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Gas Warms Up a Cold Peace

By Neal Sandler Nearly 26 years after signing a peace treaty, Israel and Egypt have finally concluded their first major business deal. The two countries have embarked on a $3 billion project to supply Israel with Egyptian natural gas. The agreement, signed June 30, will turn Egypt into Israel's largest supplier of natural gas in the coming years.

"This is a historic breakthrough in economic relations between the two countries," said Israel's National Infrastructure Minister, Benjamin Ben-Eliezer, at a signing ceremony in Cairo on June 30. He predicted that the deal would have far reaching economic implications for both countries.

MOVING AWAY FROM OIL. Trade between the two former enemies has never really taken off since their 1979 peace treaty. In 2004, bilateral trade amounted to a mere $44 million. But the gas deal is a sign that the situation is about to change. Under the 15-year agreement, Egypt will sell Israel 1.7 billion cubic meters of gas a year. The value of the gas is estimated at $2.5 billion to $3 billion over the life of the agreement. And there's an option to extend the deliveries for a further five years.

The gas will be delivered via a 80-mile-long undersea pipeline that will be built from El Arish in the Egyptian Sinai to a point off Israel's southern Mediterranean coast, where it will link up with a planned Israeli gas-transmission network. The fuel is expected to start flowing in early 2007.

The deal with Egypt comes as Israel is stepping up efforts to switch the country's electricity and industrial sector from oil to gas. State-owned Israel Electric Corp (IEC) began burning natural gas about a year and a half ago at its Ashdod power plant. Gas will be replacing fuel oil at older coastal power plants, as well as at newer inland facilities.

PREVENTING SHORTFALL. The state-owned utility, private power producers, and industrial users are investing billions of dollars in gas power plants. "Local demand for natural gas is expected to reach 5 billion cubic meters by the end of the decade, and more than double by 2020," predicted Amit Mor, CEO of Eco-Energy, a local energy consulting firm.

Currently, the sole supplier of natural gas is Yam Thetis, an American-Israeli consortium that discovered gas off Israel's southern Mediterranean coast in 1999. But those reserves are forecast to run out in 10 to 12 years.

The new agreement will prevent any possible shortfall, and even more gas may be on the way: "The IEC sale will likely be the first of many more with the Egyptians in the coming years," says Ben-Eliezer.

"MUTUALLY DEPENDENT." The main force behind the deal is East Mediterranean Gas (EMG), a joint venture between Israeli dealmaker Yossi Maiman, the state-owned Egyptian Gas & Petroleum, and Egyptian businessman Hussein Salem, a close confidant of President Hosni Mubarak. Maiman and Salem teamed up in the past to build a refinery in Alexandria. The partnership is a rarity among Israeli and Egyptian businessmen.

"What's important is the deal will make the two countries mutually dependent," says Maiman. The former Mossad intelligence agent has been trying to cut a deal for over five years. But the political climate during the years of the Palestinian intifada led the Egyptians to put the project on hold.

Now, with the blessing of both governments, EMG wants to wrap up a commercial deal with the IEC within the next few weeks and begin the pipeline's construction by the end of the summer. "If all goes as planned, the gas should reach Israel within 20 months," Maiman says. Needless to say, after years of investment in the project, he's now looking for a handsome payoff. Sandler is a correspondent for BusinessWeek in Jerusalem

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