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Egypt Israel Gas Deal

March 1, 2018

Egypt Israel Gas Deal

Israeli and Egyptian firms announced in late February 2018 that they would pursue two 10-year energy agreements. Under the arrangements, Egypt’s Dolphinus Holdings will purchase 64 billion cubic meters of natural gas from companies operating Israel’s Tamar and Leviathan fields in the Mediterranean Sea for a total of $15 billion USD. However, a number of business and geopolitical disputes involving Israel, Egypt, and Turkey could prevent or significantly delay the deal’s implementation.

The opportunity for an Egypt-Israel deal stemmed in large part from a rise in natural gas prices over the past two years, itself driven by higher crude oil prices and expanding gas consumption. All of these factors combined to make Israeli gas exports an appealing opportunity, both as an industry for Israelis to nurture and for other countries to buy.

But Egypt will first need to settle an outstanding dispute with an Israeli firm before the natural gas arrangement can be realized. A 2015 international arbitration rulings recently awarded $1.76 billion USD to one company, Israel Electric Corporation. Notably, the Israel Electric Corporation had issued claims for a significantly higher amount, about $4 billion USD. Another Israeli company, Eastern Mediterranean Gas Company (EMG), is now owed $1.03 billion USD from Egypt after a more recent round of arbitration. The dispute between the Israeli firms on the one side and Cairo on the other stems from Egypt’s cutoff of natural gas supplies to Israel in 2012.

Despite the arbitration, the Egyptians appear reluctant to pay off their award to the Israeli companies, while the Israeli side is unwilling to cancel Egypt’s debts. This could prove problematic in the future, as the Egyptian oil minister, Tariq al Mulla, noted the revocation of the arbitration awards as a likely precondition for Cairo to sign onto a deal with Israel.

In the past, Israel might have prioritized exports to Turkey over Egypt. Today, Turkey presents an additional potential obstacle to any multilateral energy development in the Eastern Mediterranean that includes Israel. Traditionally, Turkey was a desirable market under Israelii gas export strategies. However, bilateral political relations between Turkey and Israel have suffered during the concurrent terms of Prime Minister Benjamin Netanyahu and President Recep Tayyip Erdogan and intergovernmental talks on energy cooperation have reportedly stalled. Despite a brief rapprochement after Israel apologized for the 2010 Mavi Marmara incident and paid the families of Turkish citizens killed in the event, ties are once again deteriorating. Erdogan’s rhetoric has becoming increasingly hostile toward Israel as he seeks to generate popular support both inside Turkey and beyond, and the Israelis have responded with their own sharp criticisms directed at Ankara, including for its support of Hamas. Practical relations have suffered in tandem. Today, the volume of Israel-Turkey trade is lower than in 2013 and 2014, before the reestablishment of official ties between the two governments.

The upshot from the falling out with Turkey is that Israel has had to move in different directions as it seeks to export natural gas, leading it to potential customers like Egypt that have in turn proven problematic. Even as Israel and Turkey fail to reach an understanding on their own energy relations, Ankara is complicating other options for the Jewish state. For example, the Israelis have explored the option of an undersea pipeline connecting their gas fields with the Cyprus (which controls the Aphrodite gas field), and then on to Greece and Italy. The problem is that this would insert Israel into the longstanding territorial dispute between the Cypriot government and the internationally unrecognized, Ankara-backed Turkish Republic of Northern Cyprus (TRNC), with a pipeline barely missing the Turkish line of control.

Turkey has previously used the TRNC to attempt to drive other countries away from developing energy projects with Cyprus. In early February 2018, Turkey declared a 2013 agreement between Egypt and Cyprus to be “null and void” because it supposedly violated Turkish sovereignty. Here, the demarcation of Turkish sovereignty according to the authorities in Ankara may differ from more broadly accepted definitions as Turkey marks areas internationally recognized Cypriot areas as Turkish or TRNC zones. The accord between Cairo and Nicosia aimed to advance gas exploration on the frontier between the two countries’ respective Exclusive Economic Zones (EEZ). Major General Kamal Amer, who heads the Egyptian parliamentary National Defense and Security Committee in turn stated that Cairo rejects any “infringement” of its EEZ.

Ankara’s firm stance on gas exploration around Cyprus may introduce a destabilizing military element into energy projects in the Eastern Mediterranean region, complicating matters for Israel, Egypt, and any other country that seeks a route via the contested island nation. As recently as mid-February, Nicosia charged that the Turkish armed forces had prevented an Italian commercial vessel from conducting gas exploration activities in Cypriot territorial waters.

*Evan Gottesman for iStrategic International