypt peace treaty of 1979″ is absolutely false

      Reply to Comment
    6. Jack

      Great, using the tools of Israel have used and pushed for decades – sanctions, boycotte, blockade is the way to go to get Israel to understand that peace not war is what they must follow as the leading principle.

      Reply to Comment
    7. sh

      XYZ – “Just as Mubarak used the MB as the red flag in front of the Americans saying “you have to support me no matter what I do, otherwise the MB will come to power and they will be worse”, now the MB-dominated gov’t will tell the same thing to the Americans using the Nour-Salafists as the great danger that the Americans will have to prevent coming to power by supporting the MB.”
      .
      And guess which country that trick, which already has a long pedigree, came from.
      .
      No matter what the real reason, the termination of the deal has been sold to the Egyptian public as being in support of the Palestinian people by at least one of the Presidential candidates vying for election there.

      Reply to Comment
    8. Carl

      I love how Mofaz declared that this “requires” an American response. The American response that he’s likely to get is the CEO of (Houston-based) Noble Energy pressuring the Israeli government to lower the tax on oil and gas extraction profits.

      Reply to Comment
    9. TLA

      Not to worry, Egyptians will get sued in a court of law and will pay much more in reparations than they were “losing” in the deal.
      .
      Not a very smart move. They could have at least try renegotiate the deal instead of breaching the contract.

      Reply to Comment
    10. Max – If you have evidence to support your assertion, then please provide it. Otherwise, your comment is meaningless.

      Reply to Comment
    11. max

      @Lisa,
      About Lieberman: http://www.bloomberg.com/news/2012-04-23/israel-s-liberman-says-egypt-gas-cut-commercial-spat.html
      About the gas (originally, oil) as an appendix to the treaty just search “gas deal appendix treaty”.
      For example “Israel and Egypt signed a peace treaty in 1979 which provided for Egypt to supply Israel with oil. Egypt’s capacity to do so, however, dwindled in the next two decades, and a clause was added to the peace treaty
      which stipulated that Egypt would provide Israel with natural gas.”
      .
      See also “An arrangement was also made to insure Israel a right to buy oil from the fields without interruption.” in the NYT article celebrating the treaty
      .
      After all these, we can look at the text itself :)
      It includes “Annex III

      The Treaty of Peace and Annex III thereto provide for establishing normal economic relations between the Parties. In accordance herewith, it is agreed that such relations will include normal commercial sales of oil by Egypt to Israel, and that Israel shall be fully entitled to make bids for Egyptian-origin oil not needed for Egyptian domestic oil consumption, and Egypt and its oil concessionaires will entertain bids made by Israel, on the same basis and terms as apply to other bidders for such oil.”
      .
      Quite clear, I’d say

      Reply to Comment
    12. Max –

      I wrote that the gas deal has nothing to do with the peace treaty. I did not write, as Lieberman claims, that the termination of the deal has nothing to do with politics. It does have a lot to do with politics – specifically, under Mubarak any dispute would have been resolved quickly and behind closed doors.

      I am familiar with the text of the treaty. It calls for “normal” economic relations between Israel and Egypt. It does not specify that Egypt is obliged to sell natural gas to Israel at below-market prices; by extension, it does not specify that Egypt should supply Israel with natural gas even when Israel fails to pay its monthly fees for four months in a row.

      According to the treaty Israel should come to a final status agreement regarding the West Bank and Gaza within five years of the signing of the Accords, according to the specifications of UN resolutions 242 and 338. And yet here we are, 33 years later, still occupying the West Bank and keeping Gaza under closure.

      Reply to Comment
    13. max

      @Lisa, I guess you simply didn’t pick the right words, as “The gas deal in fact has nothing to do with the Israel-Egypt peace treaty of 1979″ is false, and what you wrote later is true. The gas deal – regardless of its financial details – was the embodiment of Annex III of the treaty.

      Reply to Comment
    14. Max, I chose the right words. You’re just choosing to misinterpret them.

      Reply to Comment
    15. max

      No, I didn’t choose, that’s how I read it. I may be the only one, but I doubt.
      BTW, do you know for a fact that Israel is wrong and Egypt is right about the (lack of) payment?

      Reply to Comment
    16. caden

      Because Lisa automatically goes to the default position that if there is a dispute between Israel and anybody else then Israel must be the guilty party.

      Reply to Comment
    17. zayzafuna

      Comment deleted.

