Some legal aspects of the Egypt-Israel gas deal (part I)

I’ve long wanted to write a post about the legal aspects of the Egypt-Israel natural gas deal without taking the time to do so, but its probable breakdown makes this a moral imperative. Correct and specific legal information on what is after all a commercial transaction subject to the usual confidentiality clauses has been hard to find, and much more could probably be found by exploring Israeli (and thus Hebrew) sources, but I’ll leave that to Israeli media or bloggers. The specific legal architecture of the 2005 Egypt-Israeli gas sale deal is sketchy, but I think the following gives a relatively reliable picture.

I – The legal context: the gas contracts are based on a bilateral inter-governmental agreement

First, there are two parallel legal tracks here: there’s first an overarching agreement between the governments of Egypt and Israel on the gas sale, contrary to what many, me included, have thought (the second legal track being the contractual arrangements between the different Egyptian and Israeli companies involved).

"In the last few years, when lawsuits were filed in Egypt against the sale of gas to Israel, the government often claimed that it was only selling gas to EMG, and has no transactional relationship with Israel".

Until a few days ago, I thought as much: the contracts were presumably signed between Egyptian and Israeli gas or energy companies – more on them later – with no explicit, direct legal involvement of either the Egyptian or the Israeli governements. Contrary to what many think, the Treaty of Peace between the State of Israel and the Arab Republic of Egypt  (the version on the Israeli MFA’s website is more comprehensive) does not contain any undertaking by Egypt to sell gas to Israel – there is a clause on trade in annex II, but it doesn’t impose a duty on Egypt to supply gas to Israel:

Article 2: Economic and Trade Relations

1. The Parties agree to remove all discriminatory barriers to normal economic relations and to terminate economic boycotts of each other upon completion of the interim withdrawal.

2. As soon as possible, and not later than six months after the completion of the interim withdrawal, the Parties will enter negotiations with a view to concluding an agreement on trade and commerce for the purpose of promoting beneficial economic relations.

There is however a memorandum of understanding dated March 26, 1979 between Israel and the USA whereby the US guarantees Israel’s oil supplies, but Egypt is not party to it, and it does not cover natural gas. But then I stumbled – by chance – on the 2005 Memorandum of understanding relating to the purchase and the transmission through a pipeline of natural gas signed between the governements of Egypt and Israel – you’ll find below the provisions that I find relevant to this dispute.

The Government of the State of Israel and the Governement of the Arab Republic of Egypt, hereinafter referred to as the "Parties",

(…) Aware of the resolution of the Cabinet of Ministers of the Arab Republic of Egypt during its meeting held on 18 September 2000, authorizing the Egyptian Ministry of Petroleum represented by the Egyptian General Petroleum Corporation to conclude the necessary contract with Eastern Mediterranean Gas Company, an Egyptian joint-stock company, hereinafter referred to as "EMG", for the export of quantities of Egyptian natural gas to the consuming markets in the Mediterranean countries as well as the European markets;

Welcoming contracts between EMG and Israeli companies such as the contract between the Israeli Electric Corporation Ltd., hereinafter refered to as "IEC", and EMG for the supply of natural gas originating from Egypt to Israel, through a pipeline to be constructed between El Arish and Ashkelon, for a period of 15 (fifteen) years, renewable by mutuall agreemnt, as well as additional contracts to be concluded between EMG and other Israeli companies;

Have agreed the following:

Article 1 General: The purchase of natural gas, its transmission through a pipeline between El Arish and Ashkelon, including the construction of the pipeline and its operation, shall be in accordance with the terms of this Memorandum of Understanding and in accordance with and subject to the laws of the State under whose jurisdiction it lies.

Article 2 Guarantee of supply: The Government of the Arab Republic of Egypt guarantees the continuous and uninterrupted supply of the natural gas contracted and/or to be contracted such as between EMG and IEC for the initial 15 years as well as for any extended period, according to the provisions of the contract and for a yearly total amount of up to 7 BCM (seven billion cubic meters). The same guarantee shall apply to any other entity importing gas from Egypt to Israel. This guarantee will start on the date of the activation of any contract of purchase of natural gas from egypt.

