Day of High Drama Sees Egypt Freeze Gas Negotiations with Israel
Relations between Israel and Egypt sank to a new low yesterday after two Egyptian gas companies, EGAS and EGPC, were ordered by the ICC arbitration panel to pay $1.76 billion in compensation to Israel Electric Company Corp (IEC).
Another company, EMG, which oversaw Israeli-Egyptian gas deals from 2008 to 2012 has been awarded $288 million in compensation. EMG built and operated the 60 km EMG undersea pipeline, between al-Arish in North Sinai and the Israeli town of Ashkelon, which delivered Egyptian natural gas to Israel.
In response to the arbitration results, Egypt said it would appeal the arbitration outcome and the two Egyptian companies said they were ordered by the Egyptian government to freeze further negotiations with Israeli gas companies over future deals. On the heels of the Egyptian announcement, Israel's Energy Minister, Yuval Steinitz, said that Israel will promote other export options to other countries in the region, such as Jordan, Greece and Turkey and also with countries in Western Europe.
These events took place during the Knesset's Economic Affairs Committee's natural gas regulatory framework deliberations, expected to reach a crescendo when Prime Minister Benjamin Netanyahu testifes before the committee Tuesday morning. Mr. Netanyahu will have to justify his support for the framework despite export to Egypt, the framework's main pillar, which is now in doubt. Mr. Netanayahu and his supporters claim that supplying Egypt with Israeli gas would help stabilize President el-Sisi's regime since Egypt is experiencing gas shortages. However, that same regime froze gas negotiations with Israel yesterday (December 6), at least for the time being.
The arbitration result was revealed Sunday morning when IEC reported to the Tel Aviv Stock Exchange (TASE). The corporation said that it will act toward collecting the sums it is entitled to according to the arbitration result. The arbitration claim, totalling approximately $5 billion, was filed 3.5 years ago by IEC and EMG. In addition to the $1.76 billion in compensation, IEC will receive interest payments according to a mechanism that was decided in the arbitration and partial coverage of legal expenses.
The arbitration in Geneva, Switzerland was heard before a panel of three lawyers. Deliberations and conclusions are confidential and usually cannot be challenged in an appeal though this time it looks as if an appeal will be heard by Swiss courts and the final dispute results may be delayed for a few years. In its defense during the arbitration, Egypt claimed for a force majeure that caused the halt natural gas supply to Israel.
From 2011-2013, until Tamar gas field started gas production in the spring of 2013, supply interruptions and eventually the contract cancellation, cost the IEC NIS20 billion ($5 billion) in overpayments for the purchase of more expensive fuels for power generation. Currently, IEC's debt is over NIS 70 billion.
Egypt, as part of its negotiations with potential Israeli gas exporters, demanded dropping all arbitration claims. One arbitration currently ongoing is an $8 billion arbitration claim, filed by EMG shareholders, against the Egyptian companies for disrupting the natural gas supply in 2011 and 2012.
During those years, following the dismissal of the Hosni Mubarak, the former President of Egypt, terror attacks on the pipeline in the Sinai Peninsula were commonplace, causing damages and interrupted supply to Israel and Jordan. Following those attacks, regime changes in Egypt and natural gas shortages in the country, the contract was eventually cancelled.
Egypt also demanded in the past that Union Fenosa Gas's (UFG) contract with Tamar Partnerships would be conditioned upon the former, dropping its $6 billion arbitration claim against Egypt.
The arbitration result has, therefore, the potential to derail the Tamar and Leviathan Partnership negotiations with Egyptian customers or with international energy companies which operate the liquefaction facilities in Egypt, although so far it is not clear whether Egyptian companies, EGAS and EGPC, were part to these negotiations. The only contract signed so far between Tamar Partnerships and an Egyptian entity was with Dolphinus Holdings, a private, non-governmental body that represents private businesses in Egypt. However, the 5 bcm, 3 year contract signed in March 2015 was not approved by the Israeli government.
Speaking with Natural Gas Europe before Egypt announced the negotiation freeze, Oded Eran, a former Israeli ambassador to Jordan and to the EU, and currently a senior researcher at the Institute for National Security Studies in Israel (INSS), estimated that the arbitration process will have only limited influence over commercial negotiations. "It is a totally a commercial thing and quite negligible to the diplomatic relationship [between Israel and Egypt]" he said, referring to the arbitration results. "The two countries have two main common interests: security cooperation in Sinai, fighting terror organizations and the big gas contracts. The interest here is much bigger than obligations from the past. It will be right to remove this affair from the headlines and finish it off."
Ya'acov Zalel