US embassy cable - 05TELAVIV6617

C O N F I D E N T I A L SECTION 01 OF 02 TEL AVIV 006617 
 
SIPDIS 
 
E.O. 12958: DECL: 11/21/2015 
TAGS: ENRG, ECON, PREL, IS, EG, GOI EXTERNAL, ECONOMY AND FINANCE 
SUBJECT: BUSINESSMAN DISCUSSES EGYPTIAN-ISRAELI GAS DEAL 
AND POSSIBLE FUTURE PROJECTS 
 
Classified By: Ambassador Richard H. Jones for reasons 1.4 (B) and (D). 
 
1. (C) Summary: According to Nimrod Novik, the senior vice 
president of the Merhav Group, "all systems are go" for the 
export of USD 2.5 billion worth of Egyptian natural gas to 
Israel over the next two decades.  Novik, whose company is 
the Israeli partner in the deal, noted that the Egyptians had 
been sensitive to any Israeli control of assets, especially 
in the Sinai.  He denied reports that Israel would transship 
gas to Turkey, saying the idea had been broached publicly to 
provide Egypt with political cover for the deal, and 
advocated development of the small gas deposit off Gaza for 
Palestinian use.  Novik also discussed the possibility of 
joint Israeli-Egyptian power plant and desalination projects 
in the Sinai.  End summary. 
 
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Details of Israeli-Egyptian Gas Deal 
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2. (C) Novik told the Ambassador that after a 30-month delay 
during the Intifada, "all systems are go" for the export of 
USD 2.5 billion dollars worth of Egyptian gas to Israel.  He 
claimed that Merhav had secured "the best price in the 
world," because the terms for the 20-year deal had been set 
years ago when gas was much cheaper.  Novik noted that the 
Egyptians are particularly sensitive to any appearance that 
Israelis own property or investments in the Sinai.  They had 
insisted that Egyptian subsidiaries hold title to land that 
Merhav required for its pipelines from El-Arish.  While the 
Merhav Group has 30 percent of the equity and property, Novik 
said its official share of the project is limited to 25 
percent to ensure that the Israeli company does not have 
voting rights. 
 
3. (C) Novik claimed that Merhav's main customer, the Israel 
Electric Corporation, would prefer to have access to the gas 
immediately, but must wait until the third quarter of 2007 
due to an inadequate and incomplete system of pipelines in 
Israel.  The Ambassador asked about reports that Merhav would 
transship excess gas to Turkey or western Europe.  Novik 
admitted that the quantities Merhav has the right to purchase 
far exceed current domestic Israeli requirements. 
Nonetheless, he called the Turkish option unrealistic, 
describing it as an attempt to provide Egypt with political 
cover for exports to Israel. 
 
4. (C) Novik also said that the Palestinian areas do not 
figure in Merhav's calculation for the gas deal.  He added 
that the small gas deposit off Gaza is sufficient to fill 
Palestinian needs for the next 15 years.  He claimed that 
British Gas had mishandled its initial attempt to develop the 
field, choosing one of Arafat's cronies for their partner. 
Maintaining competition would be good for the Israeli market, 
Novik said he had spoken to PA Finance Minister Salam Fayyad 
and urged him to move the project forward. 
 
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Possible Power and Desal Plants in the Sinai 
-------------------------------------------- 
 
5. (C) The Ambassador asked about reports that Merhav and its 
Egyptian partners are negotiating to build a power plant in 
El-Arish.  Novik confirmed that this idea -- which he claimed 
stems from talks at Camp David during Barak's term in office 
and discussions between PM Ariel Sharon and President Hosni 
Mubarak at Sharm El-Sheikh -- is still a possibility.  He 
noted that a 1,200-megawatt plant in El-Arish would have 
ready access to Egyptian gas.  It could supply power to the 
Sinai, Palestinian areas, southern Israel and Jordan, and 
could be coupled with a new desalination plant in the same 
area with a huge capacity of 1,000 million cubic meters per 
year. 
 
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Experience with Refinery Project Helped Seal Gas Deal 
--------------------------------------------- -------- 
 
6. (C) Novik recounted Merhav's experience with Egyptian 
partners in constructing an oil refinery in Alexandria in the 
1990s, lamenting that "I had hoped the refinery would be a 
precedent; it turned out to be a fig leaf."  In a process 
that Novik described as being "kicked out with glory," the 
Egyptians had paid a generous price to buy out the Israeli 
shares in 2000-2001, making it clear that they did not want 
Israelis to own any Egyptian assets.  Nevertheless, Novik 
maintained that the cooperation established on the refinery 
project helped overcome initial Egyptian uneasiness about a 
gas deal. 
 
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