A month after militants attacked a Sinai pipeline, supply has yet to resume

Israel’s energy industry looks like it’s on its way to becoming the country’s first casualty of the emerging new Middle East, where governments are responding to public pressure for an end to secret deals and taking a harder line on the Jewish state.

More than a month after militants attacked a key pipeline in Egypt’s Sinai desert, the flow of natural gas to Israel has yet to be resumed. In Israel, industry officials and experts now admit that the shutdown isn’t due to technical problems but the changing political environment in Egypt since Husni Mubarak was forced to step down last month.

Ampal-American Israel Corp., which owns a 12.5% interest in the pipeline running from Egypt’s Al-Arish to the Israeli port city of Ashkelon, said last Thursday that repair work on the pipeline was complete but that final testing has been delayed. After promising repeatedly over the last month that supplies would be resumed shortly, Ampal conceded it could no longer offer any assurances.

“In the short term, there will probably be a renewal of gas deliveries, but in the long term it’s going to be a big problem. I don’t think Egypt will be a reliable source for Israel,” Brenda Shaffer, an energy expert at the School of Political Science of Israel’s University of Haifa, told The Media Line.

The gas crisis has major economic and political implications for Israel. Over the last several years, the country has made a rapid switch from oil and coal to natural gas for electric power, and it was counting on Egypt as a major source of energy. But just as critically, the cutoff may also signal cooling political ties with Egypt, which Israel has seen as a key regional ally.

The two countries signed a gas accord in 2005 under which Israel agreed to import 1.7 billion cubic meters, (60 billion cubic feet) of Egyptian gas annually. Since then, Israel has found increasingly large quantities of its own gas off its Mediterranean coast, but the government encouraged imports to create competition in the gas market and as a stopgap until domestic supplies can come on stream.

Until last month, pipeline operator East Mediterranean Gas (EMG) supplied 45% of the energy needs used by Israel Electric Corporation (IEC), the country’s government-owned power monopoly. Without the gas, IEC has been forced to burn coal and diesel fuel at a cost of about $1.5 million more a day. Israel has also stepped up production at its tiny Yam Thetis field.

Higher costs and increased air pollution aside, Israel can manage for now, analysts said. But if Egyptian supplies don’t resume by the summer, when electricity demand peaks as Israeli switch on their air conditioners, the country could face a power shortage. The only solution will be to relax environmental regulations, said an industry source who asked not to be identified.

He said Israel will only be able to breathe easier when its next big field, Tamar, begins to pump gas sometime in 2013.

In Israel, the gas crisis has been blamed on Egypt’s shifting politics. Although a army-dominated transitional government runs the country, the Muslim Brotherhood and other opposition groups now have a bigger say in decision making and take a harder, if not outright anti-Israel, line. This week Ahmed Aboul Gheit was replaced as foreign minister by Nabil Elaraby, a career diplomat critical of the terms of his country’s peace agreement with Israel.

But Shaffer said the main cause of the gas crisis isn’t political but economic. Egypt subsidizes energy costs and that feeds domestic demand. Much of that demand is wasted, but the transitional government that is supposed to be shepherding the country into democratic elections isn’t likely to take unpopular measures in the meantime, she said.

“They face rising domestic consumption, which gives them less and less for export,” Shaffer said. “If there are electricity shortages in Egypt while they are exporting gas, this isn’t going to be popular.”

The bilateral gas agreement is also ensnared in the anti-crony politics that have come to the fore in Egypt since Mubarak resigned. The coterie of business people alleged to have made fortunes by their close ties to the president and his son Gamal have been subject to a campaign of arrests, impoundment of funds and press criticism. Many have fled the country.

Among Ampal’s partners in EMG are stated-owned Egypt Natural Gas Co., Israel’s Merhav, American businessman Sam Zell and most controversially Egyptian businessman Hussein Salem. Egyptian prosecutors are seeking to question Salem, 83, a close friend of Mubarak and one of the richest men in the country.

They also want to question Yossi Maimon, the head of Merhav, and Zell, who acquired some of Salam's shares in 2007.

Shaffer said that part of the problem in restarting gas supplies is that the people involved are laying low or have left Egypt altogether and can’t manage supplies. Egyptians media have reported that Salem escaped to Dubai at the start of the uprising

“The first thing that collapses in revolution is the oil and gas industry. People flee because they are richer and have international connections. They were the ones making the money so they have to flee,” Shaffer said.

The gas deal with Israel faces a further problem because it is secret. No one knows the price Israel pays or other key terms, but industry sources suspect it is probably low by global standards and less than Egypt’s other neighbors, Jordan, Syria and Lebanon, are paying for their imported Egyptian gas. Even when Mubarak was in power, the matter of the price was fuel for law suits and opposition grievances in Egypt.

In fact, the attack on the gas pipeline a month ago targeted the branch that delivered energy to Jordan, Syria and Lebanon, all of which have fewer alternatives than Israel to Egyptian supplies, according to the Oil Drum, a website on energy issues. Jordan relies on gas from Egypt for 80% of its electricity generation needs, which makes it the biggest loser.

“Jordan …is in an extremely uncomfortable position, with no reserves of its own and no immediate replacement for Egyptian gas,” the Oil Drum said.