When the Arab Spring came knocking on Egypt’s door, nobody could have predicted the ripple effects it would have. Hosni Mubarak stepped down, the army stood back, and Egypt, for the first time in its history, held a democratically free election. All seemed to be going well for the politically starved people of Egypt… or so it seemed. Three years later, there is something all too familiar happening in Egypt.
While in early 2011, millions of Egyptians in Tahrir square were denouncing the Mubarak regime, the very ministers and business tycoons who let Egypt’s resources drain away began to plan their exit. As a result, today’s Egypt finds itself in billions of dollars worth of debt to foreign energy companies. The country faces austerity measures not seen since the days of Anwar Sadat. It is also in the middle of a surprisingly underreported multi-billion dollar lawsuit that threatens to bankrupt the entire Egyptian economy.
If your timeline runs between 2011 to present day, it would be difficult to piece together the current flow of events. To do this, one must go back almost half a century, to a war that lasted only six days. In June of 1967, the world watched Israel launch a pre-emptive strike against Egypt, Jordan, and Syria. As a result, Israel gained control of the resource-rich Sinai Peninsula.
Israel’s occupation of the Sinai was by no means coincidental. Since its inception, one of Israel’s most significant strategic weaknesses had been its dependency on foreign natural resources. With the seizing of the Peninsula, Israel found itself in control of two major oil refineries. Exploratory missions soon followed on land and in the Suez Canal. By the time the Camp David Accords were signed, two-thirds of Israel’s energy resources were coming from a land it had occupied outside of its borders.
The Camp David Accords voided Israeli occupation of the Sinai, which could have had significant consequences for Israel: finding a way to overcome a significant shortfall in energy supply. This concern never materialized, in fact the very opposite happend. In the Accords, Israel was guaranteed commercial rights to buy oil and gas from Egypt. In the event of any disruption to distribution, the United States, as a broker of the Accords, guaranteed to offset energy shortfalls.
Fast-forward to the early 90s: we now have an established relationship between Egyptian business elites and their Israeli counterparts. Following the Oslo Accords in 1994, that Egypt had helped broker, an Israeli investment of $1.2 billion was made in a petroleum refinery in Alexandria, called the Middle East Oil Refinery (MIDOR). Who had made such a deal possible? It all boiled down to three, key players: Hussein Salem, a former intelligence officer with close links to the Mubarak regime; Sameh Fahmy, the energy minister under Mubarak; and Yossi (Joseph) Maiman, a former intelligence official with Israel’s Mossad.
The three men had set up a company called ‘Eastern Mediterranean Gas’(EMG). With Fahmy as energy minister, Salem was able to broker a deal with the Mubarak regime to have Egypt sell its gas at below market value to EMG. The gas would then be retailed to the state-owned ‘Israel Electric’using Maiman as the link— also at prices below market value. The quickest and most cost efficient way to ship the gas would be to build a submarine pipeline between El Arish in the Sinai and Ashkelon in Israel.
In mid-2005, Fahmy signed a 15-year $2.5 billion ‘Memorandum of Understanding’ with the Israeli Minister for National Infrastructure, Benjamin Ben-Eliezer, whereby Egypt would supply ‘uninterrupted’ gas to Israel. The original contract between EMG and the Egyptian government stipulated that gas sold to EMG was fixed at $1.50 per ‘Million British Thermal Unit’(MBTU). In the U.S., the gas price that same year was $6.14 per MBTU at its lowest. Five years later, while Japan was importing gas at $9.13 to $10.75 per MBTU, EMG was buying Egyptian gas at approximately $3.00 per MBTU and selling it to Israel Electric at approximately $4.50 MBTU. In other words, Egypt was on the wrong side of this deal.
EMG, through Salem, had the unquestionable support of Hosni Mubarak. However, the latter resigned from his presidency on February 11, 2011 marking the beginning of the end for the key players of his crony entourage, who were being taken out one by one. Sameh Fahmy was arrested and eventually sentenced to 15 years in prison and an arrest warrant was sent out to detain Hussein Salem, whose dual citizenship had allowed him to flee to Spain. Considering how beneficial this arrangement was to Israel, it comes as no surprise that little was done to reprimand Yossi Maiman.
As the revolution continued, Western concerns over the future of relations between Egypt and Israel emerged. Tensions reached an all-time high with the election of Mohamed Morsi, a member of the Muslim Brotherhood. Morsi immediately became the major obstacle to any current and future Egypt-Israel gas deal. Before Morsi had even taken office, fourteen different attacks had been laid out on the Arish-Ashkelon pipeline, causing the army to halt exports.
It was this decision by the army that had the most significant consequences. By halting exports, they had automatically violated ‘Article 2: Guarantee of Supply’of the Memorandum of Understanding. Article 2 stated“…Egypt guarantees the continuous and uninterrupted supply of…Natural Gas…between EMG and IEC…”. Long story short, EMG could officially launch legal action against Egypt in various international courts, including the International Chamber of Commerce and the World Bank.
It was Yossi Maiman who was specifically given the task of launching, on behalf of EMG, an $8 billion lawsuit against Egypt. Egypt is also being sued by the Spanish energy giant, Union Fenosa, for approximately $6 billion. Last but not least, Egypt is in debt another $6 billion to foreign energy companies for gas it has purchased for domestic use.
This all leads us to the present day. After ousting Morsi, Abdel Fattah el Sisi traded in his military outfit for a suit and quietly allowed private companies to begin importing gas. Charges against Salem were subsequently dropped. Meanwhile, Fahmy has been released from custody, his trial pushed back until late August 2014. The lawsuits are currently in arbitration and pending a decision.
Most importantly, Egypt is facing a genuine energy shortage with no resolve. Interestingly enough, Israel discovered, in December 2011, the largest natural gas reserve ever— an asset worth approximately $95 billion. In the hopes of offsetting local pressures, there is a growing possibility of a hard-pressed Egypt buying gas from Israel reversing the dependency relationship. As Sisi further cements himself as Egypt’s new head of state, Egypt shifts towards a position that includes the return of the old guard.