Israel, Egypt said close to accord on natural gas dispute

By David Wainer, Yaacov Benmeleh, Jonathan Ferziger on 5/18/2016

TEL AVIV, Israel (Bloomberg) -- Israel and Egypt are nearing a compromise that would sweep away a major obstacle to a multi-billion-dollar natural gas deal.

Israel may agree to settle for half of the $1.73-billion fine Egypt was ordered to pay it so talks on exporting Israeli offshore gas there can go ahead, two people familiar with the negotiations said, requesting anonymity because the talks are private. Payments would be spread over 14 years, one of the people said.

Negotiations are still under way, and authorities in both countries would have to approve any final figure, the people familiar said. State-owned Israel Electric Corp., which had sought the award from Egypt, and the Egyptian Foreign Ministry declined to comment.

Israel has painted gas exports to Egypt and other nations in the region as a strategic imperative in a region rocked by strife, and removing this obstacle would be crucial to the export deals it seeks to clinch and cement its ties with its closest ally in the Muslim world. Energy-strapped Egypt needs fuel until it develops its own newly discovered fields, and it can use an idle gas pipeline there to transfer Israeli fuel for export to third countries.

Israel’s TA Oil & Gas index increased gains to 1.5% to 904.86 at 4:25 p.m. local time.

Close Cooperation

Israel’s willingness to compromise on the fine reflects the tight cooperation between the countries since Abdel-Fattah el-Sisi became Egypt’s defense minister in 2012, then president in 2014. Security relations between the two countries, fighting a common enemy in Islamist militants as strife and instability rock the region, have never been better, Israeli officials have publicly said.

An accord on the damages would be important progress, but it wouldn’t immediately clear the way to deals. Six years after discovering its largest gas field, Israel has failed to conclude a regulatory framework for its natural gas industry. Its largest reserve, Leviathan, remains undeveloped as a result, and companies won’t sign contracts while rules governing the industry remain in limbo.

U.S.-based Noble Energy Inc. and Israel’s Delek Group Ltd., the lead partners in the Leviathan field, need export contracts with Egypt to obtain financing for the development of Israel’s largest natural gas pool. The government, which expects to reap billions of dollars from gas exports, is working to finalize its energy policy so work on Leviathan can proceed.

Deals between Egyptian and Israeli companies had been in the works, though, when an international arbitration court in December ordered Egypt to pay Israel damages for violating a contract to supply Israel Electric with Egyptian gas. Egypt ordered its oil and gas authorities to freeze negotiations until the dispute over the arbitration was resolved.

Dolphinus, an Egyptian gas-trading company, had been in non-binding negotiations with partners in Israel’s largest offshore field, Leviathan, to buy as much as 4 Bcm of natural gas a year for 10 to 15 years. It also signed a deal last year to import fuel from Israel’s second-largest reserve, Tamar.

Egypt exported natural gas to Israel until it canceled the agreement in 2012 as its wells became depleted and the pipeline carrying it came under repeated sabotage. It has said any gas import deal with Israel should include a resolution to international arbitration cases.

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