EGYPT/ISRAEL GAS DEAL TO BE SIGNED IN EARLY MAY

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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