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Business Is Business: $3 Billion Israeli-Egyptian Gas Deal
Jan 31, 2001
Ariel Sharon, Israel's front-running candidate for prime minister, isn't thrilled about it. And many Egyptians don't like the idea either.

But despite objections on both sides of the border, Egypt has agreed to start supplying Israel with natural gas next year, a deal totaling $3 billion that will continue until at least 2012.

In the end, the decision between the often bitterly estranged neighbors was based "on purely commercial considerations, taking into account the price of the product, its quality and its availability," said Yaakov Razon, director general of the state-owned Israel Electric Corporation.

The long-term sales contract will forge the first strong economic bond between the two countries, although Egypt has been a minor supplier of oil to Israel for two decades. It is an arrangement that diplomats in both countries hope will under gird regional peace efforts with new financial and security links.

"This is very, very important to cementing peace, to widening the circle of mutual interests, so that war will be considered impossible," said an Israeli Foreign Ministry official.

Negotiated between two state- owned companies at a time of strained diplomatic ties, the deal will instantly quadruple the volume of Israeli-Egyptian trade and represent Israel's first big import pact with a Middle Eastern energy producer.

The agreement marks the first natural gas purchase of any kind for Israel, and the first major gas sale for Egypt, which sits on some of the world's largest natural gas deposits.

So sensitive is the issue politically, though, that neither President Hosni Mubarak of Egypt nor Prime Minister Ehud Barak of Israel has publicly embraced the new energy partnership though Mr. Barak did say, in response to a question, that he favored diversified energy sources.

The decision was announced a week ago, when the Israel Electric Corporation said it planned to award the contract to an Egyptian consortium to supply natural gas to some of its biggest power plants.

Israel's semiautonomous electricity monopoly was praised and attacked for resisting intense political pressure from the Israeli right and from a local company that sought preferential treatment in the bidding process for its own newly discovered offshore reserves.

By all accounts the gas is a bargain. The Egyptians, whose huge Nile Delta gas fields greatly exceed domestic needs, underbid their Israeli-based rivals by about a third, industry sources said.

Officials in both companies said technical issues still under negotiation should be resolved within three months and Egyptian gas should start flowing through a new offshore pipeline by the end of next year.

Pumped in through the port of Ashkelon, the Egyptian gas should initially satisfy about 15 percent of Israel's electric power needs. Eager to diversify supplies and maintain competition, the Israeli electricity company is now taking bids for gas from reserves off Israel and the Gaza Strip for a second, slightly smaller 10-year contract.

During the next decade Israel's natural gas demands are expected to at least triple, leading to expectations of further long-term contracts for Egyptian, Israeli and even Palestinian gas.

For weeks before the long-scheduled contract decision, newspaper and radio advertisements urged the state power company to spurn "Arab" gas and opt instead for exclusive reliance on "blue and white" Israeli fuel.

Egyptian companies, with official encouragement, are cutting back on Israeli imports as a show of support for the Palestinians, Israelis were reminded. "Mubarak could turn off the faucet as part of the Arab boycott he declared against Israel," a radio commercial warned. "And despite this we are still contemplating buying gas from Egypt and binding the country to economic and strategic dependence on Egypt."

Two days before the deal was announced, Mr. Sharon weighed in, saying he also thought Israel should depend exclusively on its own domestic gas supplies. As the minister in Israel's last Likud government with responsibility for energy policies, Mr. Sharon raised similar objections to dependence on Egyptian energy.

But the head of an Israeli company with a minority share in the Egyptian venture shrugged off Mr. Sharon's comments, saying he was certain that no future Israeli government would undo a binding commercial contract. "Imagine how this would be interpreted," said Yossi Maimon, president of the Merhav Group. "What would happen to the financial and commercial standing of Israel?"

To the surprise of many, Mr. Sharon publicly recanted. "Yossi Maimon is right," he said after the announcement by the Israel Electric Corporation. "The I.E.C. has a board of directors that has taken a decision, and I do not intend to interfere with it."

The gas deal has also confronted widespread disapproval in Egypt, where there is intense popular opposition to trade and cultural ties with Israel. Egypt withdrew its ambassador from Israel in the fall as a protest against the Israeli military response to violent Palestinian demonstrations in the Gaza Strip and the West Bank.

Last week's decision was expected for some time in industry circles in both countries. So confident were the Egyptians that Israel would become their first major gas customer that two years ago an Italian-Egyptian consortium began building a $150 million pipeline to the border. Their ultimate goal was to stretch the pipeline offshore all the way to Turkey.

But energy-hungry Israel was the financially essential first stop. The $100 billion Israeli economy was a large enough market to justify the expenditure by itself, even if further- flung contracts failed to materialize.

For economic and environmental reasons the Israeli electricity company decided a decade ago that it needed to fuel at least some of its power plants with natural gas. Egypt's mammoth gas fields, the largest in the Mediterranean basin, were by far the cheapest potential supplier.

Earlier negotiations between Egypt and Israel foundered as relations chilled during Benjamin Netanyahu's term as prime minister, with President Mubarak' S ministers and Mr. Sharon, who controlled Israeli energy policy as minister of infrastructures, appearing equally unwilling to strike a deal.

But the election of Mr. Bark's center-left coalition in May 1999 removed the major political obstacle to the contract.

The new gas deal is 10 times the size of Israel's million-barrels-a- year oil contract with Egypt. And supply interruptions in a gas pipeline to electric power plants would be far more disruptive than cancellations of oil tanker shipments, note some Israeli foreign policy specialists who otherwise favor expanded business ties with Egypt.

"One should draw a distinction between trade with Egypt and dependence on Egyptian gas," said Dore Gold, a former Israeli ambassador to the United Nations and an adviser to the Sharon campaign. "What's done is done, but states usually prefer to strengthen their own energy independence first."

Mr. Gold still favors reliance on multiple gas suppliers but holds out hope that the gas contract and the $300 million it will earn Egypt each year will encourage further economic and diplomatic cooperation.

Yet because Cairo's gas revenues go directly to the national treasury, the economic benefits may not be visible to ordinary Egyptians, an Israeli diplomat cautioned. "This alone won't warm up the cold peace," she said.
Source: The New York Times Company

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08 February 2001 05:12:41 PM

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