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Case Analysis 22 May, 2012

The Significance and Implications of the Israeli Stance on the Termination of the Egyptian Gas Export Deal

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The Unit for Political Studies

The Unit for Political Studies is the Center’s department dedicated to the study of the region’s most pressing current affairs. An integral and vital part of the ACRPS’ activities, it offers academically rigorous analysis on issues that are relevant and useful to the public, academics and policy-makers of the Arab region and beyond. The Unit for Policy Studies draws on the collaborative efforts of a number of scholars based within and outside the ACRPS. It produces three of the Center’s publication series: Situation Assessment, Policy Analysis, and Case Analysis reports. 


This paper seeks to examine the potential political, strategic, and economic implications of the Egyptian decision to cancel its 2005 gas export deal with Israel, an agreement that had been considered one of the major achievements born of the supposed "peace" between the two countries. This paper also seeks to present some of the hidden motives that drive official levels within Israel to present themselves as having accepted the official Egyptian justification for the cancellation of the deal, and their description of it as exclusively a "trade dispute". In addition to that, this paper shall also examine the mechanisms for action the Israelis have, in fact, already taken, as well as forecasting steps the Israelis might take, in the future, to face the consequences of the Egyptian action, and how these will reflect on the future of Egyptian-Israeli relations. The context in which these events take place is the preoccupation of Israeli elites in a continuous debate regarding the repercussions of the January 25 revolution [in Egypt] for the Israeli strategic environment.


A Trade Dispute or a Strategic Transformation?

Israeli decision-makers have tried to belittle the significance of this Egyptian decision on gas export: Prime Minister Benjamin Netanyahu described it as a "trade dispute" between the Egyptian General Petroleum Corporation (EGPC) and East Mediterranean Gas Co. (EMG), the company which supplies natural gas to Israel, one which did not carry any political significance. Netanyahu's Foreign Minister, Avigdor Lieberman adopted the same approach, reminding others that the Egyptian-Israeli agreement on the trade in natural gas did not form a part of the Camp David peace treaty which ended hostilities between the two countries. The question that now presents itself is: do these Israeli decision-makers sincerely believe that the Egyptian move [to cancel gas exports] is purely a commercial matter that does not form the preamble to a strategic shift vis-à-vis Egypt? Or is it that the official Israeli statements are attempts to prevent a further deterioration of Egyptian-Israeli relations?

Leading Israeli energy economics expert Amir Barkat is of the view that Netanyahu knows full well the Egyptian decision is not the result of any trade dispute, but that it is the beginning of an strategic Egyptian shift that was necessitated by the January 25 revolution, and marks the end of the rule of Mubarak, under whose rule the agreement to export Egyptian gas to Israel was signed. In Barkat's view, Netanyahu's insistence on the commercial nature of this disagreement is born of the latter's intention to prevent a final political rupture with Egypt's Supreme Council for the Armed Forces; the Prime Minister knows that the end of the Egyptian gas agreement is the greatest crisis to ever face the Israeli energy sector.[1] In Barkat's opinion, Israeli decision-makers at the time did not insist for adequate guarantees when they signed the agreement with Egypt, assuming all along that Mubarak's regime would continue indefinitely; they held, instead, that Mubarak's rule and the continuation of the Mubarak regime were a guarantee in itself of the terms of the agreement. It would serve well to know more of the evaluation of former Israeli Minister of Infrastructure, Benjamin Ben-Eliezer, who signed Egyptian-Israeli gas agreement on behalf of the Israeli party in 2005, and was the Israeli official closest to Mubarak.

Ben-Eliezer refuses the common explanation that the cancellation of the Egyptian-Israeli gas agreement was simply a "trade dispute," expressing certainty that the cancellation is a political development with its own important strategic repercussions. Ben-Eliezer adds: "The flow of gas to Israel was the most important tangible achievement of peace. The gas flow agreement was historic as a result of its strategic implications, and its long-term benefits for the Israeli economy."[2] Ben-Eliezer's statements remind all of us of a singular fact: that the parties to the Egyptian-Israeli gas-sharing agreement were the Israeli and Egyptian governments, and they continue to be legally obliged to fulfill the terms of the agreement.  Ben-Eliezer also emphasizes that the cancellation of this agreement damages the peace agreement presently standing between the two states, and that it ushers in a new phase in their relations. The peace agreement, claims Ben-Eliezer, is without value in the absence of the gas export deal; the pipeline tying Egypt's Al Arish to Ashkelon is what reifies the relation between Israel and Egypt.

