Gas deal termination is a commercial decision, experts say

Since the export of Egyptian natural gas to Israel began, it has fomented grassroots campaigning, been considered an indicator of the previous regime’s corruption, and impacted the Egyptian political and economic situation. 

The cleverly structured deal allowed the previous government to play coy, selling the gas to an intermediary, Eastern Mediterranean Gas (EMG) that was dealing with the Israeli side. EMG is a joint Egyptian-Israeli consortium part-owned by fugitive businessman Hussein Salem.

And despite numerous court cases that ruled against the export of gas at such a low price, and numerous gas shortages in Egypt over the years, the gas kept flowing as the government ignored the courts. After the 25 January uprising, the pipeline that transports the gas across Sinai was blown up in different places 14 times.

The announcement on Sunday that the company responsible for pumping the gas will halt the flow of gas is being portrayed as ostensibly a business, rather than political, decision, possibly as an attempt to head off speculation about ties between Egypt and Israel. And indeed, the decision to halt the supply apparently came after payments were not forthcoming from the Israeli side.

However, it is now being painted as a response to litigation brought by EMG shareholders against the Egyptian General Petroleum Corporation (EGPC) and the Egyptian Natural Gas Holding Company (EGAS) in October 2011 for failing to supply the requisite quantities of gas.

The halt only came to light because the Ampal-American Israeli Corporation, which owns a 12.5 percent stake in EMG, had to divulge the information due to it being listed on the Nasdaq stock exchange. It released a statement in which it said that EMG considered the halt unlawful and in bad faith, and was looking at what legal action to take.

“EMG owed US$100 million to EGAS and under the terms of the contract, that gives it the right to terminate it,” said Mohamed Raslan, a senior associate at the law firm Hegazy & Associates. In fact, this leaves EMG in a bind, he added, because now the Israeli government has the right to request either that the gas resume or that EMG itself compensate it for the lack of gas.

Raslan felt the decision could have more widespread implications for other gas deals Egypt is involved in.

“Countries that Egypt exports gas to will be wary now,” he said, “because it is saying now that, as a government, it is cancelling gas deals from one side. It doesn’t give a good impression.”

Yet even if it is a business decision, it will have a political dimension due to the geopolitics of the region. Head of the Human Rights Committee in Parliament Mohamed Anwar al-Sadat from the Reform and Development Party released a statement in which he said that even though the decision was a business one, not political, he welcomed it nonetheless as it was the longstanding will of the Egyptian people to see the end of this deal.

However, the MP added that to cancel the deal for political purposes was a step that had “repercussions and cannot be done in one day.” The reason for this was “unfair treaties” that had been signed by the previous regime which were internationally and legally binding even if the regime had fallen.

Abdallah Helmy, the political consultant for the Human Rights Committee in Parliament and a founding member of the popular campaign against the export of gas to Israel, formed in 2008 said, “It’s a great step and it was carefully studied to take into account the repercussions. They found a loophole in the contract. The company (EMG) did not abide by its financial obligations. It’s been four years, but it has finally happened.”

Asked about the legal implications of halting the supply and litigation initiated by EMG last October, Helmy said, “It must run its course in the courts of international arbitration, but the issue here is about the terms of the contract, and the halt would not have occurred if the contract didn’t allow for it. The pipeline was blown up 14 times, what could anyone do?”

There are of course insinuations that the ruling Supreme Council of the Armed Forces is behind the decision, having again cleverly exploited legal avenues to make a populist decision, at a time when its popularity is being challenged by other political forces.

The SCAF has taken a battering over the impending presidential election, from which Islamist candidates have been barred for various reasons. Islamists are attacking the SCAF for attempting to influence the outcome of the election and keep them away from it. So the termination of the contract with EMG comes at a good time for the military junta.

“This is a decision that first and foremost is based on EMG failing to adhere to its financial obligations,” said Nabil Abdel-Fatah, expert at Al-Ahram Center for Political and Strategic Studies, “but the SCAF is attempting to regain its positive image and limit criticism of its relationship with Israel because of the selling of gas at lower prices.”

He added that the termination “will have positive implications domestically as it is part of the struggle between the SCAF and other political forces in Egypt, especially the Islamists. However, externally it opens the door to US-Israeli pressure to negotiate a new deal. Israel will lobby the US to pressure the SCAF over the deal, or at least set a new one.”

Israel, from its side, downplayed the termination decision, expressing hope that a renegotiation would occur and asserting that Egypt and Israel are held together by a peace treaty. "We don‘t see the gas cancellation as resulting from political developments," Prime Minister Benjamin Netanyahu was quoted as saying in a statement by German news service DPA. "It is, in fact, a business dispute between the Israeli company and the Egyptian company."

In a statement on Monday, Minister of Planning and International Cooperation Fayza Abouelnaga said Egypt is ready to negotiate its exports’ deal to Israel with new terms and tariffs. She also confirmed that the termination decision was mainly commercial since Israel didn’t pay its dues despite five notifications sent by the Egyptian government.

The first Memorandum of Understanding between Egypt and Israel regarding gas exports was signed in 2005, committing Egypt to export 1.7 billion cubic meters per year over 15 to 20 years. At the time, international observers said that the agreed-upon price was below market value. An amendment to the on-sale agreement was signed in 2009 setting the price at US$.75 per million cubic meters. Egypt has been renegotiating all its other gas deals to reflect market prices, except the one with Israel.

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