Israel’s Gas Diplomacy with Egypt

Introduction

Israel’s relations with Egypt since its formation on 14 May 1948 were antagonistic in which both states fought four wars in 1948, 1956, 1967, 1973, and the War of Attrition between 1969 and 1970. However, the period of confrontation subsided after the signing of the Camp David Accords on 26 March 1979. For Israel, the end of belligerency and peace with Egypt was a strategic asset that removed the Egyptian threat and provided greater freedom of action in the region. It opened the prospect of peace with other Arab states that could guarantee its security needs, provide recognition, and open up trade and energy sources. The excitement was, however, short lived.

Due to external pressures from the Arab world and internal pressures from within Egypt, a distinct pattern emerged in the Egyptian–Israeli ties, which is depicted as “Cold Peace.” In cold peace, the fundamental issues remain unresolved, but the role of military force is replaced by diplomacy, and ties are moderated by formal agreements. Moreover, peace did not permeate into the society, and there is continuity in historical narratives, news coverage, symbols, etc., that defined the period of conflict (Aran & Ginat, 2014; Abadi, 2006).

The cold peace entailed a unique foreign policy path for Israel. Amnon Aran has argued that the period of cold peace is not monolithic, and there are variations in Israel’s security and political approach toward Egypt after 1979. It was motivated by Egypt’s strategic perception, Egyptian public attitude, and isolation imposed by the Arab states (Aran, 2012). It was further complicated by the failure of Palestinian autonomy talks; Israel’s actions in occupied territories and against other Arab countries; the role of regional and global factors; and Hosni Mubarak’s political authority and foreign policy. While it received a cold start, and diplomatic interaction continued to remain skeletal throughout the 1980s, the situation changed in the 1990s due to Egypt’s return to the Arab fold, end of Cold War, Madrid Peace Conference, and Oslo Peace Process, when Egypt’s policy oscillated between cold peace and mediation. Since 2001, Egypt maintained a proactive political, economic, and energy outreach toward Israel.

It was also during this period that cooperation in trade and energy heightened. On 14 December 2004, both states signed Qualified Industrial Zone (QIZ), allowing Egyptian textiles with duty-free access in the US markets that contained 11.7 per cent of raw materials from Israel and 11.7 per cent from Egypt (Kessler, 2015). Crucially, it opened the prospect of natural gas for Israel, which was seen as a new phase of normalization. The following section would provide a brief background about Israel’s motivations for energy self-sufficiency, and its energy policy and contextualize Israel–Egypt relations within the context of the natural gas–based engagement.

Israel’s Quest for Strategic Self-Sufficiency

The drive for oil and gas exploration in Israel began after its formation, but the exploration of fossil fuel was largely unsuccessful, barring the discovery of small deposits. The government provided attractive commercial options to international oil and gas firms seeking to invest in Israel, but most showed little interest due to fear of backlash from the Arab states that contained large reserves of oil and gas (Shaffer, 2011). Petroleum exploration started before the state’s formation in the central part in 1947, and the first discovery was made in 1955, namely Heletz-I and small deposits of petroleum were also found in Kochav and Brur in 1957 (Israel Ministry of Energy, 2018). In terms of natural gas, discoveries were made in Zohar in 1958, Kidod in 1960, and Kannaim in 1961. However, the production of oil and gas was limited and unsustainable and forced the state to develop a high dependency on imported fossil fuels such as coal, oil, gasoline, diesel, kerosene, and so on. After the June War of 1967 and the resulting occupation of the Sinai Peninsula, Israel took control over the oil fields, and by 1971, it produced 43.2 million barrels of oil, essentially becoming self-sufficient for domestic consumption (Bahgat, 2011). It, therefore, relied heavily on petroleum and petroleum products for transport and electricity generation.

However, geopolitical compulsions in terms of neighbors’ attempts to sabotage its supplies by blocking oil tankers and equipment from reaching Israeli ports have affected its energy policy. It has been traditionally de-linked from the regional energy infrastructure (Bahgat, 2011; Gross, 2017). The oil embargo imposed by the Gulf States amidst the October War of 1973, the return of the Sinai Peninsula to Egypt after the 1979 Camp David Accords, and end of oil supplies from Iran after the Islamic Revolution endangered Israel’s energy reserves, and it was forced to diversify its energy requirements (Bahgat, 2011; Shaffer, 2011). Israel opted for coal as the prime resource since it is widely available and harder to stymie supplies, and by the 1980s, it built numerous coal-fired power plants and by the 2000s, 70 per cent of its electricity production came from thermal power plants (Rand, 2009).

