US embassy cable - 04TELAVIV2123

C O N F I D E N T I A L TEL AVIV 002123 
 
SIPDIS 
 
NEA FOR BURNS/SATTERFIELD 
NSC FOR ABRAMS/DANIN 
 
E.O. 12958: DECL: 04/08/2014 
TAGS: ENRG, IS, ECONOMY AND FINANCE, GOI EXTERNAL, LABOR AND COMMERCE 
SUBJECT: DETAILS OF EGYPT/ISRAEL GAS PIPELINE APPROVED BY 
GOVERNMENT 
 
REF: TEL AVIV 1288 
 
Classified By: Economic Counselor Theodore A. Mann for reasons 1.4 (b) 
and (d). 
 
1.  (C) Summary.  The Egypt/Israel gas pipeline project 
cleared a crucial hurdle on April 4 when the GOI gave its 
blessing to the Israel Electric Company (IEC) to negotiate an 
agreement with the supplier of Egyptian natural gas, Eastern 
Mediterranean Group (EMG).  Under the proposed agreement EMG, 
a joint Israeli/Egyptian company, will purchase 1.7 billion 
cubic meters per year of natural gas from Egypt, oversee the 
construction and operation of a pipeline to Israel, and then 
sell the gas to IEC.  Merhav, EMG's Israeli partner, told 
Embassy econoff that they expect a final agreement to be 
signed as early as May, with gas exports beginning in 
mid-2006.  Merhav claims the government decision solved most 
of the remaining issues on the Israeli side (reftel).  End 
summary. 
 
2.  (C) On March 7, Embassy econoff spoke with Merhav Senior 
Vice President Nimrod Novik about the April 4 decision. 
Novik said that decision taken by the sub-cabinet (comprised 
of the Ministers of Finance, Infrastructure, and the PM's 
office) cleared the way for IEC to enter into final 
negotiations with EMG and the Egyptians.  Novik said the 
government avoided the thorniest issue, which was a demand 
for each government to issue a guarantee in case either side 
was unable or unwilling to honor their sides part of the 
agreement.  The GOI decided not to get involved in a mutual 
guarantee process, but instead will allow the parties (IEC, 
EMG, Israel Natural Gas Line (INGL), and Egyptian Gas (EGAS)) 
directly involved to provide the necessary guarantees.  For 
example, Novik said, INGL, the Israeli pipeline builder and 
operator, will provide a guarantee to IEC in the event that 
the pipeline in Israel is not ready to receive the gas on 
time. 
 
3.  (C) IEC's contract with EMG is for the supply of 1.7 
billion cubic meters (BCM).  Novik added that the government 
decision allows IEC to decrease its contracted supply by an 
amount equivalent to the future amount of gas contracted by 
any IPP in Israel (see reftel).  (Note:  Israel has only one 
natural gas supplier at the current time, the joint 
Israeli/U.S. consortium Yam Tethys.  Prime Minister Sharon 
decided in 2003 that Egypt, represented by EMG, would be 
Israel's second supplier.  This week, in addition to the 
decisions regarding Egyptian supply, Israel reportedly 
settled on British Gas's (BG) offshore Gaza Strip natural gas 
reserves as Israel's third supplier if there is available 
demand.  According to the press, the sub-cabinet's approval 
of BG will allow it to negotiate with potential natural gas 
buyers in Israel.  End note.) 
 
4.  (C) The next step, according to Novik, is a meeting of 
the IEC Board on April 15 where the board is expected to 
approve this week's government decision and the parameters of 
a final agreement to be negotiated with EMG and EGAS 
beginning the following week in Egypt.  Novik expects that 
Merhav, as part of EMG, and IEC will travel to Egypt on April 
20 to begin final negotiations.  Novik said he was pleased 
with this week's events.  The project, he asserts, is the 
most visible link between the two countries and enjoys the 
support of Prime Minister Sharon and President Mubarak. 
Novik acknowledged that there are still obstacles to a final 
agreement, but he is confident that they are diminishing 
rapidly.  Novik asked that Washington consider commending 
President Mubarak during his upcoming visit to the U.S. for 
the leadership he has shown in supporting this important 
bilateral project.  And he added that the U.S. should 
encourage Mubarak "to explore other opportunities for 
Israeli-Egyptian bilateral cooperation." 
 
5.  (C) Comment:  This week's cabinet decision was a 
significant step forward for the Egypt/Israel natural gas 
pipeline, however, the accelerated timetable laid out by 
Novik is likely to slip.  The long history of this project 
suggests that there could be a few more hurdles to come. 
 
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