NEGOTIATIONS FOR EGYPT/ISRAEL GAS PIPELINE CONTINUE

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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