Egypt's cancellation of gas sales to Israel was inevitable

The unraveling of a multibillion-dollar contract to sell Egyptian natural gas to Israel has been a long time in coming. The dissolution was virtually assured at the fall of Egyptian President Hosni Mubarak in February last year.

But to judge by some of the reactions today, Egypt's cancellation of a contract to supply natural gas to the private East Mediterranean Gas Co., which in turn delivered to customers in Israel, you'd be forgiven for thinking this was a bolt from the blue.

Shaul Mofaz, a legislator and leader of Israel's opposition Kadima party, described Egypt's decision as a "clear violation" of the peace treaty (in this, Mr. Mofaz is mistaken – the treaty makes no mention of this or any other gas deal and only calls for "normal economic relations" between the states).

Israeli daily newspaper Haaretz captions a story on Egypt's decision that it "may also constitute economic suicide." Israeli Prime Minister Benjamin Netanyahu, meanwhile, sought to paint the matter as divorced from politics. "This is actually a business dispute between the Israeli company and the Egyptian company," he said today.

Mr. Netanyahu is also mistaken. The chaotic politics of post-Mubarak Egypt practically required this step be taken.

Like most Egyptian decisions lately it isn't clear how it was made – on orders of the ruling miltary junta? On the initiative of a senior official at the Energy ministry? But this is a move that has long been supported by practically every political corner of Egypt. The average Egyptian saw the deal as natural-resource theft to the benefit of the Jewish state. As an easy applause line, Egyptian politicians have been attacking the gas deal at campaign stops.

While Egyptian officials, like Netanyahu, have insisted this is simply a business matter, such statements should be taken with metric tons of salt. Politics touch all dealings between the two states, and in this deal even more than usual.

The deal involved cronies close to the deposed Hosni Mubarak. The involvement of Israel was always going to make it an object of scrutiny. And the pipeline that ships the gas to Israel has been attacked by angry locals on the Sinai peninsula at least 10 times since Mubarak fell from power.

The gas deal was imagined by its political architects (the US and Israel had been pushing for a pipeline across Sinai as far back as the early 1990s) as something that would bring Egypt closer to Israel. But in fact its failure now is a reminder that the cold peace forged at Camp David never became anything more. Some business has been done and money made, another war remains unlikely, but the fact remains that the gas deal is a political liability in a changing Egypt where popular sentiment has far more force than it did under Sadat or Mubarak.

Eastern Mediteranean Gas (EMG) is a business partnership that shows the benefits of having friends in high places. Hussein Salem, a wealthy Egyptian who was widely viewed in Cairo circles as a bag man for Mubarak and his family, is one shareholder. Mr. Salem fled his homeland soon after Mubarak fell and has since been fighting extradition attempts on corruption charges connected to the gas deal.

Yossi Meiman, an Israeli businessman with close ties to former Prime Minister Ariel Sharon, is another. Mr. Maiman managed to cash out a direct 12.5 percent stake in EMG in 2008 – by having Ampal American-Israeli Corporation, a company he controls, issue about $230 million in bonds to buy him out. Those bonds are now set to default. Jewish-American billionaire and philanthropist Sam Zell is another partner. 

Aside from political risks, EMG had a sweet deal. A guaranteed supply of gas at a fixed price at one hand, with a guaranteed buyer at a 50 percent markup, at the other. The size of that markup, negotiated as it was between a company partially controlled by a close business associate of Hosni Mubarak and the state oil company, had led to whispers of corruption in Egypt from the moment the deal was signed in 2005. With the uprising against Mubarak last year, the whispers have become shouts.

Egypt's leading presidential candidates have all attacked the deal. Amr Moussa, the former head of the Arab League who was popular regionally for his fiery anti-Israel rhetoric, praised the cancellation, saying the gas deal was obviously tainted with corruption.

Going forward, it's conceivable but not likely that gas sales will resume. Israel, always leery of counting on a neighbor like Egypt, has major gas developments of its own under construction, and the country is confident it will soon be able to replace lost supply. Egypt has substantial demand for subsidized fuel at home, and resource nationalism is a potent issue at a time of economic crisis.