Egypt-Israel Gas Deal A Pipe Dream

An Egyptian company’s plan to import gas from Israel is nothing but a pipe dream, according to documents viewed by Rebel Economy and interviews with people familiar with the situation.

Last week, Dolphinus Holdings signed a seven-year deal to buy an estimated $1.2 billion of natural gas from Israel’s Tamar field, but negotiations haven’t included the firm that actually owns and operates the pipeline, East Mediterranean Gas, according to a letter sent from EMG to Israel’s largest gas sellers operating on the offshore Tamar gas field.

Egypt gas pipeline

The letter states that “EMG was not a party to the reported deal and was not included in such negotiations. There are no discussions held between EMG and Dolphinus on such a transaction and there have been no negotiations held in the past.”

This is just the latest twist in the story of the notorious Egypt-Israel gas pipeline, one that has been cursed with misfortune and represents a tangled web of espionage, global diplomacy efforts, big business and even terrorism (the pipeline has been bombed more than a dozen times by unknown militants in Sinai).

EMG, which built and operated the pipeline, was founded by one of Egypt’s most controversial tycoons, Hussein Salem, but is now owned by a consortium of companies including the American billionaire, Sam Zell and the Thai government’s state gas company, PTT.

Several Egyptian government officials were imprisoned over the deal after the uprising and the new government cut off its contract with EMG (claiming it missed payments). That set in motion several high-profile international arbitration cases by EMG against the government. EMG is seeking billions of dollars in damages for its shareholders.

The last four years have been disastrous for Egypt’s economy, including its energy sector. The country is now in such desperate need of gas that it agreed to buy liquified natural gas at a huge cost from European sellers.

It’s ironic that a pipeline originally designed to send gas into Israel for Egypt’s profit is now being considered as a way for a hobbled Egypt to buy gas from Israel. The rationale is easy: importing gas over a 90-km pipeline from a neighbour is much cheaper and requires less infrastructure than bringing in LNG from abroad (which requires specialised plants to turn it into useable gas).

But this deal cannot take place without EMG’s approval and that seems nearly impossible, according to a person familiar with the discussions.

That it because there is no way EMG’s shareholders will agree to drop their arbitration cases against Egypt, the person said. The Egyptian government said that would be a prerequisite of approving any deal to import gas from Israel. Even so, the Dolphinus deal would only represent annual revenues in the tens of millions of dollars for EMG, versus billions won from arbitration settlements.

To make matters even more complicated, EMG owes the state-owned National Bank of Egypt in excess of $170 million, according to documents reviewed by Rebel Economy, a loan it took out early on to build the pipeline. It was paying it off until the Egyptian government cancelled EMG’s contract in 2011. (A classic case of Egypt inadvertently screwing itself.)

So for this deal to work, shareholders of EMG would not only need to forego the possibility of billions of dollars of compensation but also agree to not get paid anything for years because any money EMG makes would be used to pay down its debts.

That may be one of the reasons why they have been excluded from the negotiations, but it’s only the tip of the iceberg for this messy non-deal.




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