Israel, Egypt Gas Partners Near Deal to Control EMG Pipeline

(Bloomberg) -- The companies developing Israel’s largest natural gas fields and an Egyptian partner are close to a deal that would give them control of the pipeline to Egypt, eliminating some of the outstanding legal disputes that have impeded progress on a $15 billion export contract.

Israel’s Delek Drilling LP, U.S.-based Noble Energy Inc. and an Egyptian company are in advanced talks to buy 37 percent of East Mediterranean Gas Ltd., which operates the undersea pipeline that connects to Egypt’s Sinai peninsula, people familiar with the matter said. The buyout would give the companies the largest voting bloc in EMG and they expect to reach an agreement with other stakeholders to control and operate the pipeline, the people said.

The stakes under discussion include those currently owned by businessmen Sam Zell and Yossi Maiman, who had successfully filed arbitration cases against Egypt over a previous deal. The buyout would clear a major obstacle to the use of EMG’s pipeline to transport 64 billion cubic meters of natural gas from Israel’s Tamar and Leviathan fields to Egypt’s Dolphinus Holdings Ltd. over 10 years.

The Tel Aviv Oil & Gas Index, which was down 0.6 percent before the news, reversed the losses to close 0.3 percent higher.

Hailed as a breakthrough in a region fraught with conflict, the Israeli-Egyptian gas export deal announced in February adds economic depth to a relationship dominated by security and clouded by mutual suspicion since the two countries signed a peace deal four decades ago.

Though it takes the most populous Arab country a step closer to its goal of becoming an energy hub for the East Mediterranean, the deal has been held up by four separate arbitration cases against Egypt, which used to send gas in the other direction.

The section of the pipeline that runs through northern Sinai was repeatedly attacked by militants and, with its own reserves dwindling, Egypt ultimately canceled gas exports to Israel in 2012 to divert supplies for domestic use.

Israel Electric Corp., the state-owned utility that was using the gas, sued Egyptian state entities for damages. Some EMG shareholders, including Zell and Maiman, filed separate suits. Egypt has said it was keen to settle the cases before any gas deal is implemented.

EMG Managing Director Maamoun ElSakka and an official at EGI, which is managed by Zell, both declined to comment. Egyptian Oil Minister Tarek El-Molla, representatives for Maiman and a spokeswoman for the Leviathan partners did not immediately respond to requests for comment.

New Era

Since the supply disruptions, both Israel and Egypt have made significant offshore gas discoveries that could transform the region and boost their economies. The deal announced in February would send gas from Israel to Egypt, where it can be used domestically or re-exported using existing infrastructure.

Delek and Noble could pipe the gas via Jordan or build new infrastructure but all parties involved prefer to use the existing EMG pipeline as it is the shortest existing route and requires the least investment.

The three partners will create a joint venture to buy the stakes, half of which will go to Noble and Delek, and the rest to their Egyptian partner, said the people, who spoke on condition of anonymity as the negotiations are confidential. Delek is convening a shareholder meeting on July 1, where it will request approval to scrap dividend payments so the company can pay $200 million to finance its portion of the EMG deal, according to a Tel Aviv Stock Exchange filing this week.

The sides expect to reach an agreement in the next few months, with the aim of piping the first gas from the Tamar field to Egypt by the beginning of next year, the people said.

The buyers started testing the state of pipeline more than one month ago, though due diligence on the Egyptian side hasn’t begun due to security concerns, the people said. The companies will need to invest in the pipeline to reverse its direction.

IEC Talks

Once the buyout takes place, the deal will hinge on finalizing a preliminary understanding that Egypt said in February had been reached with Israel’s electricity company.

Then-prime minister Sherif Ismail declined to give details of the plan but people familiar with the matter said that the deal involves reducing the $1.76 billion fine set by an international arbiter and spreading the payments over multiple years.

IEC “is not aware of this arrangement,” company spokeswoman Dalia Bodinger said by phone.

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