The former Israeli Ambassador to Egypt, Tzvi Mazal also points out the strategic meaningfulness of the Egyptian move to cancel the agreement on the flow of gas: such a move cannot be down to a trade dispute alone, and is filled with strategic meaning. Mazel expresses certainty that the EGPC could not have taken this step without the approval of the head of the Supreme Council of the Armed Forces (SCAF), Major-General Mohammed Tantawi. For these reasons, Mazel argues that the cancellation of the Egyptian gas export agreement represents a political transformation filled with a long-term strategic significance, and that this change will cast a long shadow over bi-lateral relations between the two sides.[3] Mazel tried to explain the rationale of SCAF approving such a move, indicating an opinion that the Supreme Council of the Armed Forces had intended to use this move to gain traction within Egyptian public opinion, particularly at a time when the Council was being criticized. Mazel points out that what truly marks Mubarak out from all of the other presidents of Egypt is that he was concerned about having a sound relationship with Israel, while he paid no attention to public opinion in his country, something which will differ in the aftermath of the revolution. Mazel opines that SCAF's implicit agreement to the cancellation of the gas trade deal is but one of a litany of moves the new rulers of Egypt have made that have made many Israelis very nervous. Another such move was the reluctance of the SCAF to intervene and break the siege on the Israeli mission to Cairo (September 2011) before Netanyahu urged US President Barak Obama to intercede directly in the matter to resolve the situation. 

Mazel's belief that the cancellation of the Egyptian gas agreement was a preamble to strategic transformations is born of his assumption that heightening tensions with Israel is a tool used for domestic Egyptian political maneuvering by the SCAF leadership.  In this vein, Mazel suggests that the SCAF's decision to cancel the agreement for the export of gas to Israel be viewed in light of the Council's dispute with the Muslim Brotherhood over the drafting of the Egyptian Constitution. Mazel is of the opinion that SCAF is attempting, through such a move, to bolster its bargaining position vis-à-vis the Brotherhood, and to improve the chances of their preferred candidate in the Egyptian presidential elections. Likewise, Mazel claims that SCAF, in acceding to cancel the gas export agreement in particular, is further motivated by the urge to distance itself from accusations of corruption; it is this self-same agreement which is often mentioned by political forces as the most visible sign of the spread of corruption under Mubarak.[4] A further Israeli voice that regards the cancellation of the Egyptian gas agreement as a result of the changes afoot in Egypt in the wake of the January 25 revolution is Boaz Bismuth, Arab Affairs Correspondent for the Israel Hayom ("Israel Today") newspaper. Bismuth contends that Egyptian policymakers had no choice but to cancel the agreement to supply the Israelis with gas, given the objective context governing politics in Egypt after the revolution.[5] Bismuth expresses dismay with those Israelis who claimed to be shocked by the Egyptian decision to cancel the flow of gas, suggesting that there were many perambulatory actions that made the cancellation of the agreement seem predictable. Some of the main actions which set the stage for the cancellation include: Islamist domination of People's Assembly of Egypt, the 14 explosions that hit on the Egyptian pipeline carrying gas to Israel, and the overall heightening of tensions on the Egyptian-Israeli borders after a period of calm.

Bismuth, like others before him, emphasizes the importance of Egyptian public opinion in shaping the country's sovereign decisions in the post-revolutionary period, in contrast to the Mubarak period when the Egyptian public was of no importance. Bismuth does not miss the point that criticizing the former Egyptian-Israeli gas deal has now become a beacon uniting all sections of Egyptian society; this is borne out by the fact that the agreement now forms one of the major planks for the trial of Mubarak, his two sons, and other members of his former coterie. Meanwhile, a minority of Israeli researchers and writers has identified the cancellation of the gas export agreement as a natural response both to the corruption of the Mubarak regime and Israel's intentional sleights against Egyptian national dignity. Arab Affairs analyst at the Israeli daily Haaretz, Zvi Barel, explains that the Egyptian decision to end gas exports is because the gas pipeline itself became a major milestone symbolizing the normalization of Egyptian-Israeli relations and with it, a symbol for the corruption of the Mubarak regime.[6]

