US embassy cable - 05TELAVIV2367

C O N F I D E N T I A L SECTION 01 OF 02 TEL AVIV 002367 
 
SIPDIS 
 
E.O. 12958: DECL: 04/15/2015 
TAGS: ENRG, IS, EG, GOI EXTERNAL, ECONOMY AND FINANCE, LABOR AND COMMERCE 
SUBJECT: EGYPT/ISRAEL GAS DEAL TO BE SIGNED IN EARLY MAY 
 
REF: 04 TEL AVIV 05593 
 
Classified By: Economic Counselor William Weinstein for reasons 1.4 (B) 
 and (D) 
 
1.  (C) Summary:  Egypt and Israel appear to be coming closer 
to signing a gas deal that has been in the negotiations for 
years.  The GOI says that the governments are ready to sign a 
memorandum of understanding (MOU) by early May.  In addition, 
the two companies involved, Israel Electric Corporation and 
Eastern Mediterranean Gas (EMG), are currently clarifying the 
language on the tax status of EMG as the supplier.  According 
to Merhav, the Israeli partner in EMG, both the MOU and the 
commercial contract will be signed before Israeli 
Independence Day on May 12.  End summary. 
 
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Governments Ready to Sign 
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2.  (C) Yaki Dayan, an advisor in Prime Minister Ariel 
Sharon's office, confirmed press reports to Charge d'Affaires 
on April 13 that the memorandum of understanding (MOU) for 
the gas deal between Israel and Egypt will be signed in early 
May.  According to Dayan, despite some concerns about tax 
issues related to the deal, Foreign Minister Silvan Shalom's 
trip to Egypt resulted in an agreement with the GOE, and the 
MOU between the two governments will be signed by the first 
week of May.  Press reports indicate that the Egyptian Oil 
Minister and Infrastructure Minister Binyamin Ben-Eliezer 
will sign for their respective governments.  Hatim Mahmud 
Hassouba, Second Secretary at the Egyptian Embassy in Tel 
Aviv, also told economic officer that the MOU will be signed 
in approximately two weeks. 
 
3.  (C) Dr.  Nimrod Novik (please protect), Senior Vice 
President of Merhav and partner in the Eastern Mediterranean 
Gas (EMG) consortium bringing gas to Israel, told econoff 
that Ben-Eliezer had wanted to sign the MOU next week in 
Cairo, but Egyptian President Hosni Mubarak is hosting 
African leaders at Sharm al-Shaykh and the timing does not 
work.  According to Novik, Ben-Eliezer had wanted the MOU 
signed before a visit by Russian President Vladimir Putin on 
April 27 or 28 because Putin plans to discuss gas with the 
GOI and Ben-Eliezer wants "hard facts" before their meeting. 
 
4.  (C) The Egyptian majority partner in EMG, however, is 
resisting signing the MOU before the commercial contract is 
ready for fear of embarrassment in case the boards of either 
EMG or Israel Electric Corporation (IEC), the buyer, reject 
the commercial agreement.  Novik said EMG will not reject the 
commercial contract, but the board of IEC may make things 
difficult because some on the board are of a "different 
sentiment."  He mentioned that Ben-Eliezer is willing to make 
pitch to the board in person if needed. 
 
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Still to be Resolved 
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5.  (C) Novik told econoff that negotiating teams for IEC and 
EMG are currently in Cairo wrapping up the text of the 
commercial agreement.  The contract may be initialed today, 
and then it would go to the boards of IEC and EMG for 
signing.  The boards have about two weeks to read the 
contract, one week to comment, and then at that point both 
should sign.  Novik explained that there are two issues to 
resolve with the contract.  One is a small technical matter 
between Israeli and Egyptian banks. 
 
6.  (C) The second issue with the contract relates back to 
the MOU.  Currently, EMG is tax exempt and IEC has committed 
to reimburse EMG's taxes if at any point during the 20-year 
contract future Israeli governments reverse EMG's tax status. 
 IEC, however, will not sign the commercial contract until 
either the language in the MOU is clarified or it receives a 
guarantee from the Israeli Tax Authority.  Novik said that 
once IEC sees a copy of the MOU, the board should sign the 
commercial contract.  Taking into account that IEC will not 
sign the contract until it sees the MOU, and that EMG does 
not want the MOU signed until the contract is ready, Novik 
predicted that both documents will be signed simultaneously, 
or at least on the same day, between the end of Passover and 
Israeli Independence Day on May 12. 
 
7.  (C) Hassouba also told econoff that the two parties had 
agreed on the outstanding issue of the path of the pipeline 
from al-Arish to Ashkelon.  He said the pipeline will be 
built 21.5 kilometers off the Gazan coast so it will not be 
in Palestinian territorial waters. 
 
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