Another Victim of the Intifada

How an Israeli-Egyptian joint venture came undone

Not far from Alexandria, Egypt, there's a brand-new oil refinery that once served as the most visible symbol of the new cooperation between Israel and its neighbors. The $1.3 billion Midor refinery, up and running for just two months, was bankrolled by both Israeli and Egyptian capital. The investment, the biggest one by Israelis in the Arab world, involved the privately held Merhav Group, which has telecom and energy projects worldwide. Merhav's boss, prominent peace advocate Yosi Maiman, had high hopes for the profits he would reap from his Egyptian operations.

Now the Israelis are out, and the refinery symbolizes the broken promise of Arab-Israeli cooperation after nine months of intifada in Gaza and the West Bank and increasing antagonism between Israel and its neighbors. It's not a story of complete breakdown, since the Egyptians and Israelis may still find a way to do business together. But the episode illustrates how tortured Arab-Israeli business relations have become.

The end for Merhav's involvement in Midor came abruptly. On May 31, the Israelis confirmed that the Egyptian government, the majority partner in Midor, had quietly bought out Merhav's stake for $150 million. Merhav executive Nimrod Novik says the company netted a nice gain, but refuses to offer specifics: Industry sources say Merhav put $60-$70 million in the project. "We've had several offers, and this time the price was right," says Novik.

EASED OUT. But government and energy industry officials in both Egypt and Israel say Cairo wanted to distance itself from Israel at a particularly poisonous moment. Egyptian Economic Minister Youssef Boutrous Ghali said on May 23 that the refinery partnership was formed "10 years ago, when the relations between Egypt and Israel were at their best and when peace was the strongest choice." Implication: Those days are over.

Meanwhile, Egypt's Petroleum Minister, Sameh Fahmy, say industry executives, had worked since early April to oust Merhav. "Until last week, I knew the minister was trying to push them out, but they wouldn't go," says a foreign oil executive in Cairo. The Egyptian ministries confirm they organized Merhav's departure, but will not comment further.

With the end of the partnership, the chance of further cooperation between the Arabs and Israelis on energy projects is unclear. Egypt has large gas reserves, and plans had started to construct a pipeline to ship the stuff to Israel. Merhav, in fact, remains involved in this project, the East Mediterranean Gas Pipeline Co. Merhav's Egyptian partner, Hussein K. Salem, is a former intelligence officer with excellent connections; he would not return calls for comment.

In Cairo, the feeling is that none of this matters. The prospects of Egyptian gas going to Israel anytime soon "are pretty well zero," as a Western diplomat puts it. For now, Egyptian Prime Minister Atef Ebeid wants to build a gas pipeline across the Gulf of Aqaba straight to Jordan, deliberately squeezing out Israel. Ebeid and his petroleum minister have also been traveling in the gulf looking for Arab investors in Midor to replace Merhav.

The Israelis, though, are still hoping that more deals will work out. Israel Electric Corp. still plans to negotiate the final terms of a contract with East Mediterranean Gas so that gas can start flowing by the end of 2003--even though some members of Prime Minister Ariel Sharon's government oppose the deal. For its part, Egypt stands to get some $1 billion a year eventually by selling natural gas to Israel, should it proceed with more joint energy projects. "Selling natural gas to Israel is the most viable [plan] for Egypt," says Israeli energy analyst Amit Mor.

The Israelis are hoping that time will turn the tide of Egyptian hostility. Says one high-level Israeli source: "The Egyptians want the pipeline project out of the news until the Israeli-Palestinian conflict settles down." One way or another, business as usual keeps proving to be impossible in this troubled region.

By Susan Postlewaite in Cairo and Neal Sandler in Jerusalem

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