Article 3: Subject to its law and the provisions of this MOU each Party shall facilitate the implementation of this MOU.

Article 4 Safety and security:

(1) Each Government shall have the right to determine, in accordance with its own laws, the safety and security measures which are to govern the construction and operation of the part of the pipeline under its jurisdiction.

(2) Operation of the pipeline, or any part thereof, shall not commence until each party has issued all necessary authorizations and permits in accordance with their national legal requirements. (…)

Article 7 Tripartite agreement: The Egyptian Government designates the Egyptian General Petroleum Corporation (EGPC) and the Egyptian Gas Holding Company (EGAS) as representatives of the Egyptian Ministry of Petroleum in signing the tripartite agreement as the First Party in the agreement guaranteeing natural gas supply, with EMG as the Second Party in the agreement, and IEC as the Third Party in the agreement. The same shall apply to any other entity importing gas from Egypt into Israel and/or consuming gas from Egypt in Israel.

Article 8 Consultations: The parties, recognizing each other’s legitimate interest in safeguarding the supply of natural gas from Egypt to Israel may consult each other with a view to find a solution to outstanding issues.

Article 9 Entry into force: (1) This Memorandum shall enter into force on the date of the latter of the diplomatic notes by which the Parties notify each other that their internal legal requirements for the entering into force of the Memorandum has been complied with. (…)

Done at Cairo, Egypt, on the 30 day (sic) of June 2005 which corresponds to the 23rd day if Sivan 5765 (…)

Some remarks: I’m not impressed by the quality of the legal drafting here – this is a shoddy and hastily drafted agreement. As a jurist, there are many issues I would have expected to see tackled in such an agreement – I’ve seen grants contracts for 25.000 € music festivals with more substantive legal content than this MoU, and a cursory glance into the Gas Regulation 2012 volume, containing a 361-pages overview of gas laws around the world, does indicate that there are possibly one or two issues that may have been overlooked. There is for instance no arbitration clause should consultations fail to achieve a compromise between the parties, nor are the different steps of the consultations phase detailed.

Or take article 1 for instance: it states that the sale and transmission of Egypt’s natural gas to Israel shall be "in accordance with and subject to the laws of the State under whose jurisdiction it lies". So, if Egypt’s People’s assembly votes a law barring the sale of natural gas to Israel or mandating that the price of that gas should be three times the market price, that would be in accordance with the MoU, right? It doesn’t make much sense to allow such unqualified loopholes in an inter-governmental agreement governing highly contentious multi-billion sales of natural gas.

More importantly, the lasting impression one gets when reading this MoU is that it was drafted by the Israeli government (although if that is the case I’m underwhelmed by their legal service): while Egypt takes upon itself wide-ranging guarantees regarding the "continuous and uninterrupted" supply of natural gas to Israel (you will note that there is no force majeure clause, or no mitigation of Egypt’s wide-ranging guarantee), the Israeli government undertakes no corresponding guarantee vis-à-vis Egypt, as regards payments or price levels (no price revision clause), for instance. It is quite strange to see a government guaranteeing a private company’s supplies – EMG’s in this case – to another commercial operator such as the IEC on the Israeli side to such an absolute and unqualified extent. There is for instance no statement that Egypt’s guarantee is one of last resort, no indication of prior procedural steps or time-limits for the guarantee to play, and more importantly still there is no financial ceiling.

A more appropriate drafting from an Egyptian point of view would have been that the Egyptian government undertook not to unreasonably or unjustifiably hinder or obstruct said gas supplies, and to enter into prior consultations with its Israeli counterpart if it were envisaging action likely to substantially affect the supplies of natural gas to Israel. The absolute guarantee provided by this MoU seems unreasonable, and I would be interested to hear from better informed readers if other inter-governmental MoUs concerning oil or gas supplies contain similar wide-ranging guarantee clauses, especially in the absence of a reciprocal guarantee of payments from the buyer’s government.