Israel’s current outlook toward energy security is multilayered, focusing on indigenous production, preservation of strategic petroleum reserve, and energy diversification to reduce dependence on fossil fuels. Therefore, reliability, affordability, and environmental sustainability are key components of Israel’s energy policy (Bahgat, 2011; Shaffer, 2011). It relies on seawater desalination, which requires large supplies of energy. Therefore, the water policy is closely interlinked with the energy policy. The energy sector is broadly under the purview of the Ministry of Energy and Water Resources that regulates energy production and distribution. The Prime Minister’s office, Ministry of Foreign Affairs, National Security Council, and National Economic Council also play a critical role in setting and coordinating energy policies (Shaffer, 2011). Moreover, Interior Ministry oversees zoning law and planning commissions; Environment Ministry oversees environment–energy correlations; and Finance Ministry oversees taxes and royalties (Bahgat, 2011). The lack of single authority has occasionally impeded swift decision-making.

The impetus for the development of gas-based energy infrastructure was slow due to Israel’s reliance on coal and oil. Natural gas production also requires large infrastructure and long-term supply contracts. Gas, at the same time, is a cleaner form of energy and cheaper than other fuels (Hashimoto, Elass, & Eller, 2004). By the 1990s, Israel sought to diversify its access to energy and signed a memorandum of understanding (MoU) with Qatar in 1993 to supply natural gas. It also opened up gas import channels with Russia and Azerbaijan via Turkey (Bahgat, 2011; Shaffer, 2011). In 2002, Natural Gas Authority was formed in accordance with the National Gas Industry Law to oversee planning, licensing, and regulating the domestic natural gas market (OECD, 2019). Since the mid-2000s, Egypt emerged as a critical energy partner for Israel, and the latter received gas to the tune of 1.51 billion cubic meters (bcm) in 2009; 2.10 bcm in 2010, which lowered to 0.69 bcm in 2011 and finally to 0.06 bcm in 2012, as a consequence of the Arab Spring protests and subsequent supply disruptions (Reis, 2014). The following section discusses the role of gas trade between Israel and Egypt that opened a new phase of normalization in the post-2005 period.

The Role of Gas Trade

On 1 July 2005, Israeli Minister of National Infrastructures Benjamin Ben-Eliezer and Egyptian Oil Minister Sameh Fahmy signed a US$2.5 billion energy agreement to supply 1.7 bcm natural gas per year through an undersea pipeline from el-ʻArīsh and Ashkelon for a period of 15 years (Kershner & El-Naggar, 2011; Reis, 2014; The New York Times, 2005). Ben-Eliezer exclaimed the agreement as historic, but Egypt was facing power shortages, and the news about natural gas exports to Israel was downplayed to avoid public outrage (Reis, 2014; The New York Times, 2005). Egypt was also seeking to diversify its energy export markets and substitute gas for the growing demand for oil domestically (Bahgat, 2011; The New York Times, 2005).

Notably, after 1979 Camp David Accords, Egypt regained control of the oil fields in the Sinai Peninsula. Egypt agreed to supply oil to Israel; however, the oil trade was short lived due to a decline in production and, subsequently, Egypt harnessed infrastructure for gas exploration to replace oil for domestic consumption and adopted measures to expand export markets. In 1988, Egyptian General Petroleum Corporation (EGPC) signed the first natural gas production agreement (Bahgat, 2012). By the early 2000s, Israel emerged as a potential market for Egyptian gas. The natural gas infrastructure within Israel was at a nascent stage after natural gas production began in Yam Tethys in 2004 (Bahgat, 2012; Reis, 2014).

The gas supply from Egypt commenced from 1 May 2008, and by 2010, the Egyptian gas contributed to 40 per cent of Israel’s total consumption. In 2009, the total gas supply from Egypt to Israel was at 1.51 bcm, which increased to 2.10 bcm in 2010 (Reis, 2014). During the 2011 Arab Spring in Egypt, the energy ties with Israel were widely condemned. After President Hosni Mubarak’s forced resignation on 11 February 2011, the political transition period witnessed a complete breakdown of law and order in the Sinai region. The gas pipeline was attacked at least 14 times between February 2011 and April 2012, disrupting supplies to Israel and Jordan. In 2011, gas supply was interrupted for 225 days, providing only 0.69 bcm of gas and between January–March 2012, the supply froze for 66 days in which Israel received only 0.06 bcm of gas (Kershner & El-Naggar, 2011; Reis, 2014). The supply completely stopped after an attack on the pipeline on 5 March 2012 (BBC News, 2012). Eventually, on 22 April 2012, the Egyptian Natural Gas Holding Company (EGAS) unilaterally withdrew from the gas agreement with Israel-based East Mediterranean Gas (EMG), citing nonpayment of gas supply for 4 months (BBC News, 2012).

Zack Gold has identified a twofold symbolism for the pipeline attacks that derailed the gas relations. First, the local Bedouin population in Sinai perceived the gas channel as a stolen resource that benefitted the government while marginalizing the local communities. Second, the radical groups viewed it as an Islamic resource, which is being sold to “the Zionist occupier” (Gold, 2016). The regular attacks on the pipeline infrastructure, therefore, drove Egypt to halt gas supplies (Kershner & El-Naggar, 2011; Reis, 2014).

