Abu Dhabi, UAEThursday 13 December 2018

'Peace pipeline' deal in ruins as energy officials await their fate

Four years after the first unit of gas was pumped through what has been called the 'peace pipeline', a gas deal between Egypt and Israel collapsed in a confusion of regional politics, bombings, corruption charges and lawsuits.
This gas pipeline, which supplies gas from Egypt to Israel, has come under attack at least a dozen times since former Egyptian president Hosni Mubarak was toppled.
This gas pipeline, which supplies gas from Egypt to Israel, has come under attack at least a dozen times since former Egyptian president Hosni Mubarak was toppled.

CAIRO // It had the makings of a deal for the century: Egypt would export gas to Israel, a country it has long seen as one of its greatest security threats.

The deal, which was signed in 2005 and was set to run for 20 years, appeared to be mutually beneficial. Egypt would fill its coffers with profits and cement its national security. Israel, long-reliant on fuel imports to run its power stations, would get access to a new source of cheap gas.

But just four years after the first unit of gas was pumped through what has been called the "peace pipeline", the deal collapsed in a confusion of regional politics, bombings, corruption charges and a dizzying array of arbitration proceedings and lawsuits.

The demise of the gas contract illustrates how Egypt's fast-growing energy needs is weighing heavily on the country's economy, and its fraying relations with Israel, after the January 25 uprising that paved the way for the country's first Islamist president to be elected last week.

Today, a criminal court hearing related to the gas deal is scheduled that could end up sending some of the country's former top energy officials to prison or set them free after more than a year and a half of detention while awaiting trial.

The case has taken on a political dimension, with many critics of the Hosni Mubarak regime pointing to the deal as one of the former president's crimes. It was alleged that Mubarak awarded a lucrative contract to a business tycoon he was close to - and who he bought villas from in the past. It was claimed the tycoon, Hussein Salem, then used the subsidised price from the Egyptian government to make money at the loss of the Egyptian people.

However, Mubarak was found innocent earlier this month of any wrongdoing related to the gas deal. He was sentenced to life in prison for his complicity in the killing of protesters during the uprising.

The Egyptian government maintains that its termination of a deal in April with the sole broker and owner of the pipeline, East Mediterranean Gas (EMG), was because EMG had stopped paying the Egyptian government for the gas. At the time, EMG was owned by international investors from Thailand, Turkey, the United States, Poland and Israel.

However, an examination of official documents and agreements seen by The National, and interviews with officials involved with the deal, reveal that deficiencies in the agreement between the two countries put it on a slow-motion path to destruction for more than a decade.

"The whole arrangement was totally illogical from the start," said Joseph Paritzky, who served as Israel's minister of national infrastructure and energy from 2003 and 2004. "The idea of Israel buying gas from Egypt was good, but what was actually created had no transparency and the characters were suspicious."

Shadowy beginnings

The idea of selling Egyptian gas to Israel had been around since the mid-1990s, but negotiations never yielded a solid plan until two men with a history of espionage came up with the idea of a go-between company.

EMG was formed in 2000 by Salem, an Egyptian businessman who had access to the highest echelons of the Mubarak regime, and the Israeli Yosef Maimen, widely reported in the Israeli press to be an ex-Mossad agent who had worked with Salem on an earlier project to build a refinery in Alexandria.

Little is known about Salem's past, other than that he was a confidant of Mubarak. But he was a long-time source for the Egyptian intelligence, according to retired General Mohammed Rashad, who was a member of the Egyptian intelligence services from 1966 to 1993.

"Salem was never on our staff, but he was useful," he said. "His character is one of someone who knows how to climb the ladder very fast. He knew how to get to people and use them. In time, he built up connections across the world."

Mr Maimen is the founder and chairman of Merhav Group, an Israeli conglomerate with interests across the world in energy, infrastructure, agriculture and investment. One of the consultants he used on the EMG project was Shabtai Shavit, an ex-head of Mossad.

EMG's negotiations with Israel and Egypt were cloaked in secrecy, which fuelled suspicions among Egyptians that the country's rulers were making a pact with the devil. A key criticism was that the prices that Israel paid from 2008 were considered subsidised by the Egyptian taxpayer, but analysts say this was true of all of Egypt's gas exports at the time.

As news of the deal emerged in the Egyptian press in 1999 and 2000, it was attacked by critics, legislators and the general public. Demonstrations were held against Egypt's cooperation with a country that many saw as the brutal oppressor of the Palestinians.

Egypt's gas shortages

A dispute over the pricing of the gas exported to Israel concealed a bigger problem brewing in Egypt: its rapidly rising domestic demand for natural gas.

Egypt had continuously refused to send the contracted amount of gas to Israel from the moment gas started flowing in 2008. At first it seemed that Egypt was using this tactic as a bargaining chip in price negotiations, but the shortage continued even after new contracts were signed in 2008, with Egypt getting a higher price in the renegotiated deal.