Barel points out that Egyptians regarded the gas export agreement as a sign that their country's vital national interests were squandered: Egyptians paid more to access their own natural gas than Israelis did. In the wake of the revolution, the Egyptian-Israeli gas trade agreement became a symbol of national shame. Barel believes that it is impossible to view this development in isolation from Egyptian public outrage at the Israeli aggressive treatment of Palestinians. Decision-makers in Tel Aviv have been prisoners all along to their belief that the US administration would be able to force any Egyptian government to treat their relations with the Israelis separately from the Palestinian track. In Barel's estimation, the Israelis are now paying the price for their mistaken assumption that Egyptian gas would continue to flow as the most important pillar of the peace agreement between the two countries, that the Egyptian people's national dignity and their interests would never come into question. In the same context, Barel claims that if the Israelis are to coexist with other countries in the region, and to continue to enjoy commercial trade with them, the requirement, first of all, is that the Israelis give up the pretense that their "right" to occupy others' lands is equivalent to their right to independence.


Economic Implications


Since the actual gas supplies were discontinued three months prior to the Egyptian decision to cancel the agreement - as a result of the repeated post-revolution explosions of the gas pipeline - no immediate repercussions can be seen for the Israeli economy. Nonetheless, the Egyptian cancellation of gas supplies definitely draws the curtain on a historic period that allowed the Israelis to reap enormous economic benefits because of gas flow. The price difference between Egyptian gas sent to Ashkelon by pipeline and that sold on international markets meant that the Israeli state's coffers were better off by billions of dollars, beginning in 2008, when the 2005 gas export agreement actually became effective. While an average price on the world spot markets was USD 12 per cubic meter, Egypt sold its gas for USD 3 per cubic meter to the Israelis. According to former General Director at the Israeli Ministry of Finance, Yoram Aryav, it was this flow of cheap gas that allowed the Israelis to produce energy at low cost.[7]  In fact, the last year has witnessed a 20% increase in Israeli electricity tariffs, which is a result of the fact that about 37% of the electricity produced by the Israeli state power company was produced by gas from Egypt. Another increase of a further 25% is also predicted.[8] Complicating the Israeli energy crisis further, the Yam Thetis gas field off the coast of Ashkelon, which provides 60% of the gas needed by the Israeli Electricity Corporation's natural gas requirements, will be completely exhausted within six months.

This will require the Israelis to build new coal-powered power stations; these stations are far less economical, costing several times as much as gas-powered generating facilities, and produce far worse environmental pollution.[9] While the Israelis have indeed discovered other offshore gas fields, such as Tamar and Leviathan, which lie in the Mediterranean, bureaucratic complications mean that they are unable to exploit these for the time being. 

Another Israeli fear is that Egypt's cancellation of the gas trade deal would be the preamble to an ending of all trade ties between the two states, particularly since the volume of Egyptian-Israeli trade initially increased nearly four-fold following the Egyptian revolution. According to data from the Israeli Export Institute, Israel had exported USD 46 million worth of goods to Egypt during January and February 2012, compared to only USD 12 million for the same period the previous year.[10] While the scale of this bi-lateral trade is without serious consequence for the Israeli economy, it nonetheless serves as an indicator of the stability of Egyptian-Israeli relations. Such a move also raises further questions about the future of joint economic projects between Israel and Egypt, such as the large-scale textile factory built by the Israeli-owned Delta company, not to mention the possible termination of bank transfers between Egyptian and Israelis banks, although this has so far not happened.

Mechanisms of Israeli Action

What suggests, perhaps more than other things, that Israeli decision-makers do not believe the hype about this being purely a "trade dispute," is that the Israeli government moved to find alternatives to coal-powered electricity generation, which the Israeli authorities want particularly to avoid, and this hot on the heels of the Egyptian decision to cancel the gas export agreement.