      Reply to Comment
    18. XYZ

      Let’s stop playing games. Everyone knows that the new regime in Egypt, regardless of whomever forms the next gov’t will try to reduce relations with Israel to a bare minimum. This will be a popular move. People claim that Egypt was getting too low a price for the gas…if that is so, why did they sign the agreement in the first place? A unilateral abrogation of a contract is a serious thing. I think it is very instructive for the people of Israel to see how the Arab world views agreements made with Israel….they are to be torn up the moment they view it as no longer serving their interests. Their word and integrity mean nothing. Interesting.

      Reply to Comment
    19. Jack

      XYZ,
      “Everyone knows that the new regime in Egypt, regardless of whomever forms the next gov’t will try to reduce relations with Israel to a bare minimum.”
      -
      Nonsense, no peace treaty have been fired up as claimed by the same pro-israeli crowd. Even if Egypt did, it would be positive to pressure Israel, just like it would be positive to pressure any other regime engaged in constant violation of international law.
      -
      “People claim that Egypt was getting too low a price for the gas…if that is so, why did they sign the agreement in the first place?”
      -
      Have you missed that the regime signed that government were by the unelected mubarak regime? That made a good deal for themselves but not for the egyptian people. I think your standpoint rather show a disdain for the egyptian people.
      -
      “A unilateral abrogation of a contract is a serious thing. ”
      -
      Why then did Israel apparently breached the deal? There is no point having this unequal deal if one of the parties dont follow it.

      Reply to Comment
    20. XYZ

      I do not believe Israel unilaterally violated the agreement. Maybe they didn’t pay (if indeed that is the case) because of the repeated disruptions to the flow of gas due to the sabotage of the pipeline. The Egyptian gov’t didn’t make a very serious attempt to protect it.
      I find it odd that since “official” Egypt hates Israel across the board, many candidates are saying they want to end the peace agreement, they want Egypt to take the leading role in confronting Israel away from non-Arab Turkey and Iran, yet the Left/Progressives say the abrogation of the gas agreement is Israel’s fault? C’mon!

      Reply to Comment
    21. Jack

      XYZ,
      “The Egyptian gov’t didn’t make a very serious attempt to protect it.”
      -
      You mean Egyptian government want to see revenue going up in smoke over and over again?
      Egyptians have made it clear, they have offered Israel a new deal. Israel is yet to respond. Will they? Or do they want to be isolated, a victim?

      Reply to Comment
    22. XYZ

      That’s right, they didn’t make a serious attempt to protect it. There was an article a few days ago reporting on how the Egyptian gov’t supposedly sent army reinforcements to the Sinai to rein in the chaotic situation there. The reporter saw Egyptian troops in several locations park their armored personnel carriers in various locations and then spend the day sitting in them.

      You have this belief that governments always do what is in their economic interests. Not true. Look at North Korea. Look at how things will develop in Egypt and the other newly Muslim-run states. There are things more immportant than money for many people.

      Reply to Comment
    23. XYZ

      That’s very noble of the Egyptians to offer a new agreement after unilaterally tearing up the old one. How long will they honor the new one? Doesn’t their word mean anything?

      Reply to Comment
    24. Jack

      XYZ,
      Egyptians doesnt want to loose revenue, thats a ridiculous irrational conspiracy theory.
      Look at North korea? Why? In North Korea the ruling regime live well, like the situation under mubarak.
      -
      “Doesn’t their word mean anything?”
      -
      Well doesnt it? Why did Israel violate the agreement when it comes to the payment?

      Reply to Comment
    25. XYZ

      Jack- I understand your “progressive” mentality…on the one hand Israel is vile, foul, racist, despicable county. Thus, everything it does is foul, racist, and despicable. Thus, when Egypt unilaterally tears up an agreement, you blame Israel. Nothing Egypt or any Arab country does regarding Israel is wrong. They are all saints. You take every action and turn it on its head. EGYPT DIDN’T BREAK THE AGREEMENT BECAUSE OF SUPPOSED ISRAELI NON-COMPLIANCE. They broke it because they hate Israel, want to lower relations to a bare minimum and go onto a confrontational relations. What the heck is your problem with that? You agree with their aims and goals, don’t you. SO why the heck SHOULDN’T Egypt unilaterally tear up the agreement? You would, wouldn’t you? But you still have to turn everything around and claim Israel is unilaterally abrogating it. Why don’t you be like Martillo or Palestinian and say what you really think instead of playing games with us?

