The deal for the export of Israeli gas to Egypt is first and foremost a surprise. No-one outside of Delek Group Ltd. (TASE: DLEKG) suspected that the negotiations that had been conducted with the Egyptians for three years were going anywhere, certainly not after a huge gas reservoir called Zohr, even larger than Israel's Leviathan reservoir, was discovered in Egyptian waters.
Delek Group insisted that the Egyptians were still in need of gas, despite the discoveries, but their presentations, which showed a meteoric rise in demand for gas in Egypt, failed to convince.
The signing of the agreement is therefore a personal achievement for Delek Drilling CEO Yossi Abu, who continued to believe in the Egyptian option, and invested his time and energy in it, despite the sceptics. The deal is of course good news for the Leviathan developers and for all those invested in the reservoir and who directly benefit from it.
This is also an important deal from the point of view of the Israeli gas industry as a whole. Up to now, development of the Leviathan reservoir was dangerously dependent on one strategic customer, the Jordanian Electric Power Company. This second gas agreement provides security that was very badly needed for the future of Israel's second major gas reservoir.
The path to implementation of the deal is still not clear, even physically. It is still not certain by what means the gas will be transported to Egypt: whether via the Kingdom of Jordan, which is demanding a high transit price, or whether via the old infrastructure of EMG. This question opens up old wounds that have never completely healed.
A short reminder: EMG, a company owned by Josef (Yossi) Maiman, a mysterious Egyptian partner, and investors from the US and Thailand, which held an exclusive right to sell Egyptian gas to Israel, signed a gas supply agreement with Israel Electric Corporation (IEC) in 2005. The gas started to flow in 2009 after prolonged delays, and not before the Egyptian company unilaterally raised the price of the gas by 40%. It later emerged that the original price was lower than the price at which gas was supplied to the domestic Egyptian market, which aroused claims of corruption against the regime of then president of Egypt Hosni Mubarak.
The supply of Egyptian gas was irregular, and ceased altogether following a series of explosions at pipeline stations in the Sinai Peninsula in 2011 and 2012. The explosions were blamed on Bedouin living near the installations, who took the initiative as Mubarak's rule collapsed, and apparently tried to extract protection money from the Egyptians.
Israel was caught unprepared for the halt in the supply of cheap gas from Egypt, and was forced to buy much more expensive diesel and fuel oil instead. The direct financial damage was put at NIS 15 billion; the Israeli financial institutions that had invested in EMG wrote off their entire investment, amounting to some $100 million; and IEC was saved from collapse thanks to massive government aid and a 30% rise in electricity prices.
IEC joined EMG's arbitration action in Switzerland against the Egyptian gas suppliers, and won a ruling awarding it $2 billion. Egyptian ministers have said that no Israeli gas will be sold to Egypt as long as this arbitration ruling stands. What will happen to it now?
Meanwhile, EMG also won in the arbitration proceedings it brought in Switzerland, and lately also won a court ruling in Egypt itself, awarding it damages of over $1 billion.
In order to join Israel to the Egyptian gas supply, EMG constructed a 90-kilometer undersea pipeline from El-Arish to Ashkelon at the astronomical cost of $480 million. When the supply of gas stopped, the pipeline was left abandoned, and many entrepreneurs eyed it covetously over the years. To whom does the pipeline belong? Can it be used again in the reverse direction? And who will prevent the Bedouin from blowing up the installations in Sinai this time? All these questions have again become acute.
Israel's experience with private companies whose ownership is mysterious - such as Dolphinus Holdings Ltd., the buyer of the gas in the current deal - also does not bode well. It can be presumed that, as in the previous round, everything will stand or fall at the will of one man; current Egyptian ruler General el-Sisi.
Published by Globes [online], Israel business news - www.globes-online.com - on February 19, 2018
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