Why Israel's gas deal with Egypt really blew up

After some two dozen bombings of the natural gas pipeline linking Egypt to Israel, Cairo has canceled a gas supply contract between the two nations 12 years before its official expiration.

Outside analysts attribute the loss of Egyptian gas -- the source of 40 percent of Israel's gas needs -- to the Arab Spring, which ousted President Hosni Mubarak in February 2010.  But 33 years after they became the first to sign a Jewish-Arab peace, Israelis and Egyptians themselves say it is pure business.

Daniel Byman, a professor colleague at Georgetown University, says he does not expect fighting down the road, but that politics between the neighbors is likely to worsen. "I think it signals that the cold peace will get even colder," Byman told me in an email exchange. Byman:

I think [the Israelis] will not react calmly -- they've been doomsaying about the new government in Egypt, and this seems like proof (and, frankly, they have a point, I think, with this one).

Maybe so. Regional politics surely contributed to the gas cancellation, announced yesterday. Yet, when you examine the few contractual details that are out there, the picture becomes mixed.  

Under the 2005 deal, gas began to flow four years ago. The parties in the deal have the usual labyrinthine appearance one sees in energy contracts abroad: Egypt's state gas company, EGAS, sold the gas to a private Egyptian-Israeli concern called East Mediterranean Gas (EMG), which then sold it on to Israel and Jordan, according to accounts by Reuters and the Wall Street Journal.

Why was the gas not sold directly? That's what the Egyptian public -- highly agitated over the deal in the country's current presidential campaign -- would like to know. Egyptian voters also are asking why the gas has been sold for just a bit over the fire-sale prices it receives in the glutted U.S. -- $2-$3 per 1,000 cubic feet, lower than the $4 per 1,000 cubic feet that Egyptian businesses pay for gas, according to the WSJ account, and much lower than gas goes for in Europe and Asia.

Egypt is trying Hussein Salem, a major EMG shareholder who lives in Spain, in absentia on corruption charges that include the allegations surrounding the gas deal. One allegation is that large middleman fees changed hands in the completion of the contract.

What will Israel do now? Given the disruptions over the last 14 months, it has already been importing much of its gas from elsewhere at a higher price. Egypt has said that Israel can negotiate a new price, which once suspects that it will attempt: Massive volumes of gas have been discovered off of Israel's shores, notes Byman, but "it takes a while to develop."

AFP/Getty Images

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