      Reply to Comment
    26. Jack

      XYZ,
      Since Israel apparently didnt follow the treaty (a violation if correct) there is no reason to proceed with it for Egypt.

      Reply to Comment
    27. XYZ

      I think I am catching on. Israel should not negotiate nor make agreements with any Arab country that does not have a democratic regime. Thus, Israel should refuse any talks with Abbas or HAMAS. Israel should not have signed the agreement with Sadat to give up the Sinai. Not democratic. Israel should cancel the peace agreement with Jordan…no one ever elected the little king there. Got it.

      Reply to Comment
    28. Jack

      XYZ,
      Hamas and Fatah is both elected parties and are democratically elected compared to mubarak. But this wasnt the point but the alleged failure of Israel to follow the deal regarding payment.

      Reply to Comment
    29. XYZ

      There has not been an election in the Palestinian territories in six years. Abbas term as President expired some time ago. HAMAS took power in a violent coup in the Gaza Strip. Neither Palestinian regime has legitimate democratic credentials. The official Palestinian gov’t elected six years ago had a HAMAS majority and it was ousted after the Gaza coup.

      Reply to Comment
    30. Jack

      XYZ,
      Hamas was elected 2006 and PLO have announced to have elections next year.

      Reply to Comment
    31. XYZ

      HAMAS and FATAH claimed already a year ago that they were forming a unity gov’t and there would be elections. None of this has happened, and there won’t be elections.

      Reply to Comment
    32. XYZ

      They are going through the motions. They can’t even decide on an interim gov’t. The ONLY reason they are even pretending to negotiate is because of supposed pressure from the “Palestinian street” which is inspired by the overthrow of the Arab dictatorships. The reason there won’t be elections is because neither side wants to face the possibility of losing control of the turf each one controls (FATAH-West Bank, HAMAS-Gaza).
      You tell me why they haven’t reached an agreement after more than a year. I am sorry, but your image of the Palestinians as an idealistic people led by honorable leaders who care only for the welfare of their people is a farce.

      Reply to Comment
    33. Jack

      XYZ,
      As I said they are hammering out a deal. However something that keeps palestinians from unity is the pressure Abbas gets from the US and Israel which threats with collective punishment if Fatah and Hamas get together, with that being said sure palestinian leaders must pay attention to the street. Also compared to rest of the arab world these are elected people, you could check polls and still see who have the backing from the palestinians, its Hamas and its Fatah.

      Reply to Comment
    34. O.selznick

      @Lisa Goldman – please do your homework.

      no one is saying the Israeli Government were angels in this deal, but so far the official government response is that this is a legal/business dispute between Eygpt and Ampal.
      a few politicians may have said what they think (to try to score some public opinion points) but not to mention the official response is bad journalism.

      Reply to Comment
    35. Selznick –

      a) Steinitz is an official of the Israeli government. Therefore he made an official response.

      b) Netanyahu & Lieberman chimed in one day after I published this article. But I don’t suppose you’d consider yourself a bad reader for not having checked the date before commenting, eh?

      Reply to Comment
    36. O.selznick

      נתניהו: ביטול הסכם הגז – בגלל סכסוך עסקי

      http://www.haaretz.co.il/news/politics/1.1692216

      lisa, Yossi Miaman’s lobby is trying to make it more than it is, Bibi ( lucky for us this time) is not on Maiman’s payroll (hes in Sheldon’s pocket) so hes treating it like it should be treated.
      dont believe the hype, even if it fits with your agenda, Israel is not ruin the status quo with Egypt about this. Israel’s interest in a peaceful border with Eygpt goes way beyond gas and Yossi Maiman’s profits.
      and just to set the record straight – yes, the Fianance Minister is a government offical, but that does not make his statments automatically official israeli statements let alone his words dont set official israeli foreign policy.

      in a perfect government, it would be the foreign minister setting out israel’s foreign policy, in israel things a abit complicated since Liberman is baiscally Persona non grata in the US and Western Europe – so we have the defence minister and prime minister mostly in charge of foreign policy while Liberman just rants on the side.

      anyway, regardless of what Stienitz says its not under his authority.
      although I can understand why its confuesing you.

      Reply to Comment
    37. Selznick, if you think I am buying into hype then you have seriously misunderstood my post. Perhaps you are confused because English is not your first language. I can understand that.

