The case against Egypt selling gas to Israel

For what must be the third or fourth time since the Egyptian revolution began on January 25, the Sinai gas pipeline that takes Egyptian gas to Israel has been attacked. These attacks are not particularly dramatic, but are enough of a bother that it takes several weeks to restore the flow of gas to Israel — and often Jordan, which is affected by the pipeline. The people behind the attacks are thought to be Sinai-based Islamists who oppose the sale of gas to Israel, but we don't really know for sure. The attack took place only 60km east of the Suez Canal, and it could very well be people from the Nile Valley carrying out the attacks — and they don't have to be Islamists, either, since plenty of other people oppose the gas deal.

Since the revolution, the interim government has reviewed gas prices but thus far everything indicates that the sale of gas will continue. From what I've been able to gather (and I'd like to write something longer on this one day), Egypt was selling the gas to Eastern Mediterranean Gas (EMG), the private firm that then sold the gas to the Israeli National Electricity Company, at around $3 per mbtu (that's million British thermal units — the standard measurement for these things). EMG then sold it to the Israelis for around $4.5 per mbtu, pocketing a 50% profit margin for no more than the transaction costs and some of the infrastructure between the two countries. The market price for gas (which is not as fungible as oil since it tends to rely on pipeline infrastructure unless shipped as LNG) is currently around $4.40 for futures in North America, but spot markets in recent years passed the $10 per mbtu mark. Either way, there is no doubt that the price of the gas sold by Egypt to EMG was well below market prices, and that the company made an easy profit without investment of its own (I'll leave the issue of whether EMG sold the gas to Israel at a fair price aside.)

EMG is owned in large part by an Egyptian business, Hussein Salem, who has long been known to be a frontman for the Mubarak family (and is a former security official), and Yossi Meiman, an Israeli businessman close to the Sharon clan in Israeli politics (he owns the Israeli energy company Merhav), as well as some additional minority investors from South East Asia. Incidentally, although this was not widely known until after the revolution, Salem (who has been arrested in Madrid recently and is wanted by the Egyptian authorities) also had a similar deal set up with Jordan, involving the same kind of markup, and this deal (it's not clear with who on the Jordanian side, but I'd look at the royal family or the security services) is also being reviewed by the Egyptian authorities.

In the last few years, when lawsuits were filed in Egypt against the sale of gas to Israel, the government often claimed that it was only selling gas to EMG, and has no transactional relationship with Israel. This is the ideal time to turn the argument on its head. If EMG was involved in high-level corruption under the previous regime, it is perfectly understandable if the Egyptian government, which controls the sale of natural gas, were to decide to terminate its relationship with EMG. This does not mean that EMG can't sell gas to Israel: it would just have to meet its commitment from elsewhere than Egypt. Legally, this procedure may be dicey. EMG is free to resort to international arbitration, or even sue (which would provide an opportunity to look into its accounts). But my feeling talking to energy people in Cairo from multinationals (many operate in Egypt — huge ones like BP, BG or Statoil and independents like Apache) is that they don't care if the Israeli gas contract is not honored. They want to cover their bacon first, and have assurances that their own substantial investments in Egypt will be untouched. They don't care about the Israelis and understand if the deal is cancelled, it will be an understandable political exception.

Now, it's likely that there were personal commitments from Mubarak to successive Israeli governments that the gas would continue. If these exists on paper, let the government make them public. If they don't — well, an oral contract is as good as the paper it's written on and we fall back to a relationship between Egypt and EMG. And then let's see that contract and get the details of how this massive fraud was conducted. There remains a lot of uncertainty of what the state-to-state relationship is, however, considering former FM Nabil Al-Arabi's statement that Israel should pay the difference in price for already purchased gas.

Another aspect of this story is that it is widely believed the US encouraged this deal as a peace-building measure. It was certainly true of the 1980s and 1990s, but I have no details of what role the US played in the EMG deal. That's another question worth investigating, because the US Embassy in Cairo knew who Hussein Salem was (he was previously convicted of fraud by a US court in a corrupt deal involving the Egyptian army and US military aid), so if it did pressure the Egyptian government on the deal (which initially involved no American investor) one should ask why they did so if they knew of the corruption involved. It may be involved today because a US investor in EMG is threatening to sue the Egyptian government to respect its commitments to Israel. This is something worth digging into, particularly as US pressure in favor of the EMG deal was said to be strong in 2005, precisely at the time the Bush administration was pressuring Mubarak on democracy. Was there a quid-pro-quo there, considering the democracy promotion was abandoned in 2006 as Egypt's policies generally became more explicitly pro-Israeli (of course there was the Hamas election too at the time)?

It will probably fall to the next parliament and president of Egypt to make a decision about the Israeli gas deal. But it appears right now that negotiations are underway to continue the gas flow at a renegotiated price, so the matter could soon be resolved. I am all in favor of selling gas to Israel — it makes sense as part of a coherent and transparent energy policy, if domestic needs and LNG export commitments are sufficiently covered. But not to an Israel that continues to occupy Palestine and the Golan Heights, and wages punitive wars against civilian populations as it did in Lebanon in 2006 and Gaza in 2009. Just like the boycott campaign against South Africa in the 1980s, a boycott campaign against Israel today makes moral sense. Those Egyptians who support it need to demand greater transparency on the deal (i.e. access to contracts, prices, individuals involved etc.) from their government, and help those of us from other countries (US, Israel) who want to greater clarity on their governments' involvement in what was clearly, from the very beginning, a massively corrupt endeavor.