An Egyptian-Israeli agreement: New maritime borders and Israeli gas imports for a reduced gas fine
A BG Group liquified natural gas terminal in Egypt - Courtesy: BG Group

Egypt has reached preliminary agreements with Israel to resolve an international arbitration case, in which Egypt is required to pay a US$1.76 billion fine for suspending gas exports to Israel in 2012, according to private and public sector sources.

Four sources close to the negotiations, speaking on condition of anonymity, confirm to Mada Masr that the Israeli government has agreed “in principle” to reducing the fine in exchange for allowing the private sector to import gas from Israel, and opening the door for the demarcation of maritime borders between the two countries.

According to an Egyptian official directly involved in Egyptian-Israeli relations, the demarcation of maritime borders was on the table during an during a closed-door meeting between President Abdel Fattah al-Sisi and Israeli Prime Minister Benjamin Netanyahu which took place on the margins of the United Nations General Assembly in September, 2016. Delegations from both countries continued the negotiations, with Israel requesting that Egypt accept a proposed draft of the demarcation, the details of which will be negotiated at a later date.

The fine stems from a 2015 ruling issued by the International Chamber of Commerce in Geneva that required the state-owned Egyptian Natural Gas Holding Company (EGAS) and Egypt’s General Petroleum Corporation (EGCP) to pay a $1.76 billion fine to the Israeli Electricity Company (IEC), as well as $288 million to East Mediterranean Gas (EMG) for halting gas supplies.

As per a 20-year contract, Egypt had been exporting natural gas to Israel since 2008 through an EMG pipeline which became a target of several militant attacks following the January 25 revolution.

EGAS decided to terminate the contract with the Israeli government in April 2012, justifying the decision by accusing EMG, owned by Egyptian and Israeli businessmen, of breach of contract for delayed gas payments.

The four sources say that the Egyptian government sought American and European mediation to resolve the international arbitration case filed by Israel. A preliminary agreement was reached to reduce the fine to somewhere between $300–500 million, noting that negotiations were still ongoing regarding the final amount and the payment details.

Importing Israeli gas

The government issued a decree in August, on the back of a law ratified by Sisi and approved by Parliament in July, which will permit private sector companies to import and sell gas on the Egyptian market after obtaining a license from a natural gas regulatory authority, which is expected to be formed by the end of 2017.

The need for imports followed a crisis in the local natural gas supply, which prompted the Egyptian government to stop supplying liquefaction terminals for the purpose of export, instead redirecting gas to electricity plants.

There are two natural gas liquefaction plants in Egypt. The first is the Idku project, owned by the Egyptian Company for Liquefied Natural Gas (LNG) and founded by foreign investments worth approximately $2 billion, which has two liquefaction units. The other, in Damietta, belongs to the Spanish-Italian company Fenosa, and has only one unit. The daily liquefaction capacity of these plants is estimated at 59.5 million cubic meters of gas.

Companies operating in Egypt also signed a series of initial agreements with Israel in 2015 to import gas and liquefy it at their plants, to be re-exported.

CompanyPreliminary agreement
British Gas Egypt (taken over by Shell)Import of 7 billion cubic meters of gas annually from the giant Israeli natural gas field Leviathan to the Idku liquefaction factory. The contract is for 15 years at a value of $30 billion for the duration of the contract.
Union Fenosa Gas (Spanish-owned)Import of 2.5 trillion cubic feet of gas from American Noble Energy, which owns 36 percent of the Israeli Tamar gas field, to be channeled to the Damietta liquefaction factory. The preliminary agreement covers a period of 15 years.
Dolphinus Holdings (owned by Alaa Arafa)Import of up to 4 billion cubic meters of Israeli gas annually, for a period between 10 and 15 years.

Demarcating the border

In 2003, the Egypt-Cyprus maritime border was demarcated and subsequent technical discussions between Athens and Cairo aimed to do the same. Egypt has not yet signed an agreement to set maritime borders with Israel or Palestine.

According to one of the four sources, “There is an understanding between Egypt, Cyprus, Greece and Israel on the demarcation of the maritime borders, to enable the extraction of natural gas in the eastern Mediterranean basin, which would help convert the area into a regional energy center.

However, the government official, who is involved in Egyptian-Israeli relations, asserts that there are divergent opinions within Egyptian state institutions regarding Israel’s proposal for maritime border demarcation.

Some reservations are technical, concerning how many nautical miles Israel hopes to obtain. State bodies also voiced political and security-oriented concerns regarding Egypt’s security responsibilities following the demarcation of borders, the compliance with the maritime blockade imposed on Gaza and the possible consequences of the Egyptian-Israeli border on sovereignty and water rights for Palestinians.

However, the official adds that some stakeholders and institutions in Cairo and Tel Aviv see an opportunity to achieve progress on the border demarcation in the light of recent improvements in Egyptian-Israeli relations on political, military and security fronts, as well as the promising investment opportunities offered by natural gas discoveries in the eastern Mediterranean.

According to the United States Geological Survey (USGS), the reserves of the Mediterranean basin are estimated at 122 trillion cubic feet of natural gas, and about 107 billion barrels  of crude oil. Egypt’s liquefaction facilities are the only ones in the region, and they are sought out by Israel, Greece and Cyprus.

Ahmed Saeed 
Asmahan Soliman 

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