Natural Gas: Egypt’s Subsidy of Israel

Monday, 18 April, 2011 - 20:07
London, UK

Shir HeverMubarak’s regime in Egypt has been Israel’s most valuable ally in the region until recently. The role played by the Egyptian army in tightening the siege on the Gaza strip is well known, and included allowing Israel to remotely-control the Rafah crossing and deploying soldiers along the Gaza border. These soldiers opened fire on Palestinians as they were fleeing the Israeli onslaught in 2008, during operation “Cast Lead”.

A less known aspect of Egypt’s support of Israel, however, is the gas deal signed in 2005. Egypt is the largest producer of natural gas in the eastern Mediterranean, and in 2005 entered a 15-year agreement to sell thegas to Israel. The deal is facilitated by EMG, a company owned 58% by Israeli investors and 28% by Egyptian investors. According to the deal, Egypt would sell 1.7 billioncubic meters to Israel annually.

Egypt is not a very important market for Israel, and only accounted for 0.6% of Israel’s imports and 0.25% of its exports for 2010. However, the importance of the gas deal should not be underestimated. The gas has been offered to Israel at a below-market price, undercutting any other natural gas provider in the world.

The meaning of the deal is that Egypt has given Israel a gift, which already cost Egypt about US$ 500 million. Egypt also offered low gas prices to Jordan. Mubarak’s eagerness to strengthen his ties with Israel, whose repression of Palestinian resistance also served his need to keep opposition groups cowed, came at a high price to the Egyptian economy.

Egypt can ill-afford to subsidize Israel’s energy consumption. In 2010, the Egyptian government has even considered buying back 1.5 billion cubic meters of natural gas from Israel, paying US$ 14 billion for an amount which it sold for a mere US$ 2 billion. Over 15 years, Egypt planned to sell to Israel over 28 billion cubic meters of gas out of its estimated reserves of 2,180 trillion cubic meters. It is even more surprising that Egypt, in which annual per-capita gross national income (GNI) is around US$ 2,000, would be subsidizing goods for Israel which has about fourteen times as much per-capita GNI.

The criticism over this deal began before the mass demonstrations in Tahrir Square. Criticism from the opposition in Egypt called for the government to stop selling the gas to Israel below the market price. For the past six months, the Egyptian government negotiated with the EMG company over an increase of the price. Yet, only a month ago, towards the end of Mubarak’s regime, the Egyptian court ruled that the Egypt-Israel agreement over the sale of gas is legal, a ruling which strengthens Israel significantly in the negotiations. On March 11th, Egypt’s new petroleum minister Abdullah Ghorab criticized the low gas prices offered to Israel and six European countries, and said that the agreements can and should be amended. Egypt has already announced that natural gas prices to Jordan will be more than doubled.

As the revolution in Egypt began, sabotage of the main gas pipe on February 5th stopped natural gas flows to Israel, but they have been renewed by March 16th. Officials in Egypt, however, argued that Egypt should demand a fair price for the gas from now on. Egypt is likely to increase the price to EMG by about 70%, which would mean at least a 40% increaseto the price paid by the Israeli electricity company.

Egypt is facing a dilemma which is well-known to countries coming out of authoritarian rule, such as South Africa coming out of Apartheid in 1994. A new democratic government must deal with international agreements and business policies set by the former regime, and risks losing international legitimacy if they break these agreements.

Egypt, however, has already faced a similar dilemma before. In July of the year 1956, Gamal Abdel Nasser decided to nationalize the Suez Canal, and keep it as an asset of the Egyptian people rather than let Western countries continue to profit from it. Britain, France and Israel invaded Egypt as punishment for the nationalization.

It remains to be seen in the very near future how the new government in Egypt will treat the natural gas resources. Will they put the interests of their population above the commitments made by the former corrupt regime? And what punishment might be in store for them by Israel and the U.S if they choose to cancel the old agreements?

Shir Hever is an Israeli economist and commentator who researches the economic aspects of the Israeli occupation of the Palestinian territories.

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