Business as usual for Egypt-Israel relations despite major gas find

Deep sea oil platform

In the aftermath of the 2011 Egyptian revolution, pipelines carrying gas from Egypt into Israel were repeatedly sabotaged. Many Egyptians regarded the pipelines to be symbolic of normalisation between the two countries, their anger exasperated by reports that Egypt was selling gas to Israel at significantly below market value and at the expense of the Egyptian people.

Cooperation over natural resources is nothing new between Egypt and Israel. “Oil and gas have long been a key part of Israeli-Egyptian relations,” James Stocker, Assistant Professor of International Affairs at Trinity Washington University, tells MEMO.

“Israel began extracting oil (and gas) from the Sinai Peninsula after occupying it in the 1967 Arab-Israeli War,” he continues. “In the Egypt-Israel Peace Treaty of 1979, Israel was guaranteed the right to bid on Egyptian oil for domestic consumption. From the 2000s until 2012, Egypt supplied Israel with a significant portion of its natural gas.”

With this in mind, ending corruption in the energy sector and severing deals between the two countries would have been a victory for the revolutionaries; and for a short while it seemed they had achieved just that. In April 2012, energy companies terminated the deal to sell gas to Israel, officially citing trade disputes, though many speculated it was in fact a response to the 2011 pipeline bombings.

But the victory turned out to be short-lived. Sisi’s inauguration as President of Egypt in 2013 ushered in new deals with Israel, who by then had found their own natural gas fields. “This reversed the situation with Egypt seeking to import gas from Israel,” says Stocker. “However, the element of mutual dependence was still there.”

An announcement last Sunday by Italian oil group ENI that a huge natural gas field has been discovered off the coast of Egypt has now brought the country’s relationship with Israel, and energy deals between them, back into the spotlight. It has also coincided with growing contention in Egypt over energy shortages. “They made the discovery at the right moment,” says Amr Adly, a political economist for the Carnegie Middle East Centre. Not only is Egypt suffering from a “severe energy crisis” caused by gas and oil shortages, “the fact that Egypt became an energy importer in 2012 has been putting pressure on the country’s already dwindling foreign reserves,” he says.

According to Mohamed Abu Basha, an economist at EFG Hermes, it will take Egypt several years to reap the full benefits of this gas discovery. When it does the gas will initially go towards domestic consumption and then, after three to five years, “there is room for exports”, he tells MEMO.

Abu Basha says there are limited options in the region for export given that Israel has found its own gas and Jordan’s market is small and therefore not particularly lucrative. “If they do decide to export the gas the number one market would be Europe. Europe has a great demand for gas. Probably given the latest global developments it wants to diversify away from having this dependence on Russia, which is the main source of European gas.”

But as Stocker points out, “the discovery does not immediately resolve the fundamental problem: there is not enough gas to meet current needs.”

Whilst Egypt makes plans at home, across the Sinai Peninsula in Tel Aviv shares in oil and gas companies have plummeted. Analysts predict they could drop further thanks to the discovery of the new gas field, because it essentially means Egypt no longer needs an Israeli supply.

Amongst others, Egypt’s Minister of Petroleum has downplayed these fears and implied thatEgypt will still honour their contract with Israel. “[Egypt] won’t sign any future contracts because it won’t need to import gas, but I don’t think it will have an immediate impact on the contract with the Israelis,” says Adly. “The problem is that there is no transparency and we know very little about the arrangement that they had with the Israelis. So we have no idea about the price, we have no idea about the quantity; we have no idea about the obligations on the Egyptian side.”

But not everybody believes the deal is certain to go ahead as before. Abu Basha says that whilst the new discovery of gas will not affect Egypt and Israel’s relationship, the opportunity for Israeli gas to flow into the Egyptian market has been “greatly diminished”.

Perhaps the biggest problem since Egypt’s discovery is how Israel will use their resources. “While Israel has a variety of options for exporting gas, all are problematic. Thus, it is now more likely that Israel will be stuck with high capacity and relatively low demand – a formula for low prices and profit,” says Stocker.

Abu Basha says there is still the possibility to export Israeli gas to other destinations through Egypt’s energy terminals. “For using the pipeline, and going through the national soil of Egypt government approval will be required,” he says. If the Egyptian government do approve this pipeline between the Israeli field and the energy terminal in Egypt it will be built under the sea. “They’re trying to avoid security hassle,” says Abu Basha.

Either way, it seems unlikely the deal will have a political impact. “The Sisi regime seems thoroughly committed to maintaining close relations with Israel, and there is no sign that these discoveries will have any impact on this,” says Stocker.

Adly agrees: “The Egyptians and the Israelis have been working closely, especially following the ouster of [Mohammed] Morsi.” Even demonstrations are unlikely to have a big impact: “You have to bear in mind that now it’s very hard actually to protest against anything – I mean internal politics – which is more relevant than having a gas deal with Israel,” says Adly.

What is more important than the natural gas, continues Adly, is the collapse of Syria, the situation in Gaza and internal events in Egypt, including the insurgency in the Sinai and the Egyptian ministry’s pledge to fight the Muslim Brotherhood and Hamas. “These are more significant factors driving Israeli foreign policy towards Egypt than the discovery of natural gas,” he adds.

Whilst governments and companies weigh up their options in the aftermath of Egypt’s discovery, it is worth considering what the future holds for the two countries. “One likely long-term consequence is that energy could eventually be a less important part of Israeli-Egyptian relations, since both countries will have an adequate supply for domestic consumption for some years to come. This will undermine one of the longstanding economic pillars of their relationship,” says Stocker. “The political pillars will remain, though, and it seems unlikely that there will be any major change in the Israel-Egypt relationship as long as the Sisi government is in power.”

Written by Amelia Smith

Published in Middle East Monitor