Crucially, Egypt during the outbreak of Arab Spring protests was facing huge debt worth US$4 billion to international energy firms, stemming from overspending on natural gas. (Halime, 2012). The slowdown in production, along with the absence of new exploration contracts, crippled the energy reserve, resulting in electricity shortage (Meighan, 2016). The gas supply to Israel was, therefore, diverted for domestic consumption during this period.

Gawdat Bahgat has argued that despite the continuation of the peace treaty, a large section of the Egyptian society continued to view Israel as an occupying power and people-to-people contacts remained weak (Bahgat, 2011). Notably, domestic opposition was fomenting against Mubarak government’s decision to supply gas to Israel since the pipeline was operationalized in 2008. During Israel’s three-week offensive in Gaza in 2008–2009, the gas ties met with massive public uproar (Kershner & El-Naggar, 2011). The opposition to gas relations was further ignited by reports of alleged corruption and the Egyptian government’s reluctance to announce the gas prices. Unlike crude oil, there is no global benchmark for setting the price of natural gas, and it was speculated that Egyptian politicians and businesspeople were involved in corrupt nexus to supply gas to Israel at below market rates (Carlisle, 2011).

In June 2012, a prominent businessperson Hussein Salem and former Oil Minister Samih Fahmi, who was in fact the signatory of the 2005 gas agreement, were found guilty of undermining Egypt’s interests and of exporting gas to Israel at below-the-market value. They were sentenced to 15 years in jail. Besides Salem and Fahmi, five other petrol ministry officials were also given prison terms, ranging from 3 years to 10 years and were imposed a financial penalty of US$2.1 billion. While the Israeli company has denied any foul play, the prosecution team in Egypt has claimed that the state lost around US$714 million because of corruption (Hope, 2012). A former Egyptian government official noted that the Israeli-Egyptian private firm, Eastern Mediterranean Gas (EMG) Company that managed the cross-border pipeline to Israel operated at US$4 per British Thermal Unit (BTU) as compared to US$7–10 BTU for states like Turkey, Greece, and Italy (BBC News, 2012). Fahmy and Salem were, however, acquitted from corruption charges on 20 February 2015 and 18 May 2017, respectively (Reuters, 2015).

The head of the EGAS, Mohamed Shoaib, denied any political reason for terminating the deal (Ben-Eli, 2012; Reis, 2014). From Israel’s perspective, the energy agreement with Egypt was one of the cornerstones of bilateral engagement, and disruption in supplies was seen as a precedent for the decline in ties (Kershner & El-Naggar, 2011). The EMG called the termination as unlawful and demanded EGAS to reverse its decision (Ben-Eli, 2012). The company also called the termination as a breach of the 1979 Peace Treaty and feared that it would push back bilateral ties politically and economically by 30 years. Prime Minister Benjamin Netanyahu, however, downplayed the cancellation, citing it as a business dispute and unconnected to any diplomatic development (Winer, 2012)

The cutoff in gas supplies from Egypt led to drop in Israel’s gas usage from 5.34 bcm in 2010 to 2.55 bcm in 2012, and the state incurred a loss worth NIS 20 billion (Reis, 2014). The coal plants in Ashkelon and Hadera were instructed to perform to their maximum capacity, and some natural gas plants were converted to produce power using heavy fuel oil and diesel at the cost of US$1.5–2 million per day. The government, at the same time, was concerned about the environmental costs of exploiting coal and oil (Bahgat, 2011).

The uncertainty in gas supplies prompted Israel to reduce energy dependence on external actors and accelerate the exploration of domestic supplies (Kershner & El-Naggar, 2011). Energy and Water Resource Minister Uzi Landau, while regretting Egypt’s decision, had indicated that Israel was prepared to deal with the new circumstances and develop supply sources to achieve energy independence (Kirkpatrick, 2012). Prime Minister Netanyahu also mentioned that Israel’s indigenous gas reserves would allow it to become energy independent from Egyptian and other sources (Reis, 2014).

Israel’s Gas Potential

In Israel, natural gas was discovered at Noa and Mari-B fields located in the Mediterranean Sea near Ashkelon in 1999. These fields are collectively known as Yam Tethys, containing 32 bcm of natural gas and jointly owned by Israel-based Delek Drilling and the US-based Noble Energy (Gardosh, Golan, & Lippman, 2019). Mari-B fields contributed 40 per cent of Israel’s total natural gas demand between 2010 and 2013 until the reserve depleted in 2013 (EIA, 2016).

In 2000, a gas reserve containing 35 bcm of gas was discovered by British Gas in Gaza’s territorial waters, and in January 2009, new discoveries were made at Tamar gas field containing 240 bcm of natural gas. It was jointly developed by Noble Energy, Delek Group, Dor Gas Exploration, and Isramco Negev. The commercial production from Tamar fields commenced in March 2013, contributing to more than half of the state’s electricity production requirements and industrial fuel needs. In April 2009, 14 bcm worth of natural gas was also discovered in the Dalit gas field off the coast from Hadera. A bulk of the newly found gas was bought by the Israel Electric Corporation (IEC) for power generation along with Israeli Chemicals and Nesher Cement (Bahgat, 2011; EIA, 2016).