Not only does a reduction in natural gas available to Israel hinder its ability to generate electricity, but also it further poses obstacles to industrial development. A great number of Israeli industrial facilities have relied on energy produced by natural gas. Additionally, the cheap supply of Egyptian natural gas made possible water desalination projects viable for the Israeli authorities. This reality drove Netanyahu's government to quickly lift bureaucratic restrictions for the extraction of gas from the large-scale Tamar field (discovered in 2009). Israeli Finance Minister Yuval Steinitz is pressing ahead with plans that would see gas from the Tamar field being extracted by the end of this present year, claiming that he was doing so to prevent the price being paid by the Israeli state for energy production from spiraling out of control as a result of the Egyptian change of policy.[11] In order to meet that objective, the Israeli government initiated consultations with Knesset parliamentary blocs in order to convince them to be less strict in their commitment to sound environmental standards, especially since they are capable of delaying gas extraction from Tamar field.  Simultaneously, Israel is working to secure US pressure to get the Egyptians to reverse the decision, or, at the very least, to avoid taking further steps that would further halt trade exchange between the two sides. Says Gabriel Barr, the bureaucrat responsible for foreign trade at the Israeli Ministry of Trade and Industry, one option is for the US to leverage the 2004 multi-lateral trade agreements that paved the way for the "Qualifying Industrial Zones" (QIZ), which allowed Egyptian-made goods into American markets without tariff, provided that no less than 10% of the raw material in those products was Israeli-supplied.[12]  According to Baer, US insistence on the implementation of the agreement could serve to deter Egypt from other measures that would halt commercial exchange, with all of its importance as an indicator of peace between the two sides. Former Infrastructure Minister Benjamin Ben-Eliezer went further still, threatening Egypt with the loss of its annual USD 2 billion assistance if the terms of the peace agreement between the two countries were damaged.[13]


Preparing for a Showdown


Evidence of the true way in which Israeli decision-makers regard the Egyptian decision to cancel the export of gas to their country as one of the strategic transformations in the relation with Egypt comes in the shape of a new trend emerging within the Israeli cabinet, led by Foreign Minister Avigdor Lieberman, and openly declared just a few hours before the official Egyptian announcement, with Lieberman stating that the new, post-revolutionary Egypt should be regarded with greater caution by the Israelis than the Iranian nuclear program.[14] Lieberman was even quoted as saying: "The situation with Egypt is going to become more dangerous yet."  He suggested that the Israeli Army forms a new frontier corps comprising four southern brigades to be stationed on the borders with Egypt, ensuring that the necessary budgetary arrangements are made for that.[15] Lieberman started off with the assumption that Egypt will move, after the presidential elections, toward a crucial violation of the Camp David Agreement, and that it will station military forces in the Sinai Peninsula, breaching the terms of the agreement, and thereby posing a risk to Israeli national security. Notably, many Israeli commentators and analysts have come to the same conclusions - in general - as Lieberman.

A plethora of Israeli commentators share the view that the clock cannot be turned back, and that Egypt will come to be an enemy state either sooner or later. These anxieties are possibly the result of the statement made by the Arab Affairs Committee of the People's Assembly of Egypt on March 12, 2012, which presented its general outlook on future Egyptian policies toward Israel. The communiqué demanded that the political leadership regard Israel as "the central threat to Egypt's national security". The same statement further emphasized that Israel's legitimacy should not be recognized, and went on to call for support for the Palestinian people in its armed struggle against Israel.

Yehuda Ha-Levi, a researcher in the extreme right-wing Jerusalem Center for Public Affairs, reads in this statement by the Arab Affairs Committee of the People's Assembly of Egypt the transformation of post-revolution Egypt into an enemy state, stating that it would be foolish to discount the possibility of a future Egyptian-Israeli conflict in light of the changes presently under foot in Cairo.[16] Ha-Levi sees no hope of a stable relationship with post-revolutionary Egypt in the future, particularly given the demands of the Egyptian Parliament's Arab Affairs Committee that Israel be regarded as the country's "central threat to national security" and its other demands regarding the Palestinian people in its armed struggle against Israel. Ha-Levi comes to the conclusion that if Egypt's political leadership does adopt these recommendations, the result will be a rebuilding of the Egyptian military power to prepare it for a confrontation with the Israeli armed forces on all levels, including in terms of nuclear weapons, raising the threat level to the Israeli state to "existential". Ha-Levi warns that post-revolutionary Egypt may, in the future, seek to exploit Israeli actions against the Palestinians, such as the Judaization of Jerusalem or settlement construction on the West Bank, to wage a diplomatic and political battle against Israel.[17]

