Alaco

18.12.2015 | Could Egypt and Israel reach compromise over the Leviathan gas field impasse?

Israel’s long-delayed plans to develop the giant Leviathan offshore gas field have been dealt a new blow by Egypt’s decision to freeze talks on gas imports. The move came after international arbitrators ordered two Egyptian companies to compensate Israel in a long-running energy supply dispute. However, neither side is likely to severely escalate the dispute as this could harm the sensitive security and economic ties between the two countries.

When the Leviathan field was discovered in 2010 it was the biggest known gas deposit in the eastern Mediterranean basin.  It has the potential to turn Israel into a major regional energy player, but getting the gas out of the ground has been fraught with difficulties.  That’s because the production deal between the Israeli government and the two main exploration companies, Israel’s Delek and Texas-based Noble Energy, has been opposed by the country’s antitrust authority.

The question of competition has been the central issue.  The head of the regulatory authority, David Gilo, had argued that Delek and Noble’s control of Leviathan and the smaller Tamar field represented a monopoly.  The energy companies would have to sell off some of their holdings before the deal could be approved.  Eventually, they agreed to sell some assets linked to the Tamar field but retained control of Leviathan.  Gilo still wasn’t happy and resigned.  Israel’s Prime Minister Benjamin Netanyahu, deeply frustrated by production delays, then controversially chose to circumvent the regulator’s opinion, arguing that the country’s national security was at stake.  But just as this hurdle was overcome, a new one emerged.

International arbitrators ruled late last month that the Egyptian Natural Gas Holding Company and the Egyptian General Petroleum Corporation should pay the state-owned Israeli Electric Corporation $1.76 billion in compensation for cutting off gas supplies three years ago.  Egypt had been selling gas to Israel, but the arrangement collapsed after militants attacked the pipeline.  Egypt says it will appeal the arbitration award and has frozen talks with Israel over importing gas from Leviathan until the issue is resolved.

Israel regards Egypt as a key export market for output from the new field, and Israel’s Prime Minister Benjamin Netanyahu has said he will send an envoy to Cairo to try to resolve the dispute.  Israel is planning to sell Leviathan gas to Jordan and the Palestinian Authority, but the loss of the Egyptian market would force it to look further afield for another big customer.  That would incur additional delays and ramp up costs, as new infrastructure would probably be required.  Delek and Noble Energy might then start losing patience, casting further uncertainty over the development of the Leviathan field.

Israel is unlikely to waive the compensation award in order to reopen gas talks with Egypt, but it may propose that Egypt pay the fine in instalments, potentially over a period of 20 years.  The advantage of that is that it would allow the Israelis to declare that they are going to enforce the arbitration ruling, but are prepared to be flexible.  The Egyptians, in turn, would be able to claim that they honour contracts, a crucial message at a time when Egypt is keen to attract foreign investment.

If a phased payment approach is taken, then the Egyptian decision to freeze talks could be seen as a tactic to extract the best possible deal.  But whatever settlement the two sides discuss, it is not in Egypt’s economic or security interest to turn its back on Leviathan imports.

Egypt is keen to export liquefied natural gas (LNG) to bolster its economy, which has been badly affected by the political upheavals that have convulsed the country since the revolution of 2011. Egypt’s two LNG plants at Damietta and Idku are currently standing idle because the country barely has enough gas reserves to meet domestic demand.  It had been planning to use Leviathan gas to revive LNG exports, even though it recently discovered the even larger Zohr offshore field.  However, most of the gas from the latter is said to be earmarked for Egyptian consumption, with only some currently envisaged for LNG production, underlying the importance of Leviathan supplies.

Egypt, it seems, would also prefer to resolve the dispute because neither it nor Israel can afford to let the arbitration sour their security cooperation.  In recent years Islamic militants in Sinai have targeted Egyptian military personnel and state institutions.  And the region has long been the primary route for smuggling weapons into Gaza.  Since Egypt's President Abdel Fattah al-Sisi came to power, the Israelis and the Egyptians have stepped up their military and intelligence cooperation to mitigate these threats.

Beyond indicating their intention to appeal the arbitration ruling, the Egyptians have so far said little more about the issue.  But Israel is hoping the two countries’ shared energy and security concerns will persuade Egypt to think again.  "I believe that we will reach a solution due to the common interests of both sides," said Netanyahu "I think that, ultimately, those interests dictate reality."