In a major discovery in June 2010, the Leviathan field off the coast of Haifa was discovered, which, according to various estimates, contains between 450 bcm and 600 bcm worth of natural gas. The government approved a deal to develop the field in May 2016, and production is expected to begin by late 2019 (Bahgat, 2011; EIA, 2016; Shaffer, 2011). Nobel Energy holds 39.66 per cent of working interest along with Delek Drilling at 22.67 per cent, Avner Oil Exploration at 22.67 per cent, and Ratio Oil Exploration at 15 per cent in the Leviathan field (Koren, 2010). Besides, Tamar Southwest field was discovered in 2013, Royce field was discovered in 2014, and Daniel East and Daniel West fields were discovered in 2015 (EIA, 2016; Gardosh et al., 2019).

After gas supply from Egypt was halted in April 2012, IEC reduced the use of domestic gas from Yam Tethys field to maintain a steady supply and avoid depletion of reserves until Tamar natural gas field becomes operational (Reis, 2014). On 30 March 2013, gas production in the Tamar oil field commenced and a special buoy was built off the coast of Hadera in 2012 and 2013. The local production subsequently reached a significant proportion at 6.91 bcm for electricity production in 2013; out of which, Tamar reservoir contributed 5.51 bcm, Yam Tethys contributed 0.89 bcm, and buoy contributed 0.51 bcm (Reis, 2014).

Israel that was largely dependent on oil and coal from electricity generation, gradually shifted to natural gas, and by 2007, natural gas contributed to 19.8 per cent of its electricity generation, and in 2009, it soared to 32.6 per cent. In 2017, the share of natural gas in electricity generation was at a whopping 64 per cent and the contribution of coal stood at 33 per cent. In 2008, the total share of natural gas in Israel’s Total Primary Energy Supply (TPES) was at 10.6 per cent. According to International Energy Agency, the share of natural gas in TPES grew to 35 per cent with oil at 42 per cent, coal at 21 per cent, and geothermal, solar and wind at 2 per cent in 2017. The increasing reliance on natural gas is consistent with Israel’s plans to opt for clean energy. The Organisation for Economic Co-operation and Development (OECD) has estimated that by 2022, the share of natural gas in TPES is likely to increase to 50 per cent with oil at 34 per cent and coal at 12 per cent (OECD, 2019).

The gas discoveries have altered the energy consumption pattern within Israel, raising questions over the share of natural gas in Israel’s electricity production, the share of natural gas in non-power generation such as transportation, and the share of natural gas for domestic consumption and exports. Between October 2011 and June 2013, there were extensive debates in the policy-making circle to explore Israel’s export potential. Eventually, on 23 June 2013, the cabinet under Resolution 442 decided to allocate 540 bcm for domestic consumption and 410 bcm for exports (Ashwarya, 2018). The government, after re-evaluating the domestic needs and gas supplies, on 6 January 2019, agreed to reserve domestic consumption at 500 bcm (Israel Ministry of Energy, 2019a). It also concluded that new gas fields that produce up to 50 bcm could be used for exports, and fields between 50 bcm and 200 bcm should be connected to the domestic market by 31 December 2031. The new fields producing gas more than 200 bcm are required to supply 55 per cent to the domestic market for each additional bcm (Israel Ministry of Energy, (2019a).

Furthermore, internal debate arose over the control structure of the gas fields within Israel. The US-based Noble Energy and Israel-based Delek Group duopoly controlled 67 per cent of the Tamar gas field, 85 per cent of Leviathan gas field, and 100 per cent of Tanin and Karish gas field. The head of the Antitrust Commission Professor David Gilo and other critics raised concern over the impact on fair competition and prices of gas for Israeli consumers. Eventually, the government set up an inter-ministerial panel to address on how to divide the gas fields among different firms and maintain price stability in the domestic market. The National Gas Framework introduced by Energy Minister Yuval Steinitz on 30 June 2015 instructed the Delek group to relinquish its 31 per cent share in the Tamar field within 6 years, and Noble Energy was instructed to reduce its share from 36 per cent to 25 per cent (Ashwarya, 2018).

Both firms were also required to sell off their entire holdings in Tanin and Karish fields within 14 months, but the firms’ control over Leviathan would remain unchanged for 10 years (Ashwarya, 2018; Gur, 2015). Israel’s new gas production capability, at the same time, opened the prospect of Egypt purchasing gas from Israel.

