Companions to the Israeli gas deal: Noble and Delek in talks to acquire East Mediterranean Gas pipeline
Deals to import three times the agreed upon quantity of gas from Israel are on the horizon

Sources close to the gas deal signed between Dolphinus Holdings, which is partly owned by Egyptian businessman Alaa Arafa, and Delek and Noble Energy, the lead partners managing Israel’s largest gas fields, say the latter companies are in talks with East Mediterranean Gas company (EMG) shareholders over acquisition of the company.

The deal would give Delek and Noble a controlling share of EMG, the company that owns the natural gas pipeline running from Egypt to Israel, and would facilitate the use of the pipeline to transport the gas allocated for export in the deal signed last week.

The source, who spoke to Mada Masr on condition of anonymity, says that a decision has been made to begin technical alterations to the pipeline to reverse its flow and allow operators to import gas into Egypt instead of having the country export gas to Israel, which was the previous arrangement according to a deal signed in 2008.   

The pipeline was the target of successive militant attacks after 2011. In 2012, the Egyptian Natural Gas Holding Company (EGAS) terminated its contract with Israel. The state-owned company attributed the decision to a breach of contract by EMG for delayed gas payments.

The alteration is, however, pending the Egyptian State Lawsuits Authority approval of a nondisclosure agreement whereby Egypt would pledge not to use the new deal, or information relating to it, in any legal proceedings related to current or future arbitration cases with Israel and Israeli companies.

The source says the request was presented to the lawsuits authority over a month ago and that there has not been a timeframe presented within which Egypt would be obligated to sign the agreement.

The quantity of natural gas reported in the initial agreement — 64 billion cubic meters over a 10-year span — is also only a third of the amount Israel expects to export to Egypt, according to the source, the remaining two thirds to be negotiated in the future.

Little information was previously available about Dolphinus Holdings, with Egyptian officials and state-owned media outlets billing it as an Egyptian private company party to the agreement in the immediate wake of the deal. However, the source close to the deal tells Mada Masr that the company is, in fact, registered in Switzerland rather than Egypt. Another source close to the governmental departments concerned with the deal says that Arafa is not the sole shareholder of Dolphinus Holdings, and that other players in Egypt’s energy sector hold stakes in the company and will be publicly identified soon.

The Texas-based Noble Energy and Israeli-company Delek announced last week that they struck an agreement to export US$15 billion worth of natural gas from Israel’s Tamar and Leviathan gas fields to Dolphinus Holdings.

Noble Energy and Delek stated that the deal involves the sale of an approximately 64 billion cubic meters over the span of 10 years. According to Dolphinus Holdings, talks were initiated to have gas flow into Egypt through the existing pipelines owned by EMG.

The source close to the deal reports that Dolphinus Holdings will pay Israel “a rate significantly lower than what Egypt had been paying to meet its needs for liquified gas over the past two years,” a figure the sources pegs at having exceeded $3 billion. “The same amount [of gas] will cost no more than $1.5 billion at the rate at which [Egypt] will purchase gas from Israel,” the source says.

None of the parties involved in the deal have disclosed the import rate so far. However, the rate “will definitely grant Egypt leverage in any future negotiations with drilling companies, meaning that — in light of the precedent of this contract with Israel — Egypt’s next deal with any gas company will include better conditions than those offered by the contract with Eni to drill in the Zohr field,” the source says.

Under the terms of the agreement, the imported gas will hit the Egyptian market next year. The tentative plan is to allocate a portion for national consumption, while the remaining supply is to be pumped into liquefaction plants for export, according to the source.

“Intermittent deliveries” to Dolphinus Holdings will begin this autumn or early next year on a trial basis, according to the same source. By spring 2019, the daily supply is projected to steady at 700 million cubic feet.

There are two natural gas liquefaction plants in Egypt: the Egyptian Liquefied Natural Gas company’s Idku complex, which is comprised of two liquefaction terminals, and the Italian-Spanish Unión Fenosa, which is based in Damietta and is comprised of one terminal.

The Egyptian Ministry of Petroleum and Mineral Resources holds a 12-percent shareholder stake in the Idku complex through EGAS and another 12-percent share through the Egyptian General Petroleum Corporation (EGPC). The remaining shares are divided between several private companies: Shell (formerly British Gas) at 35.5 percent, Malaysia’s PetroNas at 35.5 percent, and Engie (formerly Gaz de France) 5 percent.

Eighty percent of the Damietta natural gas liquefaction complex operated by Unión Fenosa is owned by Unión Fenosa and the Italian energy company Eni. The remaining shares are divided between EGAS, which owns 10 percent, and the EGPC, which owns 10 percent.

Workarounds for arbitration cases

The source close to the deal corroborates information Mada Masr published last year regarding the aims of negotiations to import gas from Israel. By striking a deal to import gas from Israel, Egypt aimed to find a way around the international arbitration fines of $1.7 billion, owed to the Israeli Electricity Company (IEC) and over $200 million, owed to EMG. Egypt also sought to terminate commercial arbitration with the relevant partners of EMG through the deal, thereby avoiding a potential arbitration fine of $8 billion, which would have been owed to Unión Fenosa.

Sources told Mada Masr in August 2017 that the Israeli government had agreed “in principle” to reduce the fine, in exchange for permission granted by the Egyptian government to the Egyptian private sector to import gas from Israel, as well as opening the door for negotiations over the demarcation of maritime borders in return.

