The Arish-Ashkelon pipeline from Egypt to Israel is, perhaps apart from domestic subsidies, the most controversial element of the country’s energy sector, with many Egyptians angry about selling a precious resource to a country whose policies they oppose.

In 2010 Israel was the destination of 38% of Egyptian gas exports, but a string of attacks on the pipelines took place almost immediately after the revolution of early 2011, making the export of gas to Israel – as well as to the Arab countries of the Levant – impossible. By July 2011 this had resulted in lost revenues totalling some $500m, according to the American Chamber of Commerce in Egypt, and by March 2012 there had been 13 separate incidents of sabotage to the pipeline.

COLD PEACE: Though Israel and Egypt have not been at war with each other since the 1979 Camp David Accord, which ended 30 years of conflict, relations between the two countries are often characterised as a cold peace. The agreement mandated that Egypt sell gas to Israel, a stipulation that was fulfilled with a contract in 2005 obliging Egypt to send 60bn cu feet (bcf) of gas a year to Israel at $1.50 per million British thermal units (mmBtu). Deliveries commenced in 2008, and the agreement was revised in February 2010 to 247 bcf, at a price of $5 per mmBtu, but deliveries have been scant since the attacks on the pipeline began in 2011.

Egyptian Natural Gas Holding (EGAS) cancelled its contract with East Mediterranean Gas (EMG), the pipeline’s owner and operator, on April 22, 2012, alleging that the company had not been paying for the gas it had received, and had been warned five times about this. After the incident, EMG told the Israeli newspaper Ha’aretz that it was considering legal action and had already been pursuing a commercial arbitration claim in Switzerland because Egypt had not been sending as much gas as it was obliged to since the revolution. EMG is a partnership that includes Israeli infrastructure, energy and industry firm Merhav, the Thai state energy company PTT and others. It owns the infrastructure used, with the pipeline running from Arish, about 50 km west of the border with Israel, to Ashkelon, on that country’s southern Mediterranean coast.

POLITICALLY UNPOPULAR: The move to end exports in early 2012 had an air of inevitability, as the deal had been deeply unpopular in Egypt. Several candidates for the presidency had pledged to end gas exports to Israel, and this had also been part of the platform of the majority party in the country’s parliament, the Muslim Brotherhood’s Freedom and Justice Party. A spate of arrests of former president Hosni Mubarak administration officials in 2011 included Sameh Fahmy. In Fahmy’s case, his role in selling gas to Israel was cited for the arrest.

While officials on both the Egyptian and Israeli sides have claimed that the episode is a commercial dispute and has nothing to do with political relations, investors may perceive additional political risk in Egypt as a result. At time of press, a renegotiation of prices for gas exports to Israel was unlikely but had not been ruled out by the authorities.

FUTURE SELF-SUFFICIENCY: For Israel, the move to bring a halt to the exports has been partially mitigated by the emergence of its own fledgling domestic gas sector. The country has three gas fields with proven reserves of approximately 25trn cu feet between them, with exploration ongoing.

That may be enough to supply the country at its current usage rates for around 200 years, according to a report by the US Congressional Research Service. The first of these natural gas fields is expected to enter production in late 2012 or during 2013, and continued development will likely make the country less reliant on imports.

For Egypt, it is hoped that these discoveries, combined with new finds in the territorial waters of Cyprus, could stimulate increased interest in exploration nearby, within Egypt’s maritime boundaries.