Israel, Egypt Gas Partners Buy Control of Key Export Pipeline

The companies developing Israel’s largest natural gas fields and their Egyptian partner have bought control of a pipeline to Egypt, clearing the main obstacle to a $15 billion deal to export gas.

Israel’s Delek Drilling LP, Noble Energy Inc. and Egyptian East Gas Co. signed a deal to buy a 39 percent stake in pipeline owner Eastern Mediterranean Gas Co., according to a statement released to the Tel Aviv bourse. The buyers will pay $518 million, with Delek and Noble contributing $185 million each and the remainder being paid by East Gas.

The agreement gives the buyers exclusive rights to lease and operate the subsea gas pipeline owned by EMG, which connects southern Israel to Egypt’s Sinai peninsula. The partners in Israeli reservoirs Tamar and Leviathan will use the EMG pipeline to implement a deal signed in February to export 64 million cubic meters of gas to Egypt over 10 years.

Egypt’s oil ministry welcomed the agreement, which eliminates legal obstacles that were impeding the export of gas from Israel to the most populous Arab country. It adds an economic dimension to a relationship dominated by security since the two countries signed a peace treaty that changed the face of the Middle East four decades ago. Delek expects gas to start flowing in “early 2019,” the statement said.

“The deal is an indication that the bilateral relationship is at its peak – probably the closest ties the two countries have had since the peace agreement in 1979,” said Riccardo Fabiani, geopolitical analyst at London-based Energy Aspects consultancy.
Ratio Oil Exploration 1992 LP and Delek, shareholders in the Leviathan field, led the gains on Israel’s main energy index. The shares climbed 4.6 percent and 3.8 percent, respectively, at 10:09 a.m. in Tel Aviv.

The deal also advances Egypt’s plan to capitalize on its own giant Zohr gas field and position itself as an energy re-export hub on the doorstep of gas-hungry Europe. Egypt has idle liquefaction plants that would make it suitable for a regional hub. For Israel, using existing infrastructure to export via Egypt saves it the cost of building its own facilities.

The deal could place Egypt on par with “significant global energy centers,” Delek Chief Executive Officer Yossi Abu said in an emailed statement.

2019 Gas Flow

Delek and its partners will begin working on reversing the flow of the EMG pipeline, which used to carry Egyptian gas to Israel. The companies still need to test the state of the pipeline, which has been idle for years after Egypt halted exports in 2012 due to a domestic energy shortage and repeated attacks by Islamist militants on a connecting overland stretch of pipeline in the Sinai.

The deal is subject to that due diligence, as well as regulatory approvals in Israel and Egypt, and the restructuring of EMG’s existing debt to Egyptian banks, the statement said.

The partners bought a 37 percent stake in EMG held by Sam Zell and Yosef Maiman, among others, who had successfully filed arbitration cases against Egypt for canceling the previous deal in 2012. The EMG shareholders bought out by Delek and its partners agreed to relinquish all claims that were delaying the gas export deal, the statement said.

The EMG pipeline can currently transport 7 billion cubic meters of natural gas per year, enough to honor the contract to supply Egypt’s Dolphinus Holdings Ltd. The pipeline’s capacity can be increased to 9 bcm per year, the statement said.

Consummation of the deal with EMG will allow the company to pursue more contracts, Abu said. Among the options is a bigger deal with Royal Dutch Shell Plc, which is considering buying gas from Israeli and Cypriot fields partly owned by Delek and Noble.

“Israel needs export outlets for its natural gas – this deal will help it monetize its otherwise locked resources,” Fabiani said. “Egypt has taken a step towards becoming a regional gas hub, which could help improve its external accounts in the medium to long term.”

Source: Bloomberg