March 5, 2012 | The Weekly Standard

How to Kill an Economy

Egypt sours on its (lucrative) gas deal with Israel.
March 5, 2012 | The Weekly Standard

How to Kill an Economy

Egypt sours on its (lucrative) gas deal with Israel.

Late last week Spanish authorities announced that they’re extraditing Egyptian businessman Hussein Salem, a close associate of former president Hosni Mubarak. Salem is a central figure in the post-Mubarak narrative of the regime’s rampant corruption. He has already been sentenced in absentia to seven years in prison by an Egyptian court for his alleged role in selling natural gas to Israel at below market rates. The problem with that narrative is that Israel pays top dollar for Egyptian gas. How that cash was distributed within Egypt is an entirely separate matter.

Even before Mubarak was toppled last February after three decades ruling Egypt, the sale of Sinai gas to Israel was an obsession of the opposition. The deal was one of the few major trade agreements between the two states and a symbol of normalized relations after decades of war. Despite the belief that the anti-Mubarak protests had nothing to do with Israel and focused solely on corruption and other domestic complaints, the reality is that the peace treaty was always one of the major beefs that the opposition—Islamists, Arab nationalists, and leftists alike—had with the regime. The widespread belief, more like an urban legend, that Israel and Mubarak had conspired to cheat Egypt out of its gas revenues bespeaks an abiding hostility to the treaty.

With Egyptian elections now giving the Islamists a majority in parliament, it’s perhaps only a matter of time before the gas agreement is canceled. And the 30-year-old peace treaty may also be in jeopardy, an ominous sign for the rest of the region. Worse yet for Egyptians, an end to the gas deal may doom an economy that is already plumbing the depths of third-world despair.

Post-Mubarak Egypt is ungoverned, one Israeli energy executive told me, and on the verge of ungovernable. In the 13 months since the uprising, there have been 12 attacks on the pipeline that supplies Egyptian natural gas to Israel (and to Jordan). The first occurred during the midst of the anti-Mubarak protests and the most recent was February 5, leading to a three-week disruption in service. In the last year, there were 245 days during which no gas flowed. When it did flow, the gas came in quantities substantially smaller than what had originally been contracted.

The issue, according to the Israeli executive, is not that it takes that long to repair the pipeline. The delays rather are due to the political uncertainty in Egypt. Ruling authorities from the Supreme Council of the Armed Forces are afraid to make decisions that might land them in jail or force them into exile, like Salem and other Mubarak associates.

Israel counts on Egyptian gas for roughly 20 percent of its electricity, but the stoppages have forced it to dip further into its own gas resources from the Mari-B field. The problem, explains David Wurmser, an energy analyst and head of the Delphi Global Analysis Group, is that “this field will soon be tapped out. There is a gap emerging and it’s unclear whether Israel will be able to bridge it.”

Israel’s large natural gas finds, especially the enormous Leviathan field, in the eastern Mediterranean basin may in time make the country not only self-sufficient but an exporter of natural gas. However, those fields have yet to come on line. The Tamar field, says Wurmser, is supposed to come on line in late 2012 or early 2013. It was thought before the Egyptian stoppages that the Mari-B field would not be depleted until late 2013. But at current rates, that field will be depleted well before Tamar comes on line, which Wurmser thinks may lead to some blackouts.

Before 2006, Israel relied on fuel oil and coal to generate electricity. Natural gas was cheaper than the former and cleaner than the latter, and a deal with Egypt would normalize relations. “Both governments wanted to show that the peace is real,” says Yosef Maiman, chairman of the Merhav group and Ampal-American Israel Corporation, which partnering with institutional Israeli investors, owns 25 percent of the Egyptian company, East Mediterranean Gas (EMG), that sells Egyptian gas to Israel.

In 2000, Maiman set up EMG with Hussein Salem. According to a WikiLeaks cable from the U.S. embassy in Cairo, “political concerns in Egypt” delayed the signing of a gas deal. The Egyptian government sought to isolate itself from political repercussions by encouraging the formation of EMG, which brought together Maiman and Hussein Salem, who owned a majority share of the company.

Maiman tells me at his home in Herzliya, a few miles north of Tel Aviv, that Salem said that “he was about as good a friend as Mubarak had. But even then it was very compartmentalized. Salem could laugh with Mubarak about the old times they had together, but nothing about politics.”

The agreements were signed in 2005, but Egyptian gas didn’t reach Israel until 2008, two years after Israel started to tap its own fields. In May 2009, the Egyptian government amended the gas purchase agreement to double the price, while also applying a higher price retroactively to the gas that had already been supplied. Israel was now paying Egypt more than what Cairo was charging customers like Jordan (which relies on Egyptian gas for 80 percent of its electricity), and twice what it paid for its own gas.

Far from getting a sweetheart deal from the Egyptian government, says Wurmser, Israel was being blackmailed. “The Israelis had to stomach an unfair situation because the consumer agreements with the Israeli customers were already signed.” As for the notion that Israel was paying Egypt much less than the going rate, Wurmser explains that there’s no such thing as an international market price on gas. “Gas infrastructure can only be built by market agreements. You don’t have free-floating Liquefied Natural Gas tankers. It’s run like a railroad system. There are specific calculations regarding how to service that particular train, which routes it will run, etc.”

Obviously, a precise understanding of market mechanisms will have no bearing on the case of Hussein Salem. The Egyptian street wants blood and the current rulers in the military will be only too happy to slake its thirst—if only to keep the mob from coming after them.

But if the gas agreement with Israel was on the level, then what is the basis for the charges of corruption against Salem? That he didn’t spread the wealth evenly among his fellow Egyptians? This is hardly an atmosphere conducive to business or investment. Rather, it suggests Egypt is perched, once again, on the precipice of an Arab socialist nightmare.

The country’s economy is bottoming out. Maiman notes that between the lack of tourism, a steep drop-off in workers’ remittances from neighboring Libya, the flight of capital and a lack of foreign direct investment, the country desperately needs money. Egypt is going begging to the Arab states, the IMF and World Bank, while it is sitting on natural gas that it refuses to profit from for political reasons. And if Egypt fails to meet its contractual obligations to Israel, it is difficult to see investors taking further risks in a political climate dominated by Islamists.

With the entire region now in upheaval after the Arab Spring, Maiman still thinks that Israel and Egypt “are two countries that could provide stability and create a tone for the region, by cementing their relationship.” Mubarak’s fall gave hope to many that Egypt, static for 30 years, might once again lead the Arab world. The sad reality is that the largest and still most influential of Arab states may drag the Middle East in the wrong direction.

Lee Smith is a senior editor at The Weekly Standard.

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