Wednesday, September 03, 2008

Jerusalem concerned as Egypt halts gas supply to Israel

Avi Bar-Eli

The supply of natural gas from Egypt to Israel was halted on Friday and has yet to be resumed. Concern is mounting in Jerusalem: Sources there believe Egypt is struggling to supply all its clients, and has chosen to cut back its supply for its neighbors, including Israel, some of which pay especially low prices for the fuel. Israel receives Egyptian gas through Egyptian-Israeli consortium EMG.

The Israel Electric Corporation, which is the main consumer of the Egyptian gas, has resorted to buying larger amounts from the Tethys Sea group through spot deals that are significantly more expensive. The outcome could well be higher electricity bills for Israel's consumers as the IEC rolls over the higher cost onto them.
In 2001, EMG won a tender issued by the IEC to supply gas at an attractive price of $2.75 per million BTU (British thermal units). The commercial contract with the IEC was signed in 2005, after the governments in Cairo and Jerusalem signed an umbrella agreement guaranteeing the supply of gas.

The contract locks in a 15-year supply of gas, at a pace of 1.7 billion cubic meters (BCM) a year, with the options of increasing the supply by 25% and extending the deal by five years.

In 2006 EMG began laying down a 100-kilometer undersea pipeline to bring the gas from El-Arish in Egypt to Ashkelon, at a cost of $470 million. The works ended in 2007 and gas began to flow on May 1, 2008.

But the pipeline's operation has been anything but smooth, sometimes halting because of problems with the quality of the gas. Also, only about a third of the promised amount has been forthcoming.

Meanwhile, opposition has been rising in Egypt, partially against the sale of gas to Israel, but mainly against the relatively low price set in the contract. Officials from both countries have held a series of dramatic, top-secret meetings regarding the volume of supply and change to the contract signed between EMG and the IEC.

Egyptian sources strongly implied that they want to reopen the deal. Talks have broken down since then.

EMG has frozen talks to sell Egyptian gas to other Israeli consumers, until the relations between the two countries clear up. However, EMG did place a bid in another IEC tender, for the supply of 5 BCM more.

Sources in Israel's energy market say that Egypt simply doesn't have the production capacity to supply its own consumption of gas and its contractual obligations to clients. That is why Cairo has had to decide on cutbacks in the gas it supplies - and it decided to start with the countries to which it supplies gas at subsidized prices - Jordan and Syria, or at a discount - Israel.

Meanwhile, in any case, voices of opposition to the deal with Israel have been growing stronger. Foreign news agencies have been reporting that a Cairo court will be discussing a petition by opposition politicians in Egypt, challenging the legality of the agreement between Israel and Egypt.

"The commercial agreement between the Israel Electric Corporation and EMG rests on the agreement between the two nations to supply gas to consumers in Israel," the IEC stated. "We are handling the day-to-day issues, while the government is handling the strategic issues. Based on the information we have at hand, we believe that the gas supply problems will be resolved shortly."

The National Infrastructures Ministry commented that it was aware of the technical difficulties in supplying gas from Egypt to Israel, but stressed that it has faith in the agreement between the two countries.

"We have no doubt that Egypt will stand by the agreement it signed with the government in Israel, including the commercial agreement signed between EMG and Israeli customers. The ministry is in constant contact with government officials in Cairo and in parallel is making great effort to assure additional sources of gas, including Russia and Azerbaijan," the ministry stated.

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