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This is how Egypt became an Israeli gas colony

A new analysis of figures in secret documents obtained by Al Jazeera shows corrupt gas deals may end up costing Egypt tens of billions of dollars
Flames rise from a pipeline that delivered gas to Israel and Jordan after an explosion (AFP)

LONDON – Egyptian natural gas resources are a potential goldmine for the people of Egypt, yet they have been squandered for over a decade - sold off at rock-bottom prices in an utterly corrupt deal reached between shadowy Egyptian and Israeli intelligence figures.

Seen in advance by MEE, Egypt’s Lost Power, a new documentary by the Al Jazeera Investigative Unit broadcast on Monday at 8 GMT lays bare for the first time the true depths of the energy black hole which corrupt elites have plunged Egypt into.

The primary beneficiary has been Israel, which for years has paid some of the lowest natural gas prices in the world.

MEE has also seen, and is today publishing translations of, secret documents obtained by Al Jazeera that go to the very foundation of the deal to siphon-off Egypt’s gas to Israel.

Egyptian and Israeli elites pocketed the profits. But the deal became a major bone of contention on the Egyptian street, even contributing to the January 2011 popular uprising which overthrew Hosni Mubarak.

In 2012, two of the Egyptian architects of the deal were convicted over it and sentenced to 15-years in jail – but both are currently free men.

Now, with the coronation of former army chief Abdel Fatah al-Sisi as Egyptian leader (with a 96.9 percent election victory), figures involved in the deal look set to return to Egypt.

This year, Sisi hopes to shore up his power by striking a new gas deal with Israel – this time flowing in the opposite direction. Recently discovered gas off the coast of Israel means it has a surplus it wants to sell.

And with the looming threat of several astronomical law suits related to past and present gas deals, Egypt under the compliant Sisi regime is unlikely to refuse.

Rock-bottom prices

The whole story underlines just how much control Egypt’s deep state, including its intelligence agencies, has over its economy.

The US government, which refused to call the 3 July military takeover a coup, and is seeking to relax restrictions on arms sales imposed after the massacres of protesters in August, encourages these relations between Egypt and Israel.

They do so as a way of removing Egypt from the regional power balance and of shoring up Israel’s dominance.

In the new Al Jazeera documentary, former Israeli energy minister Yosef Paritzky put it succinctly: “The military in Egypt are our partners in collaboration in this region… The army, the government, the intelligence see us as legit, which is very important and we should encourage this”.

He also disparaged any hope for democracy in Egypt: “What do [the Muslim Brotherhood] have to do with democracy?  God knows, and this, almost, stupidity to bring Western values into a country which is fully Islamic, many of which are poor, fundamental Islams [sic], is ridiculous”.

‘The prices were ridiculous’

Hatem Azzam, former head of the Egyptian parliament’s Energy and Industry Committee told Al Jazeera that the gas sell-off was “the most corrupt deal ever in the history of Egypt and in the history of the oil world… no such agreement… exists on the planet”.

In 2012, Azzam was part of post-uprising attempts to reform the sector. With long experience in the oil and gas industries, Azzam backed attempts by Egypt’s first democratically elected president, Mohamed Morsi to investigate past corruption.

Azzam explains that the scheme saw the government sell gas to Egyptian-Israeli company East Mediterranean Gas (EMG) at $1.50 per million British Thermal Unit (mmBtu).

According to energy analyst Mika Minio-Paluello (whose number crunching forms a key part of the Al Jazeera documentary), around that time gas sales to Germany were around $8-$10 per mmBTU and in the more lucrative Asian energy sector, countries like Japan paid around $12 per mmBTU.

Even former Israeli energy minister Paritzky said “the prices were ridiculous”.

Egyptian former oil minister Sameh Fahmi sits in the cage during his trial at the criminal court in Cairo on 28 June 2012 (AFP).

Egyptian minister of petroleum between 1999 and 2011, Sameh Fahmi was arrested for his role in the deal soon after the January 2011 uprising that overthrew Mubarak. In June 2012, he was sentenced to 15 years in jail.

EMG founder Hussein Salem fled Egypt during the uprising against Mubarak. He was later arrested at his home in Spain, but was never extradited. He was convicted in absentia and sentenced to 15 years in jail, as part of the same trial as Fahmi.

The sentences were overturned in 2013, and a retrial is pending.

