US embassy cable - 04TELAVIV1288

C O N F I D E N T I A L TEL AVIV 001288 
 
SIPDIS 
 
NEA FOR BURNS/SATTERFIELD 
 
E.O. 12958: DECL: 03/01/2014 
TAGS: ENRG, IS, GOI EXTERNAL, ECONOMY AND FINANCE 
SUBJECT: NEGOTIATIONS FOR EGYPT/ISRAEL GAS PIPELINE CONTINUE 
 
 
Classified By: Economic Counselor Theodore A. Mann for reasons 1.4 (b) 
and (d). 
 
1.  (C) Summary:  The Egypt/Israel gas pipeline project is 
approaching some of the final hurdles in the negotiations 
between the many parties, according to the Senior Vice 
President of the Israeli firm Merhav, Nimrod Novik.   In a 
conversation with Embassy econoff on March 1, Novik said the 
process was moving ahead, but there are five outstanding 
issues that still need to be resolved, mostly on the Israeli 
side.  Merhav is a partner in the joint Israeli-Egyptian firm 
Eastern Mediterranean Gas (EMG), which is the company 
negotiating the contract to bring Egyptian natural gas to 
Israel.  Novik expects that most of these issues will be 
resolved in a meeting of the Israeli Economic Cabinet this 
week or next.  End summary. 
 
2.  (C) In recent weeks, Israeli media has suggested that the 
Egypt-Israel natural gas project had reached an impasse over 
the unwillingness of the Israel Electric Corporation (IEC) to 
provide a letter of credit to EMG to cover their development 
costs, in the event that circumstances prevent the firm from 
being reimbursed.  Novik rejected this speculation and said 
that terms of a letter of credit with IEC have been agreed to 
in principle and the amount is less than the USD 200 million 
reported in the press.  Novik said that this is one of five 
issues that will need to be agreed upon by the GOI's Economic 
Cabinet. 
 
3.  (C) The remaining issues according to Novik also deal 
with liability issues. All of these items are scheduled to be 
discussed, according to Novik, at the Economic Cabinet 
meeting this week or next. 
 
-- The GOI has asked for a guarantee from the GOE to provide 
the natural gas quantities agreed upon.  Novik said that the 
GOE has agreed in principle to this guarantee and that 
Mubarak reaffirmed this commitment in a conversation with 
Shimon Peres a few weeks ago. 
 
-- The IEC has been unwilling to sign a traditional take or 
pay agreement with the GOE.  IEC is not responsible for the 
construction of the natural gas system and so did not want to 
be held liable if the system was not completed on schedule, 
and therefore unable to take the gas.  The Israeli Natural 
Gas Line (INGL) has agreed to take on this liability, however 
the agreement needs the Economic Cabinet's endorsement. 
 
-- The IEC wants a guarantee from the government that the 
IPPs will be allowed to access the natural gas supply under 
the same terms as the IEC, should IEC not be able to use all 
of the gas that it is contracted to buy from Egypt. 
 
-- EMG believes that the Egyptian-Israeli partnership should 
not be taxed because it is the exporter, and that IEC as the 
importer should be responsible for the tax liability.  Novik 
claims that IEC has agreed to accept the tax liability both 
now and in the future should government policy change. 
 
4.  (C) Novik expects that the Economic Cabinet will resolve 
each of these issues in its meeting.  He said his only 
concern is that if there is a delay, the detractors of this 
project within Israel could mount a campaign to scuttle the 
project.  Novik said that the Knesset is scheduled to debate 
the project on March 15, and that opponents, led by those 
associated with the British Gas/Palestinian project, are 
planning on making "a lot of noise" against the project. 
When asked about similar problems within the Egyptian 
parliament, Novik dismissed recent press reports as not 
relevant.  Novik reiterated the commitments EMG has received 
from President Mubarak, the Egyptian General Petroleum 
Corporation, the Egyptian Gas Holding Company, and  others 
within the Egyptian government.  Novik concluded that the 
issues remaining were difficult "as all final issues are", 
but achievable. 
 
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