Egypt will appeal an International Chamber of Commerce order to pay Israel US$1.76 billion within six weeks for halting gas sales, Prime Minister Sherif Ismail announced, and has also taken measures to halt talks on a deal to import Israeli gas.
The chamber ruled on Sunday that Egyptian natural gas companies must pay the fine to the Israeli state-owned Israel Electric Corporation (IEC) as compensation for halting gas supplies to the company.
In response, Egypt ordered a freeze on gas import talks with Israel, reported Bloomberg. An Egyptian company, Dolphinus Holdings, is currently in negotiations with Israel’s Delek Group over plans to import natural gas from Israel to Egypt. Any such deal would require approval from both the Egyptian and Israeli governments, and Egypt has reportedly ordered its state-owned gas and oil companies to refrain from issuing any permits until the appeal is complete.
Egypt exported gas to Israel at bargain-basement prices prior to the 2011 revolution. The deals that led to these prices resulted in several corruption trials, although most officials involved were eventually acquitted.
Facing declining gas production, disagreements with Israel regarding gas prices, public anger over the deal and multiple militant attacks on the gas pipeline used for exports, the Supreme Council of Armed Forces, which was governing Egypt at the time, officially halted gas exports to Israel in April 2012.
Even before the Egypt-Israel gas deal came to an official end, interruptions due to the pipeline bombings prompted a flurry of lawsuits at international arbitration courts. These cases involve three parties: Egypt and its state-owned gas and oil companies as the supplier, Israeli state-owned utility IEC as customer and pipeline operator East Mediterranean Gas Company (EMG).
Originally owned by tycoon and Mubarak ally Hussein Salem and his Israeli counterpart Yossi Maiman, EMG built the pipeline running from Egypt to Israel and secured a contract to supply Egyptian gas to Israel. By 2007, even before gas started flowing through the pipeline, Maiman and Salem had begun selling out their stakes in EMG to Israeli, American, Thai and Turkish investors.
In September 2011, the IEC’s board decided to file a claim against both EMG and Egypt’s state-owned gas company for financial damages due to lost supplies. Arbitration began in May 2012 in front of the International Chamber of Commerce in Paris, with IEC seeking more than $2 billion in damages.
Meanwhile, pipeline owners EMG sued for damages from its Egyptian suppliers, the state-owned gas and oil companies. Initiated in October 2011, the lawsuit also demanded that the Egyptian companies, rather than EMG, be held responsible for financial damages to the Israeli electric company.
EMG’s shareholders also launched separate lawsuits against Egypt, including an ongoing suit filed in 2012 at the World Bank’s dispute settlement committee. This and similar lawsuits filed with other arbiters cited violations of Egypt’s responsibilities under bilateral trade agreements. Altogether, EMG shareholders were estimated to be seeking up to $8 billion in damages as of May 2012.
Egypt, in turn, filed a May 2012 suit against EMG, accusing it of breach of contract for delaying gas payments.
On Sunday, IEC announced the International Chamber of Commerce found in its favor, ordering Egypt’s state-owned gas and oil companies to pay $1.76 billion in compensation. It is unclear what effect this ruling will have on other lawsuits between the IEC, EMG and Egypt. Nor is it clear how successful an appeal might be, or what will come as a result of Egypt’s threats to throw roadblocks in front of future gas import deals.
The details of the arbitration are secret, explains Amir Matar, a lawyer who specializes in international disputes. Neither side is likely to publicize the exact nature of the negotiations or the settlement, he adds, but there is some precedent for Egypt being able to offer international investors alternative forms of compensation, like tax breaks.
Because of the covert nature of the arbitration, Matar says it is not possible to judge whether Egypt had legitimate reasons to break the contract.
“Whether the reason for the breach was correct or incorrect I don’t know, but there is compensation for that breach, and this is it,” he argues.
But activist Mika Minio-Paluello of the London-based Platform, which works on several oil and social justice-related campaigns, disagrees.
“The fine is outrageous,” he says. “The gas deals signed by [former President Hosni] Mubarak were a complete rip-off, and led to Egypt subsidizing Israeli industry and providing cut-price gas that ultimately helped fuel the Israeli war machine. The underpricing led to Egypt losing out to the tune of several billion dollars.”
A 2014 report co-authored by Minio-Paluello found that Egypt lost out on around $10 billion due to underpricing in gas deals, and at least $200 million due to the deal with EMG and Israel.
“Egypt was entirely legitimate in stopping its gas exports to the Israelis, given the corruption involved in the deal and that the terms were not financially appropriate,” Minio-Paluello adds.
One industry expert, who previously served as an adviser to Egypt’s Petroleum Ministry, noted that Egypt’s deal with EMG was “irregular” and may have been entered into in bad faith or as part of a “sweetheart deal.” Even before the post-2011 upheaval, EMG had trouble sourcing the contracted quantities of gas. The fact that EMG’s major shareholders, Salem and Maiman, began selling their stakes before even a molecule of gas flowed through the pipeline could indicate that the shareholders intended to cash out before gas shortages became common knowledge.
“The case is now an orphan among Egyptian government institutions,” the industry expert adds. “There are no clear responsibilities assigned, and there is no responsibility with regards to the effort or the disastrous outcome.”
By contrast, Matar thinks the fine is entirely legitimate considering that Egypt breached its contract to Israeli companies. The real question, he says, is whether Egypt will succeed in using future import deals with Israel as leverage when it negotiates the $1.7 billion fine.
“This is a contract that was breached, therefore there is compensation owed,” he says. “Whether that compensation can be reduced or whether it can be eliminated completely in lieu of future agreements between the Egyptian government and Israeli companies for purchase of gas, that might happen.”
Matar views Egypt’s decision to halt talks on import deals as “a knee-jerk response to the award, which is probably a good response in order to pressure Israel to give in a little bit in negotiations.”
Demand for natural gas has outstripped supply in Egypt, which used to be a gas exporter. The country has already secured two floating import terminals that allow it to process liquefied natural gas from around the world. An import deal with Israel would allow a steady flow of gas by pipeline, and could potentially revive the gas export infrastructure, which is currently sitting idle.
The Egyptian firm Dolphinus Holdings and its Israeli partner Delek Group have been in negotiations to import gas from the Tamar and Leviathan gas fields in Israel via EMG’s pipeline.
Although EMG has repeatedly stated it is not involved in the deal, talks between Dolphinus and Delek appear to be bearing fruit. Last month, the Delek Group announced it had signed a non-binding letter of intent with Dolphinus for a 10-15 year deal to import an annual 4 billion cubic meters of gas from the Leviathan field to Egypt.
Minio-Paluello believes Egypt’s threat to refuse to give permission for the deal to go ahead could be a good thing.
“Hopefully it will mean Egypt stopping the gas imports from the Israelis,” he says. “The new gas deal will lead to enormous revenue transfers from Egypt to the Israeli state — including to the Israeli military.”