The emerging deal between the Israel Electric Corporation )IEC) and Egyptian company Eastern Mediterranean Gas (EMG) for importing natural gas is important for the development of Israel’s natural gas and energy economy, and also has political bearing on the strengthening of Israeli-Egyptian relations. At the same time, the deal gives rise to questions involving economics, geopolitics, and business ethics.
Under the emerging deal, the IEC will import 1.7 billion cubic meters of gas per year for 20 years, starting in 2006. The deal is worth an estimated $150 million per year, amounting to a total of $3 billion over 20 years. The gas will be transported to Israel through an undersea pipeline from El Arish to Ashkelon, to be built by the EMG. The IEC will use the gas in its power plants, which will be converted from crude oil and diesel fuel to natural gas, which is cheaper and less polluting.
The negotiations for the purchase of Egyptian gas, which began a decade ago, have experienced ups and downs, and were halted several times for political reasons. The parties were close to signing an agreement in 1999. The negotiators on the Egyptian side were British Petroleum (BP) and Italian energy company ENI, which own the Egyptian gas. The negotiations were broken off at the order of Egyptian President Hosni Mubarak, then renewed a year later. The new negotiator on the Egyptian side was EMG, which was given a franchise by the Egyptian government to export the gas, while BP and ENI were ousted from the negotiations. The new negotiations, which began in 2000, were again broken off by Egyptian when the intifada began. The negotiations were once again restarted in August 2003, after Prime Minister Ariel Sharon ordered the IEC to give priority to Egyptian gas over the Palestinian gas offered by Britsh Gas.
According to its website, EMG, a private company, owned by Mubarak confidant Egyptian businessman Hussein Salem 20%, the Egyptian General Petroleum Corporation (EGPC) 10%, and a series of anonymous companies registered in the Netherlands and the UK. Israeli businessman Joseph (Yossi) Maiman is co-vice chairman of EMG.
It was recently reported that negotiations between the parties had made progress, but the IEC board of directors delayed the signing of take or pay contract, and asking for clarifications and the necessary government approval on a number of disputed issues.
First of all, it has been learned that the IEC will not need the full amount of gas it is due to buy from Egypt in the early years of the contract. The IEC is demanding that the government force private electricity producers and other business concerns to buy the excess gas, or bear the heavy losses. The IEC claims that the government is complicating its planning for the volume of electricity to be produced and the quantity of gas needed by authorizing private developers to construct private power plants. The IEC also says that construction of the gas transportation infrastructure for its power plants will not be completed by the time the supply of Egyptian gas will begin. The government published its first natural gas pipeline tender in 1997, but not a single meter of the infrastructure has been built, except for the pipeline connecting the gas fields off the Ashkelon shore, owned by the Yam Thetis partnership, to the IEC plant in Ashdod.
It is customary in long-term contracts of this type around the world for the supply to grow over the period of the contract, until it reaches the maximum quantity needed for consumers. It is therefore astonishing that the IEC is willing to make an advance commitment to buy the full amount of gas in the first year, when negotiations can be conducted with Egypt for a gradual increase in the quantity of gas to be supplied. The Israeli government recently authorized the construction by the IEC of an additional 1,200-megawatt coal-fired plant in Ashkelon, which will begin operating towards the end of the decade. Construction of the coal-fired plant can be postponed a few years to make way for Egyptian gas. In any event, the government should not force private electricity producers trying to establish themselves and compete with the IEC to buy the gas they need from the IEC when other suppliers, such as Yam Thetis and British Gas, are also willing to sell them gas.
Secondly, EMG is reportedly demanding that the IEC provide a guarantee amounting to hundreds of millions of dollars for buying the gas. No such guarantee was given to Yam Thetis. If any guarantee is given, it should be from EMG to the IEC to ensure the supply of gas. Such a guarantee should include compensation for possible disruption or discontinuation of gas supplies for any reason whatsoever, whether technical or political. Israel should also insist that the agreement should be anchored in an agreement between the Egyptian and Israeli governments, including a commitment by Egypt to supply gas to Israel, similar to the commitment to supply oil to Israel included in the 1979 Camp David Israeli-Egyptian peace agreement.
Finally, the IEC is a public company, which issues securities in Israel, the US, and Europe. As such, it is required to meet the stringent rules of fairness and full disclosure. The deal must meet both the strict rules imposed by the Israel Securities Authority, and the US Foreign Corrupt Practices Act Anti-bribery provisions. It is therefore recommended that the IEC and the government obtain legal counseling from a reputable US law firm specializing in such contracts, in order to avoid future complications, due to lack of full disclosure to investors.
The chairman and board of directors of the IEC bear personal responsibility for insuring that the contract for the supply of natural gas suits the business interests of the IEC, and nothing else. It is not their job to consider other factors, including the political interests of the government of Israel, which is interested in promoting ties with Egypt. For its part, the government must verify that the IEC is behaving with complete transparency in this delicate contract, and quickly construct gas transportation infrastructure, for the general good of Israeli consumers. Published by Globes [online] - www.globes.co.il - on March 17, 2004