Israel’s Export Prospects to Egypt

In the post-Arab Spring period, Israel was highly cautious during the transitional period as well as during the brief regime of the Muslim Brotherhood-led government between June 2012 and July 2013. Israel also feared that the peace treaty would be abrogated. However, the treaty remained untampered, and the broadening engagement in energy cooperation was seen as a crucial element that would lead to the next phase of the unfinished process of normalization.

From Israel’s perspective, in the initial stage, Egypt’s existing Liquefied Natural Gas (LNG) facilities in Damietta and Idku were considered as transit positions to liquefy gas for exports (Corkhill, 2018). At the same time, gas shortage in Egypt offered an opportunity for Israel to penetrate the Egyptian energy market. In the post-Arab Spring period, Egypt’s energy sector was struggling due to the growing population and rising demand in industrial, transportation, and domestic spheres (Hegazy, 2015; Ouki, 2018). According to the German Marshal Fund, Egypt’s overall energy consumption between 2000 and 2012 grew by 5.6 per cent, and the demand for gas hiked by 8.7 per cent (Ghafar, 2016). Egypt’s domestic supply and production growth were severely affected by a rise in consumption, stagnation in production, including depleting reserves, and withdrawal of foreign investments.

Traditionally, the political regimes in Egypt have utilized subsidies in basic goods and services, including oil and gas, as a tool to maintain political stability. It has contributed to budget deficits along with failure of the government to pay off debts to international operators, hindering new investments in the energy sector. By June 2014, Egypt owed a debt of US$7.5 billion to international energy firms (Hegazy, 2015; Ghafar, 2016). Moreover, between 2009 and 2013, Egypt’s total gas exports declined at an annual average of 30 per cent, and the hydrocarbon trade balance turned negative in 2012 and 2013 (Hegazy, 2015; Ouki, 2018). The high level of consumption and decline in production prompted Egypt to import gas.

The first hints toward energy cooperation appeared on 13 August 2013 after Delek Drilling announced that it was in talks with Egypt over both accessing the underutilized LNG facilities to export gas to Europe and domestic consumption in Egypt (Hurriyet Daily News, 2014; Reis, 2014). In November 2013, Noble Energy also expressed its preference to supply gas to Egypt rather than supply LNG to far-off European states. Eventually, in May 2014, Noble Energy announced that it would export 70 bcm of natural gas from Tamar field to LNG facility in Damietta, and in June 2014, the developers from Leviathan signed a letter of intent, offering an annual supply of 7 bcm of natural gas to the LNG facilities in Idku for 15 years (Ashwarya, 2018, p. 93). For Egypt, the LNG facilities served as a crucial platform to maintain a channel to receive gas for both domestic supplies and produce LNG for re-exports in the subsequent years.

The energy negotiations with Egyptian firms halted after the arbitrators at the International Chamber of Commerce (ICC), on 6 December 2015, ruled that EGPC and EGAS should pay US$1.76 billion to IEC and a fine of US$288 million to EMG as compensation for cancellation of the gas agreement and nonfulfillment of contractual obligation in 2012 (Ashwarya, 2018; Rabinovitch & Farouk, 2015).

In 2017, Egypt reached an initial agreement with Israel to resolve the arbitration case after the latter agreed to reduce the compensation amount, and Egypt agreed to allow private firms to import gas from Israel (Ashwarya, 2018). On 8 August 2017, President Abdel-Fatah Al-Sisi signed a legislation, allowing private firms to import gas (Wardany, Magdy, & Eylan, 2017). The Leviathan developers in August 2017 also started negotiating with Dolphinus Holdings Ltd., a consortium in Egypt, to sell 3 bcm of gas per year through Jordan via Al-Fajr pipeline rather than the direct Arish–Ashkelon pipeline (Ashwarya, 2018; Gardosh, Golan & Lippman, 2019).

On 19 February 2018, in a landmark agreement, Delek Drilling and Noble Oil signed a contract with Egyptian firm Dolphinus to supply 64 bcm of gas for 10 years at US$15 billion from Tamar and Leviathan gas fields (Cohen & Rabinovitch, 2018; Solomon, 2018). Egypt would utilize half of its imports for domestic consumption and process the rest into LNG for re-exports (Rachidi, 2019). In order to complement the agreement, on 27 September 2018, Egypt’s East Gas Company spent US$148 million, US-based Noble Energy and Israel-based Delek Drilling spent US$60 million each, and Leviathan and Tamar gas field partners spent US$125 million each to purchase the 39 per cent of the disused EMG Company pipeline linking north Sinai with Ashkelon at the total cost of US$518 million (Cohen, 2018; The Times of Israel, 2018).

The landmark agreement brought new possibilities and the factors that led to the termination of gas supply from Egypt to Israel in 2012, such as Egypt’s domestic consumption pattern and declining export capabilities, security vacuum, corruption, etc., could be addressed under the new arrangement. In other words, the high demand for domestic consumption in Egypt would promote the new deal, which was unpopular during the Mubarak regime. At the same time, Egypt has taken measures to safeguard the pipelines and ensure regular power supply. (Reis, 2014). The deal, however, came as a surprise to many as Egypt has been developing the Zohr gas field since 2015. Egypt’s interest in importing natural gas from Israel was backed by serious strategic thinking over utilizing its LNG infrastructure to shape the regional energy trade.

