[Premium] Israel, Egypt Extend their Co-operation

The eastern Mediterranean gas sector was awash with deals, disputes and even battleships in February. Tamar's and Leviathan's combined $15bn deals with Egypt's Dolphinus Holdings renewed the hopes that Israeli gas would find buyers outside Israel although how the gas will get there is an open question.

EMG, the owner of the El Arish-Ashkelon gas pipeline was awarded $1bn compensation by an arbitration tribunal in Cairo after it sued Egyptian energy companies for cancelling gas contracts; and Egypt and Cyprus are in talks about a gas pipeline from Cyprus' gas discoveries to Egypt.

Turkey which had been left out of the loop, with no gas of its own, and losing the battle to become the regional gas hub, sent its battle ships in order to prevent an Eni drillship from operating in Cypriot territorial waters.

Israel and Lebanon are also still at loggerheads over Block 9, as Israel's defence minister warned the Lebanese government and international energy companies from exploring in the block.

As always, the geopolitical situation in the region has significant ramifications on the developments in the gas sector. Animosity between Israel and Turkey, which has grown in the past year, enabled Egypt to leverage the situation in its favour in trying to become the regional gas hub, thanks to its two unused liquefaction facilities. At the same time, Israel's ties with Egypt were strengthened by their alleged military co-operation.

A sign of a thaw between Israel and Egypt came February 3, as the New York Times reported on what it called "remarkable co-operation" between Israel and Egypt, fighting jihadists and other terrorist groups in Sinai. "For more than two years, unmarked Israeli drones, helicopters and jets have carried out a covert air campaign, conducting more than 100 airstrikes inside Egypt, frequently more than once a week – and all with the approval of president Abdel Fattah el-Sissi," the report said.

This makes it easier to understand al-Sissi's statement that Egypt "scored a goal" when signing the gas deal, an unusual statement from an Egyptian head of state in relation to Israel, though the 'goal' was scored against Turkey. Later al-Sissi said that the deal was between two private companies without state involvement.

Arbitration

The deal announcement followed an earlier decision by The Cairo Regional Centre for International Commercial Arbitration (CRCICA) which awarded EMG, the owner of the El Arish-Ashkelon gas pipeline, $1bn compensation from Egyptian energy companies. The decision was probably connected to the gas deal announced a few days later. Indirectly it has been proven, when Egypt's prime minister Sherif Ismai was quoted by Bloomberg: "we reached an agreement to receive part of the gas in Egypt via its pipelines and this is part of the resolution to the arbitration."

The EMG pipeline is essential to deliver gas from Tamar to Egypt in a short space of time, though only small quantities of gas, since Tamar supplies are interruptible. Most of the gas from Tamar is delivered to Israeli customers.

Following the signing of the deal Bloomberg also reported that Egypt said that it has settled a financial dispute with IEC, concerning $1.8bn compensation from Egypt's national gas companies, which was awarded by the ICC in Geneva over two years ago. IEC denied the report and said it is pursuing the compensation.

Chances of delivering to Dolphinus

In its filing to the TASE Delek Drilling said there were three ways to send the gas to Egypt: via the undersea EMG pipeline;  through Jordan and the Pan Arab pipeline; and building a new overland pipeline from Kerem Shalom, south to Gaza Strip, to El Arish.

The most likely and the cheapest solution would be to transmit the gas through the EMG undersea pipeline. In the past Delek Drilling said that it would take just a few weeks and $10mn to repair the unused pipeline and change the direction of gas flow. An agreement between Tamar Partnership and EMG is therefore on the cards and might be announced soon. The decision by the CRCICA in Cairo was probably part of the process.

But once it is inside Egypt and piped overland from North Sinai to Egypt, it will become a target for attacks from terrorists. Protecting it would require tight security measures in order to secure uninterrupted gas flow. In the past Egypt failed to stop attacks on the gas pipeline, and it would be an expensive undertaking.

The gas price is another unknown. The $15bn price tag attached to the announcement is just a decoration. According to Delek Drilling the natural gas will be supplied to local industrial facilities in Egypt. In that case gas price of $/mn Btu will be a realistic proposition. However if the gas comes through Egypt's liquefaction facilities the price should be much lower if it is to compete with other sellers on the open market.

The last question is the identity of Dolphinus Holdings and if it can secure the payments. The company is unknown in the energy market. No one has an inkling about its financial strength and the identity of its backers. That is just another suitably byzantine part of the puzzle.