Egypt cancels gas contract with Israel – politics or economics?

Blown up gas pipeline

Blown up Egyptian gas pipeline – physically and politically

Last week Egypt cancelled it’s long-standing gas-exporting deal to Israel, triggering a diplomatic and political crisis with grave economic implications for Israel (and possibly for Egypt too).  The cancellation is not a total surprise seeing as the gas pipeline has been blown up 14 times in the last year.

From the first link above:

Ampal-American Israel Corporation, a partner in the East Mediterranean Gas Company (EMG), which operates the pipeline, said the Egyptian companies involved had notified EMG they were “terminating the gas and purchase agreement.”

The company said in a statement that the Egyptian General Petroleum Corporation and Egyptian Natural Gas Holding Company had notified them of the decision, adding that “EMG considers the termination attempt unlawful and in bad faith, and consequently demanded its withdrawal”.

[...]

Before the sabotage, Egypt supplied about 40% of Israel’s natural gas, which is the country’s main energy source.

In October 2011 EMG took legal action against the Egyptian government’s energy companies and filed an $8 billion lawsuit against the Egyptians, claiming they had breached agreements obligating them to supply natural gas to the company.

A source close to EMG shareholders told Ynet the deal’s termination will set Egypt 30 years back – both economically and politically. The shareholder was referring to the fact that the gas deal was included in the 1979 peace agreement between Israel and Egypt.

A difference of opinion exists regarding the background to the Egyptian decision:

Yuval Steinitz’s office said the finance minister views the Egyptian announcement with “great concern,” while Opposition Leader Shaul Mofaz called the decision to terminate the deal “a new low in the relations between the countries and a clear violation of the peace treaty.”

Knesset Member Binyamin Ben-Eliezer, who signed the gas deal with Egypt during his term as infrastructure minister, told Ynet the deal’s termination is yet another indication that a conflict between Israel and Cairo is possible.

He claimed the Egyptian energy companies could not have terminated the deal without the government’s backing. “The decision is political. A private company cannot terminate a deal between countries,” he said.

Mohamed Shoeb, the head of the Egyptian Natural Gas Holding Company said Sunday it has terminated its contract to ship gas to Israel because of violations of contractual obligations.

 Critics charge that Israel got the gas for bargain prices and that Mubarak cronies skimmed millions of dollars off the proceeds. Israel insists it is paying a fair price for the gas.

Shoeb said the decision to cancel the deal was not political.

“This has nothing to do with anything outside of the commercial relations,” he told The Associated Press.

He said Israel has not paid for its gas in four months. Israeli Foreign Ministry spokesman Yigal Palmor denied that.

Today the positions are reversed, with Israel claiming it is a commercial disagreement and the Egyptians claiming “it is the will of the people”.

“The Egyptian people, who managed to withstand Israel and refused normalization despite the peace treaty, is definitely not interested in the gas export agreement with Israel,” Abd el-Munam Abu al-Fatuah, one of the leading presidential candidates, said.

During an interview with al-Hayat TV station, Fatuah said that he does not see the export of gas to Israel as part of the normalization process. “As long as the Egyptian people don’t want it, the president has to abide by their wishes,” he said, adding that he had asked the Foreign Ministry to reexamine the deal in the past, but was told that it was under the responsibility of the presidential palace, and not the ministry.

Hmm. I wonder if the Egyptian authorities listen to the “will of the people” so much when confronting demonstrators in Tahrir Square.

Meanwhile, Israeli officials claimed on Sunday that the decision had to do with a commercial dispute between a private company and Egyptian governmental companies, and had nothing to do with the relationship between the two countries; but an official at Ampal-American Israel Corporation, a partner in the East Mediterranean Gas Company (EMG) said that “Israel’s government was evading responsibility by trying to paint the decision as merely a commercial or economic one.

Today, in another twist, Egypt has announced that is prepared to discuss a renegotiation of the deal:

Egypt is willing to negotiate a new agreement, with new terms, for supplying natural gas to Israel, the country’s Planning and International Cooperation Minister Fayza Aboulnaga said Monday.

