Australia/Israel & Jewish Affairs Council

A Middle East gas deal that is more than just a gas deal

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In Israel's biggest export deal to date, Egyptian company Dolphinus Holdings has agreed to buy 64 billion cubic metres of Israeli natural gas for US$15 billion from Delek Drilling, and its US partner Noble, during a 10-year period. The gas will be delivered to Egypt from Israel's Tamar gas field, and the larger Leviathan gas field which is expected to be operational in late 2019.

The gas deal has been praised by both Israeli and Egyptian leaders. Israel's Prime Minister Benjamin Netanyahu called the deal "historic" and said it would bring billions to Israel in taxes that it would use towards investing in education, health and welfare. There has been an ongoing debate within Israel on the benefits of exporting its gas reserves. Critics of exporting Israeli gas claim it could mean that there is less gas for Israel, and that Israelis may miss out on its profits. However, the Israeli government and regulators have established a criteria that permits less than half of the approximately 1,000 billion cubic metres of gas believed to be in Israel's reserves to be used for export. The gas deal is also significant because it represents Israel's new position as a gas exporter, with additional export deals reportedly in the works with Greece, Turkey, Bulgaria and Cyprus. It is also strategically important because it is the second deal that Israel has signed with an Arab neighbour, the first being with the Jordan Electric Power Company in 2016.

Meanwhile, Egypt's President Abdel Fatah el-Sisi announced on television that his country "scored a goal" by signing the Israeli gas deal, which could help turn Egypt into a regional energy hub. He said the project "has a lot of advantages for us (Egyptians). And I want people to be reassured." He added that the Egyptian government was not directly involved in the deal, however, it "provided several things to ... achieve this deal." That reassurance was likely necessary given than many Egyptians continue to have a hostile view of Israel. As Shahira Amin wrote in Al Monitor:

"Sisi's enthusiasm has failed to rub off on a skeptical Egyptian public, as many Egyptians reacted to the news with shock and outrage. Activists took to social media to question the motives behind the agreement, asking why there was a need to import gas when the country had only a few weeks earlier inaugurated the gigantic Zohr offshore gas field. Petroleum Minister Tariq al-Mulla had recently pledged that the field, off Egypt's northern coast, would help the country achieve ‘self-sufficiency in natural gas, ease the burden on the state budget and cut the imports bill."

While the gas deal has been met with scepticism within Egypt, it could pave the way towards normalising commercial relations between the two nations - which have very limited economic commerce despite their longstanding peace treaty, largely due to what has essentially been in the past an unannounced boycott of Israel by Egyptians, with tacit government acquiescence.

Meanwhile, the deal is a sign that diplomatic relations between Israel and Egypt have never been better. Egypt was the first Arab country to make peace with Israel 1979, but for many years the relationship was considered to be a "cold peace". Today Israel and Egypt are cooperating on a range of fields, including Israel's military assistance against Islamist fighters in the Sinai Peninsula.

Moreover, the gas deal offers mutual benefits as former Israeli Ambassador to Egypt Zvi Mazel writes in JNS:

"Selling to neighboring countries enables Israel to make the most of short distances and lower transportation costs. Egypt needs Israeli gas to palliate insufficient production until the mammoth Zor offshore field starts supplying enough gas for home consumption and export. Production started a few weeks ago, but it won't run at full capacity until the end of 2019, and it will take another three years for Egypt to be self-sufficient. Some of the gas from Israel will be exported to meet Cairo's contractual obligations to British Gas and Fenosa from Spain that it has been unable to fulfill, the political and economic turmoil following the ousting of Hosni Mubarak having stopped gas development and production. British Gas and Fenosa found themselves unable to fulfill their own obligations to customers and had to pay large fines."

However, the ink on the deal is not yet dry, as Egyptian officials have reportedly set some conditions before approving the import of Israeli gas to the country.

According to Turkey's Anadolu news agency, Egypt's Oil Minister Tariq al-Mulla said that gas imports must "add value to the Egyptian economy" and that "arbitration between the two countries" must be settled.

He is referring to the US$1.76 billion debt Egypt owes Israel's Electric Corporation (IEC) following a ruling by the an international arbitration court in 2015 that found Cairo violated an agreement to supply natural gas to Israel.

Egyptian gas supplies were cut off by a series of terrorist attacks on the pipeline and then in 2012 by Cairo's decision to break the contract following the ouster of president Hosni Mubarak. Last September, the Egyptians said the two sides had agreed that the IEC would forgive US$500 million of the debt it's owed.

However, Israeli officials deny that there has been any agreement on compensation. "Israel hasn't given up on the debt and the matter did not come up for discussion during talks on the Leviathan export deal to Egypt that was signed [last] week," Israel's Ministry of Energy said, Haaretz reported.

Similarly Israel Electric Corporation stated, "The company is not aware of any concessions on the debt. There won't be any backing down on the debt. The company continues to seek to collect it."

Given the mutual interests at stake, Egypt and Israel are likely to work out these thorny details to make the deal work.

Nevertheless, the potential for future sabotage of gas pipelines by Israel's enemies, and territorial disputes over gas reserves remains high. For Israel, its main territorial dispute is with Lebanon, as Keith Johnson writes in Foreign Policy:

"Lebanon's decision this month to award an exploration concession to three international firms - France's Total, Italy's Eni, and Russia's Novatek - to drill in a promising block off the Lebanese coast has ignited fresh tensions between Beirut and Jerusalem. That's because both countries claim a slice of the waters where the firms won a concession and hope to start drilling next year...
But Israel hasn't backed down, with Defense Minister Avigdor Lieberman calling the development plans ‘provocative conduct.' All the while, the Lebanese militant group Hezbollah has waded into the energy dispute, reiterating late last week that it could attack offshore Israeli energy installations if Israel interferes with Lebanon's development plans."

Meanwhile, Turkey has been flexing its muscle with Cyprus over maritime border disputes regarding gas fields, as Zvi Mazel notes:

"Cyprus has reached an agreement with Egypt regarding the delimitation of its maritime borders in 2003, in 2007 with Lebanon and in 2013 with Israel. These documents were registered with the United Nations, and are perfectly legal and binding. However, Turkey, which conquered and occupied Northern Cyprus in 1974, expressed some reservations and threatened to prevent drilling for gas unless that zone took part in the process-from research to production and revenues. It did not stop with those threats, and on Feb. 7, sent a warship to stop a drillship commissioned by ENI to protect what the Turks say are the rights of Turkish Cypriots. Undeterred, ENI tried again, but on Feb. 23, no less than five warships intercepted the drillship and made it turn back to Limassol. Efforts by the European Union to mediate the conflict have been unsuccessful so far."

The findings of significant gas fields in the eastern Mediterranean hold the potential for both tremendous opportunity and conflict. When countries like Israel and Egypt put their differences aside, and work together for their mutual benefit it contributes to the economic development and stability of the region. Israel and Egypt were once sworn enemies, and today, leaders of both are singing the praises of what can be achieved through peaceful cooperation.

On the other hand, both the Lebanon-Israeli maritime border situation and the standoff between Cyprus and Turkey suggest that conflict, not cooperation, remains a real possibility coming out of the bonanza of offshore energy resources in the eastern Mediterranean.

Sharyn Mittelman

 

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