State owned Egyptian Natural Gas Holding Company's (EGAS) cancellation of the gas supply and purchasing agreement with East Mediterranean Gas Company (EMG) will have little effect on Israel, says Citi Capital Markets. It adds that the agreement will likely hurt Egypt more than Israel.
Citi says that the disruptions in Egyptian gas deliveries in 2011 and the first quarter of 2012 has given Israel Electric Corporation (IEC) (TASE: ELEC.B22) plenty of opportunity to find alternative sources of supply, particularly since the agreement’s suspension is unlikely to have come as a surprise. It adds, "Although the Israeli Ministry of Finance estimated that Egyptian gas suspensions have cost Israel NIS 15bn (1.7% GDP), we don’t think that the damage to Israel is particularly visible. And since Israel’s offshore gas field Tamar is due to begin production in April 2013, any further domestic shortfalls are likely to be relatively brief."
As for Egypt, Citi says, "Long-run costs may outweigh any short-run benefits. Few details of the gas agreement are known, but Egypt is widely reported to have been supplying gas to Israel at below-market prices. The deterioration in Egypt’s relationship with Israel is likely to lead to economic costs in future. Although Egypt’s gas exports have no formal status within the Camp David accords that govern Egyptian-Israeli relations - Egypt was not a gas exporter in 1979 - this week’s news is perceived as a symbolic devaluation of Camp David, which in turn could have real-money consequences for Egypt in two main respects." These effects include greater risk of diminished US aid. Although $1.3 billion has already been approved for 2012, future aid allocations are growing less likely. The decision also jeopardizes Egypt's Qualifying Industrial Zones (QIZs), which generated almost $1 billion in exports in 2011.
Published by Globes [online], Israel business news - www.globes-online.com - on April 24, 2012
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