According to the minister, Egyptian parties to current agreement notified East Mediterranean Gas Co. — which transports the gas to Israel — five times about past-due amounts before deciding to end the agreement on Sunday.

Egypt “is willing to renegotiate the deal, though it would be under a new contract, with new terms and prices,” Aboulnaga said. She did not say how much money was past due.

Israel seems to be downplaying the whole issue, with Netanyahu pointing out Israel’s new natural gas finds (presumably as an implicit threat) and even our outspoken Foreign Minister Avigdor Lieberman agrees on the commercial aspect of the disagreement:

Prime Minister Benjamin Netanyahu said on Monday, “We don’t see this cutoff of the gas as something that is born out of political developments. It’s actually a business dispute between the Israeli company and the Egyptian company.”

Netanyahu added that Israel has the reserves of gas “to make Israel totally energy independent, not only from Egypt but from any other source, and to have Israel become one of the world’s large exporters of natural gas.”

Foreign Minister Avigdor Lieberman said Monday morning he hopes the support shown by presidential candidates in Egypt for canceling the gas pipeline deal with Israel is motivated by electioneering rather than a desire to end the peace treaty.

“We want to believe that all the recent announcements are part of the election campaign and afterwards things will return to normal,” Lieberman said in an interview on Army Radio. “We will wait another month and a half, until after the elections, and see if things return to normal.”

To me this whole thing sounds like extreme-electioneering on the part of various Egyptian candidates, with each one trying to out-Islamist the other via their anti-Israel credentials. Add to that the gas suppliers (and the Egyptian government)  trying to squeeze as much money out of their Israeli customers as they can, this time by extreme-Arab bazaar negotiating methods – and you get the volatile mix that is the Israeli-Egyptian peace treaty against the background of modern Middle East politics.

UPDATE: Prof. Barry Rubin has written a very incisive article about Egyptian politics in general, and specifically mentions the Egyptian gas deal cancellation:

While this is supposedly a commercial decision, it is obviously a response to public pressure and the sabotage campaign that the Egyptian government doesn’t care enough to stop.  The New York Times dishonestly reported that the issue is just a “payment dispute.” Well, let’s see. Natural gas wasn’t delivered most of the time so Israel didn’t pay. Egyptian leaders and media said the gas shouldn’t be sold to an enemy and that to do so was treason.  Sounds like a threat to those operating the natural gas industry there. The pipeline was attacked almost a dozen times and put out of commission without a major effort by Egypt’s army to defend this national economic asset. And they also demanded that Israel pay more than had been agreed, thus violating the contract. But by the time the  Times’ article finishes the problem is made to sound as if it is all Israel’s fault. Just wait until Egypt escalates anti-Israel actions and the Times blames Israel for those also.

There are two important lessons here. First, any commitment made to Israel by an Arab partner is easily deemed invalid by the latter  (and that would include any potential Israel-Palestine peace treaty). The United States may soon have the same experience in Egypt. Second, while a key Egyptian complaint has been that they wanted higher prices, Egypt will now lose the income from the pipeline, make investors reluctant from fear that their deals might also go up in smoke, and the country will be materially worse-off.

Ideology trumps economics because the difference can be made up through ideological zeal, repression, stirring up xenophobic hatred, and foreign adventures. Those are the things coming after a transfer of power is made in Egypt.

It will certainly be a hot and expensive summer for Israelis this year.  Israel can’t get its natural gas supply online too quickly.

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5 Responses to Egypt cancels gas contract with Israel – politics or economics?

  1. normanfx says:

    Israel’s leaders are in self-denial and are pretending everything with Egypt will return to normal after the presidential elections. They won’t and Israel will face a more hostile Cairo. The peace with Egypt was always of dubious value and the Islamists want to tear away even that fig-leaf. Israel’s government needs to wake the heck up and stop fooling itself into believing Egypt is not an enemy state. Egypt considers Israel its enemy. Israel should prepare for the day when Egypt formally cancels the peace treaty with the Jewish State. Its as inevitable as with Egypt’s shift from an Arab nationalist dictatorship to a Muslim Brotherhood-run Islamist dictatorship.

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