Egypt realized that it was headed for an “inevitable loss” in the arbitration cases, according to the source who is well-informed on the deal. Therefore, a decision was made “to import gas [from Israel] at a very good rate, liquify it, and then export it at a higher price or use it [for domestic purposes] on a wide scale in the very lucrative petrochemicals industry.”

Recent comments from Israel, however, may indicate that the negotiations are not yet settled. On Monday, the Israeli newspaper Haaretz reported that Israel insists it has not struck an agreement to forfeit its arbitration payout.

“Israel hasn’t given up on the debt and the matter did not come up for discussion during talks on the Leviathan export deal to Egypt that was signed [last] week,” Israel’s Energy Ministry told the paper.

A senior Israeli government source, however, told the Israeli business newspaper TheMarker that, while he doesn’t expect Egypt to pay the arbitration settlement, such a move by Egypt will not affect electricity rates in Israel because the Israel Electric Corporation (IEC) has already written off the debt as unrecoverable and incorporated the losses into rates over the last six years.  

Near the end of 2015, the International Chamber of Commerce in Geneva ruled that EGAS and EGPC were obligated to pay the aforementioned sums in compensation to EMG and the IEC. The decision served as a penalty for Egypt’s April 2012 decision to halt gas exports to Israel after the pipeline was targeted by several attacks and Egypt came to import natural gas itself as the needs of its national market increased.

In 2016, Egypt’s Ministry of Petroleum and Mineral Resources began to import liquified gas. Now, it aims to meet domestic demand for natural gas by importing approximately 80 shipments of liquified gas at a price of $1.8 billion during the current financial year, a dip from the 118 shipments that were imported during the previous financial year.

Cyprus as part of Egypt’s plan to become a regional energy hub

While Dolphinus Holdings works toward importing gas from Israel through EMG’s pipelines, Egypt and Cyprus reportedly reached a preliminary deal to extend existing pipelines from Cyprus gas fields to Egypt’s Idku complex for re-export to agreed upon destinations, according to a government official quoted in the privately owned Al-Shorouk newspaper on Monday.

“The agreement deals mainly with Egypt’s share of the quantity of Cypriot gas to be exported through Egypt and the conditions for resorting to international arbitration to settle any potential disputes,” the source said. The cost of extending the pipeline, however, is still being negotiated, but initial projections from the source have it becoming operational between 2019 and 2020.  

A Cypriot government official whose work concerns Egypt and Cyprus’ economic cooperation spoke of an impending deal to Mada Masr in an interview conducted early last week and estimated that Cypriot gas will begin to flow into Egypt two years from now.

The Egyptian source who is well-informed of the Dolphinus Holdings deal corroborated the timeline as well, saying that any similar agreements with Cyprus would take no less than two years to be implemented, “not only for the extension of the supply pipeline, but also because the Cypriot field has yet to be developed. […] Such pipelines would have the capacity of 700 million cubic feet per year.”

Much like the gas imported from Israel, a portion of the gas imported from Cyprus would be allocated for national consumption, while the remaining portion would be exported through liquefaction plants, according to the source, who describes it as part of Egypt’s plan to become a regional energy hub.

Egyptian Minister of Petroleum Tarek al-Molla signed an agreement of principles last year with Cyprus’ Minister of Energy, Commerce, Industry and Tourism Yiorgos Lakkotrypis to supply gas from Cyprus via an undersea pipeline.

For the Cypriot official, who spoke to Mada Masr on condition of anonymity, gas exports from Cyprus to Egypt are “part of a major project, which will also involve Greece, Israel and perhaps other Eastern Mediterranean states for the benefit of all these countries.” Eastern Mediterranean countries, the Cypriot official says, “pay no attention to the Turkish threats against Egypt and Cyprus, as Turkey is incapable of hindering this cooperation.”

The agreement between Egypt and Israel, the Egyptian source believes, “has aborted Turkey’s plan to introduce itself to countries of the European Union as an international hub for the import of natural gas from the east to the west, by way of the pipeline through which gas is supplied from Russia to Europe via Turkey.”

And while the source concedes that Egypt and countries of the Eastern Mediterranean are unlikely to replace Russia as the largest supplier of natural gas to Europe, he says that Egypt is capable of contributing greatly to reducing Europe’s dependence on Russia’s gas, “diminishing Turkey’s significance to the Europeans and acquiring greater influence within European diplomatic circles.”

Demarcation of maritime borders with Greece

The Egyptian government has recently agreed to begin negotiations over the demarcation of its maritime border with Greece, according to a Greek government official and an Egyptian diplomat who are have direct knowledge of the negotiations.

Egypt signed a maritime border demarcation agreement with Cyprus in 2003, which came into effect in 2013 when it was ratified by interim President Adly Mansour. Technical negotiations over the demarcation of maritime borders between Egypt and Greece, however, are still underway. Official negotiations have yet to be launched, and no maritime border demarcation agreements have been signed between Egypt and Israel or the Palestinian Authority.

“Egypt recently agreed to begin the negotiations, even though Greece has yet to begin to demarcate its maritime borders with Turkey,” the Greek official says. The negotiations are projected to begin officially in April, he says, after the conclusion of Egypt’s upcoming presidential election, with the intention to develop a final agreement prior to the Greek legislative election, which is to be held next year.

Asmahan Soliman 

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