Egypt’s Resurgence and Its Impact on Israel

The Zohr gas field discovered by an Italian firm, Eni in August 2015, is estimated to contain 850 bcm worth of natural gas (ENI, 2019). The development of the project backed by strong government support was fast-paced, and within 2 years of discovery, production began on 20 August 2017 (Ouki, 2018). In 2018, the field produced 12.1 bcm of gas, and in the first half of 2019, 11.3 bcm was produced at a per day average of 76 million cubic meters (mcm) (Rosneft, 2019a, b). Moreover, gas fields in West Nile Delta, Greater Nooros, and Atoll are developing during this period (Chazan, 2018; EIA, 2018).

The discovery of the gas field has tilted the negative energy balance for Egypt and Israeli policymakers, and firms are worried about the long-term prospects for exports. The production in the Leviathan field, which was discovered in 2010, has been delayed due to regulatory issues, and production is likely to begin only in late 2019. Elai Retting has warned that Egypt’s resumption of LNG exports through its underused terminals would be problematic for Leviathan’s developers who seek to utilize the capital gained from exporting gas toward developing the Leviathan gas field. Moreover, in the case of competition over capturing gas markets, Egypt would have an upper hand, and the scope of exporting gas for Israel would weaken (Rettig, 2016). Israeli policymakers and analysts are, however, hopeful that due to the rapid pace of economic growth and high consumption within Egypt, Israel’s gas imports would continue to remain relevant in the coming years (Chazan, 2018).

Israel presently has two export options, especially for supplying gas to European states. It can either utilize the existing LNG facilities in Egypt or build the expensive East Mediterranean pipeline connecting to Europe. Israel, along with Cyprus and Greece, has agreed to conduct a feasibility study to construct a direct pipeline, which is expected to cost US$7 billion (The Times of Israel, 2018). However, Turkey’s conflict with Cyprus and Israel’s differences with Lebanon over maritime borders are likely to weaken the initiative. On 20 March 2019, Israel, Greece, and Cyprus signed an agreement to construct a 1,900-kilometer-long new pipeline connecting Israel’s offshore gas fields to Greece via Cyprus (Papagiorcopulo, 2019).

Egypt, on the other hand, is keen to attract its Eastern Mediterranean gas producing neighbors to utilize its infrastructure for re-exporting LNG to Europe (The Economist, 2017). Egypt, on 31 August 2016, signed an agreement with Cyprus to construct a new subsea pipeline to supply gas to its LNG facilities (Al Monitor, 2016). Both states signed a new pipeline construction agreement on 18 September 2018 to provide gas from the Aphrodite gas field to the Idku LNG facility in Egypt (Psyllides, 2018). Therefore, Cyprus has emerged as a new battleground for Egypt and Israel to gain access to the European market. Crucially, Egypt’s attempts to capitalize its LNG facilities to further its interests can be sensed from the US$518 million pipeline deal signed on 27 September 2018 in which Egypt’s East Gas company invested the lion’s share with US$148 million (Cohen, 2018).

Egypt in the post-Arab Spring period has taken concrete steps to correct the impediments in the energy sector. President Al-Sisi has brought relative stability to the Arab state, resulting in investors’ confidence. The regime has focused on price reform, subsidy reform, and acting on the impact of subsidy removal, repaying arrears to international firms, encouraging new explorations, speeding the development of existing gas fields, gas contacts etc. (Hegazy, 2015; Ouki, 2018). The government has initiated new infrastructure developments by undertaking measures such as expanding refinery capability, new fueling depots in the Suez Canal, storage tanks, loading and unloading facilities, wharf for oil and gas tankers on the Gulf of Suez, and has allowed the private sector to utilize state infrastructure for production and gas trade (Chazan, 2018).

Potential for Economic Peace Between Israel and Egypt?

The changes in Egypt’s energy policy and the discovery of the Zohr gas field has invigorated the Arab state’s resolve to emerge as a regional energy hub. On 14 January 2019, the energy ministers of Israel and Egypt along with Cyprus, Greece, Italy, Jordan, and Palestinian Authority (PA) met in Cairo to launch Eastern Mediterranean Gas Forum (EMGF) to create a new regional market for ease in supply and demand of gas among the member states, optimizing resource development, improving trade relations, infrastructure development, and offering competitive prices (The Times of Israel, 2019). The choice of the word “forum” is deliberate to suggest a more flexible structure in terms of trading and marketing policy and new memberships (Macaron, 2019; Rachidi, 2019).

