DETAILS OF EGYPT/ISRAEL GAS PIPELINE APPROVED BY

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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