Pocketing the difference

The way the scheme worked is that EMG would buy the gas for $1.50 per mmBTU (a rate which was later increased only very slightly, still far below market rates), and then sell this bargain-basement gas onto the Israeli Electric Company for $4 per mmBTU.

According to  Minio-Paluello EMG “were receiving [gas] from the Egyptians for [the later higher price of] $3 and then selling it on to the Israelis for $4.5 and basically pocketing the difference”.

In an interview with Al Jazeera, former US ambassador to Egypt Edward Walker, was blase about the corruption: “It is the kind of agreement that was helping to cement the Egypt-Israel [peace] treaty and that’s why we were always very positive about it without getting into the whole corruption side of it.”

He laid down the bottom line: “It always boils down to: is it enough of an income earner to be able to cover everybody?  And I think the answer is yes, and that’s why it got started and was able to overcome its political problems”.

With popular rage against the gas deal fuelling the 2011 uprising, it is little wonder that its architect Hussein Salem fled the country.

A 2000 document founding EMG as a company in Egypt, obtained by Al Jazeera and released by MEE in English, states only that EMG was established for the purpose of “selling this gas to Turkey and states located on the eastern shore of the Mediterranean”. The prospect of selling gas to Israel was so politically sensitive that even this private document did not use the name “Israel”.

In Egypt’s Lost Power, Al Jazeera’s Clayton Swisher tracks down Salem in exile in Spain and confronts him over the deal.

He refused an interview, gave only no-comment answers, and laughed when Swisher asked if he owes the Egyptian people an explanation for current power shortages while he lives comfortably in Madrid. 

When asked why he would not return to face the Egyptian justice system Salem repeatedly said “I am Spanish”. This is an argument Salem, who has dual citizenship, is using before the Spanish judges deciding his extradition. 

The public prosecution in the case against Mubarak’s oil minister Fahmi claimed the agreement cost Egypt over $714 mn in lost revenues

Minio-Paluello provided an analysis for Al Jazeera putting the loss at between $500 mn and $1.8 bn.  The total damages incurred by Egypt’s under-pricing of gas via Salem and others - including to Jordan and Spain - is estimated at $11 bn.

“I’ll settle for $50 bn”

A precedent for the gas deal was established in 1994, when Israeli investment in a $1.2 bn oil refinery was facilitated by figures from Egyptian and Israeli intelligence.

Edward Walker, the US ambassador at that time, candidly told Al Jazeera about the US role in helping overcome popular Egyptian opposition to the deal, something regarded by many Egyptians as normalisation with a hostile state.

“The project… gave recognition to Israel in a way that many people in Egypt were not comfortable with,” Walker said. “It gave them control of a portion of the economy… But that was overcome”.

Established in 2000 while Fahmi was petroleum minister, EMG was a convenient way to “overcome” popular opinion against trade with Israel.

Salem’s partner in EMG was former Israeli intelligence agent and energy tycoon Yossi Maiman. Salem himself was an Egyptian intelligence agent in the 1960s.

In 2004, Maiman claimed to Israel’s then energy minister that he was the sole broker for selling Egypt’s gas. According to one US diplomatic cable leaked by Chelsea Manning to Wikileaks, Maiman’s stake in EMG was 25 percent and Salem’s 65 percent.

Shabtai Shavit had been Mossad director for seven years in the 1990s. According to Israeli journalist Shlomi Eldar, Shavit was the one who convinced then Israeli Prime Minister Ariel Sharon to sign the corrupt deal with the Egyptians. Shavit was hired as EMG’s chief executive in Israel.

Energy minister Yosef Patitzky opposed the deal, branding it “too good to be true” and too risky for Israeli interests. He thought Israel should sign a direct agreement with Egypt, rather than using EMG as a go-between.

Israeli energy minister Binyamin Ben Eliezer and his Egyptian counterpart Sameh Fahmi sign an agreement to supply natural gas to Israel during a ceremony on the outskirts of Cairo 30 June 2005 (AFP).

He was overruled and removed from power. The deal was eventually signed formally between Egypt’s Sameh Fahimi and Patitzky’s successor at the Israeli ministry, Binyamin Ben Eliezer.