The Cypriot Minister of Energy, Commerce, and Industry Georgios Lakkotrypis noted that, between 2009 and 2019, the East Mediterranean region produced approximately 2,100 bcm of gas, and the total consumption of gas by the European Union (EU) states in 2017 was at 410 bcm. Lakkotrypis argued that the new forum could push for securing lucrative gas deals with European states (Lakkotrypis, 2019; Meliksetian, 2019). The forum also became the first regional body in which three Arab entities, namely Egypt, Jordan, and PA, have included Israel. Several commentators have noted that Organization of the Petroleum Exporting Countries (OPEC’s) control over oil production could be modeled by the newly built forum (Lakkotrypis, 2019). The Eastern Mediterranean states currently control 87 per cent of gas deposits in the Mediterranean Sea, and the forum could be used to achieve balance in the international gas market. However, it would be difficult to assume a dominant role similar to OPEC without the presence of Russia, Iran, and Qatar, the three major gas producers. At the same time, there are no universal bodies and well-defined rules to control the gas market (Yahya, 2019). The prohibitive cost of transporting gas could also influence the forum to contain trade with each other (Rachidi, 2019).

From Egypt’s perspective, which hosts the forum, it has re-established itself as a hub in regional energy cooperation based on its new reserves; existing infrastructures, including two LNG plants, refineries, and petrochemical plants; extensive pipeline networks; connectivity routes; and wide-ranging trading and distribution centers to maximize the benefits of the member states (Emam, 2019; Reuters, 2019). It aims to interlink the pipelines of its partner states through its LNG assets. Egypt has entered into several strategic agreements, including with Israel, to import gas for processing and exports (Elass, 2019; Krauss & Walsh, 2019). Egyptian Energy Minister Tariq al-Mulla announced on 15 August 2018 that, by September 2018, Egypt would not import any gas for domestic consumption, indicating self-sufficiency in the sphere of natural gas (Elass, 2019; Mahmoud, 2019). The lull in gas flow in the post-Arab Spring period had forced Egypt to become energy-dependent, and the state was spending US$450 million per month on energy imports. Mona Salem has put the monthly amount Egypt spends on energy imports at US$220 million (Salem, 2018). Therefore, it is estimated that it can save up to US$2 billion annually (Elass, 2019).

Moreover, by including PA in the forum, Egypt has attempted to convey its support for the Palestinian cause to the domestic audience and the Arab world. The involvement of the PA would safeguard Egypt from domestic and regional criticism over gas imports from Israel (Harari, 2019). The PA is keen to develop its own gas fields off the coast of Gaza, which is estimated to contain 30 bcm of gas reserves; however, political limitations such as Israel’s apprehension that the gas revenue would be used for “terrorist” activities has impeded its growth (Coren, 2019). The forum, nevertheless, could be used as a platform to discuss the concerns between Israel and the PA, and explore the potential to integrate the reserves in Gaza with the regional gas market through a broad consensus for the political and economic benefit of the Palestinians.

For Israel, the symbolic significance of the development is immense, which is seen as a new phase of normalization, and the membership in the forum is remarked as a geopolitical win due to its history of isolation in the region (Rachidi, 2019). The Israelis are hopeful it would lead to a fresh period of economic peace with Egypt as well as with Jordan. Energy Minister Yuval Steinitz remarked that it is “the most significant economic cooperation between Egypt and Israel since the signing of the peace treaty 40 years ago” (Heller, 2019). The forum and its agreed terms and conditions could safeguard the Israeli state from unilateral actions such as the termination of gas supplies in 2012 and public opposition to Israel–Arab energy trade (Coren, 2019).

Israel’s energy capability has provided it with new leverage to gain recognition in the regional and multilateral forums. Oded Eran, former Israeli Ambassador to Jordan and the EU, commented that the economic facet would embolden security cooperation and stability in relations (Eran, 2018). It has successfully used its newly found reserves as a foreign policy tool to enhance engagement with Egypt that increasingly views Iran and Turkey as more significant threats than Israel (Yahya, 2019).

However, the working of the forum could be complicated due to the region’s difficult geopolitical history and could affect Israel’s ability to maneuver its interests, including the scope and direction of future development. There is a possibility that in the future, conflict of interest may emerge, which could limit Israel’s access to export markets and weaken policy positions in the forum. The forum could be used to pressurize Israel politically, although it is expected to be limited to energy issues. Therefore, it could be cornered, which may have security ramifications (Macaron, 2019).

Moreover, there is a danger that the forum could be used as a tool to counter and compete against each other to exploit the gas markets (Emam, 2019; Rachidi, 2019). In such a scenario, Egypt has clear advantages over Israel due to its larger reserves and extensive connectivity and infrastructure (Farouk & Saba, 2019; Harari, 2019). Israel would require efficient management and political compromises and the internal contradictions within the policy-making circle, and the public–private sphere must be addressed to cope with these challenges (Rachidi, 2019). There should be a serious consideration for the development of LNG facilities within Israel.