Energy experts and officials involved with the gas pipeline deal believe the real reason was that Egypt Natural Gas Company (EGAS) and Egypt General Petroleum Company (EGPC) were having trouble producing enough gas to meet export contracts.

This meant Egypt was in breach of two export agreements it had signed related to the gas deal with Israel in 2005 but, up to last year, Israel's electricity company and EMG opted to continue negotiations rather than file lawsuits.

By last year, Egypt's ballooning energy subsidies and rising domestic consumption had put even greater pressure on export agreements.

"We are currently at a critical level in Egypt," Magdy Nasrallah, a consultant to energy companies in Egypt and a professor in the department of petroleum and energy at the American University in Cairo, said in May.

"We are only producing a little bit more than our consumption. There is higher demand for electricity production. We are very quickly consuming most of our gas."

Professor Nasrallah believes Egypt will not sign any more export agreements for several years because consumption will outpace supply.

In an interview, Mohammed Shoaib, the chairman of EGAS, denied that increasing domestic demand had anything to do with the cancellation of the contract with Israel. He said that decision was based solely on EMG's failure to make payments.

Exit plan

By 2008, it seemed that only the men behind the original contract saw the fractures forming in the deal. The political gains were quickly being overshadowed by commercial disputes and gas shortages.

They began selling many of their stakes, leaving a new group of international businesses holding equity in EMG.

Those shareholders are now suing the Egyptian government for billions of dollars.

Salem sold his entire stake in EMG in March 2008, just months before gas started flowing.

His biggest chunk, a 28 per cent stake, was sold to Ali Evsen, a Turkish businessman who is the subject of an Interpol warrant earlier this year for a charge of fraud at the request of Egypt. Mr Evsen denied wrongdoing in an emailed statement, but confirmed he was under investigation for alleged money laundering in Spain that was connected to Salem.

The rest of Salem's stakes were sold to PTT International, a Thai company, and Sam Zell, an American billionaire.

In a rare interview on an Egyptian talk show in May, Salem said he sold his shares for about US$500 million, (Dh1.8bn) giving him a profit of about US$400 million.

Mr Maimen sold a portion of his shares into pension funds through three joint ventures he created, but he still owns an undisclosed stake.

Revolution victim

The 18-day uprising that toppled Mubarak from the presidency early last year created the circumstances that led to the gas deal's coup de grace.

Unknown assailants in Sinai, taking advantage of the country's security vacuum, attacked the pipeline supplying gas to Israel and Jordan. There were 14 remote-control bombings in total from January last year to April this year, each requiring the complete shut-off of gas while the pipeline was repaired. Egypt's exports to Israel fell to a new low and Israel was forced to scramble to find alternatives.

EMG stopped making payments to the Egyptian government after the first explosion.

In the weeks after the uprising, the Egyptian public prosecution also let loose a flurry of charges against officials and businessmen associated with the pipeline deal.

Several top energy officials involved with the pipeline, including the former oil minister, Sameh Fahmi, were arrested. Together with Salem they were charged with profiteering and causing the Egyptian government to lose $714 million by allegedly setting prices below international market rates, "hurting the country's interest" and "enabling others to make financial gains", according to the prosecutor general.

The government's witness calculated that a higher price could have been achieved throughout the history of the contract. Salem is accused of profiteering, but the others are accused of causing losses to the state, not profiteering.

Salem was arrested in Spain in June last year on charges of money laundering. He is now awaiting extradition to Egypt, where he was convicted in absentia on one charge of money laundering and profiteering in Egypt and sentenced to seven years in prison. He may be retried on that case as part of an agreement with the Spanish court if he is extradited.

Mubarak and his sons, Gamal and Alaa, were acquitted of corruption charges in a separate case related to villas bought from Salem that prosecutors argued were in exchange for political favours connected to the gas deal with Israel. Judge Ahmed Refaat ruled on June 2 that the statute of limitations of 10 years had expired for the allegations.

The decision to terminate the gas agreement set in motion a series of arbitration cases between Egypt, Israel and EMG, as well as lawsuits from EMG shareholders against the Egyptian government. The untangling of the deal is expected to last more than a year, if not longer, and prove expensive.

The shareholders of EMG alone are seeking more than $8 billion in damages from the Egyptian government.

And while Israeli and Egyptian officials have tried to play down the ending of the "peace pipeline" deal by attributing the fallout to a commercial dispute, some see the collapse of the deal as a new low in the countries' relationship.

"In the old days, kings and queens of Europe married off their children as an expression of solidarity," said Geoffrey Aronson, the director of research at the Foundation for Middle East Peace in Washington.

"In some respects, this deal was a modern-day symbol of that kind of relationship ... The fact that it fell apart is obviously a transformation in the political relationship, but it's not yet a divorce."


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