Born in Basra as Foud Ben Eliezer to Iraqi Jewish parents, Ben Eliezer became a career soldier after moving to Israel in 1950. He eventually became a personal friend of Egyptian dictator Hosni Mubarak, very publically mourning his overthrow in the 2011 Egyptian uprising, calling him an “irreplaceable leader”.

In the wake of January 2011, anger at sales of gas to Israel and security instability in the Sinai Peninsula halted the flow of cheap gas to Israel. Disgruntled, marginalised and armed; local groups blew up and sabotaged the pipeline at least 14 times.

According to the Israeli press, Maiman’s companies ran into debt problems, as they lost “their main profit centre” – cheap Egyptian gas. Since the deal Egypt signed with EMG guaranteed a 25-year supply of gas, Maiman is now suing Egypt for $8 bn.

This claim in the World Bank and other international courts and venues could potentially bankrupt Egypt according to energy analyst Minio-Paluello.

Spanish multinational energy giant Union Fenosa is also suing Egypt for $6 bn. On top of all this, Egypt is already in debt to the tune of $6 bn for gas it bought from companies for domestic use.

In total, Egyptian debt and legal liabilities could be as high as $20 bn.

Confronted by Swisher asking how much money he would be satisfied to take from the Egyptian people, Maiman responded: “I’ll settle for $50 bn”.

Reversing the flow

With chronic energy shortages now crippling Egypt at every turn, these lawsuits are being used as a threat to intimidate Egypt into signing a new deal with Israel – this time to buy gas.

In the last few years, there are have been several large underwater gas fields discovered off the coast of Israel.

The Leviathan field is thought to contain as much as 26 trillion cubic feet (TCF) of gas. But it is the Tamar field (estimated to contain 10 TCF according to the US Energy Information Administration) that is now set to be the source of gas to Egypt.

As supplies to Israel were halted after repeated sabotage, the state-owned Israel Electric Company increased its rates by a third and warned of rolling blackouts.

Egypt eventually nullified the deal in April 2012 while Israel responded by issuing threats that Egypt may be violating a clause of the 1979 peace treaty signed at Camp David.

Return of the old guard

With Sisi’s rise to power in the July 2013 military coup, everything has changed.

Morsi is in jail facing spurious charges such as collaborating with Hamas, the Palestinian resistance movement. The elected parliament Azzam sat in was dismissed by the military in June 2012. 

Crucially, the charges against Salem have been dropped, and former energy minister Sameh Fahmi was released from custody in March 2013 pending a retrial which has been delayed numerous times.

With Sisi’s power now consolidated, Egypt’s US-backed autocrat is seeking to push forward with the new deal to buy gas from Israel.

As Simon Henderson of The Washington Institute for Near East Affairs told Al Jazeera, Noble Energy (which operates the Tamar field): “have examined the notion of selling the gas to Egypt. It can either be used domestically in Egypt or it can go to the LNG [liquid natural gas] plants on the Nile Delta."

He explained: “The changing government in Egypt has meant that Israel can reconsider the option of converting some of its gas into LNG… Under the Morsi government, there was no confidence that Egypt would allow such shipments [to Asia] to go through the Suez Canal.  The change in government has meant that this potential can be re-examined”.

He concluded: "The Egyptian public can make a calculation that it’s happier to have electricity 24 hours a day because they deal with Israel in getting natural gas, or they would prefer to be in the dark for some hours a day as a matter of principle."

In January, it was reported that Egypt quietly decided it would allow private companies to import gas. Then, last month, Union Fenosa signed an agreement of intent to buy as much as 2.5 TCF from the Tamar field over 15 years – the first such agreement to export Israeli gas. The Economist reports rumours that BG Group may follow suit.

In the documentary, former Israeli energy minister Yosef Paritzky was candid about the reasons for Morsi’s overthrow: “with the return of Sisi and the return of order, I think we see now the spring, we really do.”

Former US ambassador Walker too said Sisi is “attractive because he’s not Morsi… our concern is to maintain and sustain the relationship between Egypt and Israel.”

Azzam, on the other hand is not impressed: “This energy corruption network was one of the strongest reasons why the leaders, the army generals decided to make the coup over Morsi”.

The EMG front for selling off Egyptian gas to Israel may have collapsed, but a new front to compel Egypt into buying far more expensive Israeli gas looks to be just opening.

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Egyptian Ministry of Petroleum.doc.pdf

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