Prime Minister Netanyahu and Energy Minister Steinitz visited the Leviathan gas field on 5 February 2019 to oversee the final stage of construction. According to a January 2019 media report, the present estimates indicate that the field contains approximately 535 bcm of gas and 34.1 million barrels of condensate (The Times of Israel, 2019). Steinitz expressed hope that the production would enrich the state treasury and emphasized the environmental impact by replacing coal with new supplies of natural gas and shutting down the coal power plants in Ashkelon and Hadera. The diplomatic implications of gas exports to Egypt, Jordan, and Europe were also mentioned by the minister (Israel Ministry of Energy, 2019b).

The Israeli energy minister met with the Egyptian Energy Minister Tariq al-Mulla on 14 March 2019, along with leaders from Cyprus, Greece, and the USA to discuss the prospect of the Israel–Europe gas pipeline. The Egyptian minister remarked on the significance of the meeting occurring close to the 40th anniversary of the Camp David Accords and hoped to share the benefits of peace (Israel Ministry of Energy, 2019c). For Israel, the new prospects have offered several opportunities to tap its potential to diversify its energy market. However, it is highly challenging due to Egypt’s preeminence as the largest gas provider in the Eastern Mediterranean region that could use its existing LNG facilities to slow down Israel’s overtures.

Conclusion

Israel has been historically de-linked from the regional energy infrastructure, and initial attempts at the exploration of fossil fuel were largely unsuccessful. The precarious state of energy sources prompted Israel to opt for energy diversification. The opening of Egyptian supplies since 2005 had widened the scope to engage with the Eastern Mediterranean and the wider Middle East and satisfy its energy needs. However, the political and security challenges, along with Egypt’s domestic dynamics after the 2011 Arab Spring, had ceased hope for normalization, and Israel suffered from economic losses for shifting from gas-based to coal-based energy generation and supply. The political implication and adverse diplomatic repercussions were, however, diluted by the response of Netanyahu, who downplayed the cancellation and called it a business dispute. Both states, therefore, avoided transforming the termination of the gas deal into a symbolic battleground. Israel’s response was backed by strategic calculations and its newly discovered gas resources.

Israel hastened the development of the natural gas sector, which could be utilized for domestic consumption. In terms of environmental concerns, natural gas is a cleaner form of energy compared to oil and coal, which it had relied on in the past. The new reserves also opened the doors for Israel to sell gas to its neighbors, including Egypt, and gas diplomacy was seen as an essential tool for normalization in the post-Arab Spring period. Israel’s potential for exports raised new questions over share of gas for domestic consumption and exports, and share of gas in total energy production and non-power generation such as transportation. Israel initially sought to utilize Egypt’s LNG facilities to liquefy gas for exports. Egypt’s energy balance after 2011 went negative due to internal and external factors. It, therefore, saw Egypt as a potential market for the Israeli gas, and in February 2018, Israel signed an agreement to supply 64 bcm of gas to Egypt for 10 years.

Concurrently, Egypt succeeded to bounce back after the discovery of new gas deposits and assume its position as the largest gas producer in the Eastern Mediterranean region. It also focused on tapping its LNG assets to develop deeper engagement with other gas-producing states, including Israel. Israel’s gas reserves and Egypt’s reserves and LNG assets have brought the two countries along with PA, Jordan, Greece, Italy, and Cyprus to collaborate to form a regional forum to meet its everyday needs and focus their efforts on finding new markets. East Mediterranean Gas Forum (EGMF) could potentially emerges as a promising energy competitor that serves as an alternative to Russian gas in Europe.

From Israel’s perspective, it could use the forum to seek close collaboration to optimize its export options that can help the gas from the region to compete in the international market. It has, therefore, opened a new avenue for collaboration in the sphere of energy, trade, and security. The forum and its agreed terms and conditions could protect Israel from unilateral actions. Concerning Egypt, the factors that led to the termination of the gas agreement in 2012 could be reversed due to the active engagements, both on the bilateral level and in multilateral forums such as EGMF. It is pertinent to maintain transparency in gas deals and ensure the safety of the pipelines.

Moreover, anti-normalization and anti-Israeli sentiments in Egypt could also be diluted if Israel could step up as a reliable supplier in Palestinian territories and Jordan. Israel’s partnership with Arab states in EGMF is a watershed moment in the Jewish state’s political history. However, the dynamic regional geopolitics, Egypt’s preponderance, and divergent energy policy options could affect its energy export policy. Egypt intends to receive gas from its neighbors to reprocess into LNG, which could be carried to the broader region, especially Europe. Israel conversely, at this stage, is keen to develop an expensive direct pipeline to Europe via Cyprus.

The new reserves, nevertheless, have brought about a new level of optimism within Israel. Israel, with a long history of dependence on foreign energy and hostility and boycotts from many of the biggest energy powers, could find itself in an advantageous position in the coming decade. Hence, after the discovery of gas deposits and opportunities for exports, Israel has successfully utilized energy diplomacy to align its interests on a geo-economic level with Egypt.