      Reply to Comment
    38. max

      I think that Selznick’s post, despite the English, is quite understandable. Incidentally, it’s much more logical than many other posts.
      So what do we have now:
      1. Mofaz isn’t in the government and Steinitz has no saying in this matter, while those that do – Netanyahu and Lieberman are playing down the incident.
      So no issue to start with.
      2. Under the peace treaty, Egypt is required to sell gas to Israel.
      So the deal IS tightly related to the treaty
      3. Egypt accuses Israel and Israel denies, but Lisa knows that Egypt is right.
      Altogether, a typical effort of applying one’s agenda onto whatever you can under ‘slight’ modifications.
      But maybe it’s only the readers that can’t read English… unfortunately, had it been in Hebrew it’ll have no readers

      Reply to Comment
    39. Max –

      1. The point is not whether or not Steinitz has influence. The point is that gov’t officials like Steinitz cynically manipulate Israeli fears of Egypt in order to advance their own gains. The Egypt-Israel peace treaty is not and was not threatened. The Israeli government and SCAF have excellent relations. SCAF runs the show in Egypt, but occasionally it has to throw the public a bone. That is the political fallout of the ousting of Mubarak.

      2. Egypt is not required to sell gas to Israel. Egypt is required to have a normal economic relationship with Israel. If someone who supplies me with a service decides to terminate that service, under normal rules of commerce I must accept that decision.

      3. I am not interested in whether or not Israel is in arrears of payment insofar as ethics are concerned. I point out that there are various factors influencing this incident. On the one hand Egypt claims Israel is in arrears; but on the other hand, Israel says why should they pay, since gas has not been delivered regularly due to sabotage to the pipeline. Israel tries to blame Egypt for not protecting the pipeline, even though they know Sinai is a lawless zone over which the police and army have little control, and that this situation is exacerbated by the chaos of the revolution.

      Both you and Selznick seem determined to categorize my post as an expression of an agenda. That is your prerogative, of course, but you are seriously misreading my point. I am not interested in defending Egypt or Israel in this story. Both sides are sleazy and disingenuous. The point is to bring out the nuance and the information that is not reported in the mainstream media, which is blindly parroting AmPal and the government’s self-serving disinformation.

      Reply to Comment
    40. max

      Lisa, I assumed the misunderstanding were due to unclear wordings. You told me that no, I just can’t read. You then ignore the content in Selznick’s comment and focus on whether or not you bought into the hype. o an agenda is a plausible explanation. I’m glad to her that I was wrong.
      .
      The Palestinian Authority is blocking critical websites – is this on your agenda when addressing government’s self-serving disinformation? It’s only half a teaser…

      Reply to Comment
    41. max

      sorry, challenges with my keyboard :(

      Reply to Comment
    42. Max, if you have to bring up censorship by the PA that means you are changing the subject. And if you’re changing the subject then you’re just not a good debater. So, again, I wasted my time. I must remember to stop replying to commenters.

      Reply to Comment
    43. max

      Lisa, I thought the debate was over! I agree with your points, but think that without the parts that may be read differently than you meant, it’s little news. yes, governments officials also use their high seat to advance personal – not only governmental – agenda; yes, it’s possible that although Israel allowed Egypt to introduce troops well above the limit set in the treaty into Sinai in order to calm the situation, Israel knows that they can’t really do, hard as they try.
      Yes, “Both sides are sleazy and disingenuous”.
      So I thought I’ll link your last sentence to a subject that interests me.
      .
      More seriously: I find the practice of some of your colleagues – post & forget – quite haughty. I appreciate your involvement, even when I disagree

      Reply to Comment
    44. max

      The reason for which I asked about the new subject is simple: I think that criticism (that’s 972′s focus) is good, when it’s constructive; otherwise, it’s anarchism. And to be constructive, it has to be credible. To be credible, it has to slap more than one face. And then, who knows, the tone and interaction on the site may change!

      Reply to Comment
    45. zayzafuna

      Comment deleted.

      Reply to Comment
    46. Howard

      The author of this article is disingenuous when she writes that the issue of oil was not part of the agreement.
      Sure this is true is one takes a shallow view of the agreement. Though it is not stipulated in the agreements text, it was part of the an agreement which saw the Israelis return the Abu Dis and Alma fields to Egypt.
      From the New York times March 27, 1979, I quote from the article, “An arrangement was also made to insure Israel a right to buy oil from the fields without interruption.”
      Note that Israel discovered and developed the Alma field, and wanted some recompense.
      Now isn’t clarity a good thing?

      Reply to Comment
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