This Egyptian decision to cease gas exports to Israel was taken in the context of a deep-rooted belief held in Tel Aviv that their strategic partnership has been lost forever. Retired General and Strategic Affairs researcher Ron Tyra believes that the Egyptian-Israeli strategic partnership, which had reached its apogee with the war waged by the Israelis against Lebanon in July 2006 and the siege on Gaza in 2008, no longer bears benefits for the Israelis, as it had under Mubarak. During those times, Egypt had worked to ensure that the regional environment was right to allow the Israelis strikes to continue with the least possible level of Arab and international protest.[18]

It is instructive to note that much domestic Israeli public debate has recently been taken up with measures the Israelis could possibly use to combat the effects of recent changes in Egypt following the revolution. Tyra suggests, for example, that the Israeli leadership could leverage its influence in the US to coerce Saudi Arabia to offer financial inducements to the new government in Egypt in order to maintain Mubarak's policies vis-à-vis the Israelis; Tyra also states, "regional stability is also a Saudi interest."[19]


Conclusion


The cancellation of the gas export agreement marks the end of an era. It brings to life pessimistic Israeli fears that arose after the January 25 revolution. Of course, the Israelis will try to contain the direct economic fallout from the decision; however, Israeli policy-makers are awake right now because of the drive to contain the strategic implications of a succession of changes in Egypt, in both the medium and long term, politically, militarily, economically, strategically, and security-wise. 
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[1] Amir Barkat: "Fear compels Israel to back-track in the Egyptian gas dispute," in Globes newspaper, April 23, 2012, http://www.globes.co.il/news/article.aspx?did=1000743472.

[2] Sami Peretz and Avi Bar-Eli, "Benjamin Ben-Eliezer: If I was being paid by Mubarak, would the Mossad not have known?," The Marker, April 27, 2012, http://www.themarker.com/dynamo/1.1694938. An English translation of interview in Haaretz: http://www.haaretz.com/business/israel-must-be-prepared-for-future-confrontation-with-egypt-says-ex-defense-minister-1.427239.

[3] Tzvi Mazel, "A political move of the first order," The Calcalist, April 24, 2012, http://www.calcalist.co.il/local/articles/0,7340,L-3569041,00.html.

[4] Ibid.

[5]Boaz Bismuth, "Pessimistic outlook quickly become reality," in Israel Hayom, April  23, 2012, in Hebrew:

http://www.israelhayom.co.il/site/newsletter_opinion.php?id=8503&hp=1&newsletter=23.04.2012. In English: http://www.israelhayom.com/site/newsletter_opinion.php?id=1770

[6] Zvi Barel, "The gas torch," Haaretz, April 25 2012, http://www.haaretz.com/opinion/the-gas-torch-1.426417.

[7] Etai Trelinick and Yoram Aryav, "When you have cheap Egyptian gas, you would be stupid not to use it," The Marker, April 24, 2012, http://www.themarker.com/dynamo/1.1692784.

[8] Amir Barkat, op.cit.

[9]  Shmuel Even, "The Israeli economics of natural gas-economic and strategic significance," Institute for National Security Studies, 13 (1), June 2010, http://www.inss.org.il/upload/(FILE)1277212967.pdf.

[10] Hadar Kana, "They all know that relations with Israel mean jobs for Egyptian labourers," in The Calcalist, April 24, 2012,  http://www.calcalist.co.il/local/articles/0,7340,L-3569047,00.html?dcRef=ynet.

[11] See The Marker newspaper (Hebrew): Steinitz on the cancellation of the gas export deal: " We will advance the date of gas extraction from Tamar field till the end of 2012", The Marker, April 23, 2012,

 http://www.themarker.com/dynamo/1.1692022.

[12] Hadar Kana, op.cit.

[13] Sami Peretz and Avi Bar-Eli, op.cit.

[14] See Ben Casbet, "Lieberman warns Netanyahu: Egypt more dangerous than Iran," Maariv, April 22, 2012,

http://www.nrg.co.il/online/1/ART2/360/472.html?hp=1&cat=404.

[15] Ibid.

[16]  Yehuda Ha Levi, "Worrying signs for Israel in the Egyptian parliament on the eve of Egypt's presidential elections," Jerusalem Center for Public Affairs, March 14, 2012,

http://www.jcpa.org.il/Templates/showpage.asp?FID=839&DBID=1&LNGID=2&TMID=99&IID=26556.

[17] Ibid.

[18] Ron Tyra, "The Israeli strategic climate is shaken," Adkon Strategy Journal, National Security Studies Center, 14 (3).

[19] Ibid.