Even more troubling, from the Egyptian point of view: the Egyptian government’s undertaking is not limited to the known parties to the 2005 gas sale contract, but to all parties of all Egyptian gas sales contracts with Israel thereafter. And the icing on the cake: the MoU is indefinite, with no limitation in time. Even the formalia indicates that the MoU template was Israeli – no Arabic version, and the date of the agreement indicated as per the Gregorian and Jewish calendars, with no mention of the date according to the Islamic calendar…

It is therefore necessary to resort to the general legal definition of a guarantee – see The Oxford Companion to Law (Clarendon Press, Oxford, 1980, p. 542):

A guarantee is an accessory contract whereby one party undertakes to be answerable for the debt, default or miscarriage of another, who is primarily liable to a third party. The surety’s liability does not arise until the principal debtor has defaulted and the duration and extent of that liability depend on the terms of the contract. Before recourse can be had to him, any conditions precedent to his liability must be fulfilled.

While Egypt’s guarantee implicitly applies in case of default, it is unconditional, and no direct references are made to the contract between the principal debtors in this case, EGAS and EGPC, and EMG on the one hand and IEC on the other.

A comparison between the 2005 Egypt-Israel gas supply MoU and the 1979 USA-Israel oil supply MoU is telling: the US issued no unlimited – the MoU was signed with a 15 years validity, covering the period 1975-1990 – or unconditional guarantee – its undertaking is valid only if the US meets its own requirements, and as for transportation the US only undertakes to "make every effort". More importantly still, "in any event the United States will be reimbursed by Israel for the costs incurred by the United States in providing oil to Israel hereunder"…

Then there is the legal status of the MoU: while it’s not labelled a treaty, it clearly intends to produce binding legal effects, as evidenced by article 9 (1):

This Memorandum shall enter into force on the date of the latter of the diplomatic notes by which the Parties notify each other that their internal legal requirements for the entering into force of the Memorandum has been complied with.

This is a procedure akin to that surrounding the signature and ratification of treaties. The 1969 Vienna Convention on the law of treaties states:

“treaty” means an international agreement concluded between States in written form and governed by international law, whether embodied in a single instrument or in two or more related instruments and whatever its particular designation (article 2.1.a)

It adds :

Article 11: Means of expressing consent to be bound by a treaty

The consent of a State to be bound by a treaty may be expressed by signature, exchange of instruments constituting a treaty, ratification, acceptance, approval or accession, or by any other means if so agreed.

Furthermore, the 2005 MoU does not have abstract or political aims (unlike some friendship or co-operation treaties), nor have the parties only expressed mere intentions ("the parties endeavour etc"): on the contrary, Egypt’s guarantee as to the gas supply is clear and unconditional; the provisions on environmental protection (article 5 of the MoU) and especially those on taxes (article 6 of the MoU – a tax exemption régime is set up) show unequivocally that both parties intended for the MoU to produce binding legal effects.

Accordingly, the 2005 MoU should be considered as an international treaty between Israel and Egypt, whose object is to guarantee the fulfillment of an Egyptian private company’s contractual obligations towards its Israeli clients. Robin Mill’s assertion in Foreign Policy – – is therefore unfounded in the present case.

Interestingly, and that’s yet another weakness, the MoU contains no provision on its termination. The provisions of the 1969 Vienna convention would then apply (see footnote (1) for the applicable provisions thereof).

Egypt could possibly invoke article 151 of its 1971 Constitution (it was in force in 2005, and still is to a large extent, despite the 2011 Constitutional declaration approved by referendum), which laid down the procedure for ratification of treaties, and mandated a ratification by the People’s assembly for commercial treaties or those imposing a burden on the state treasury – which could be said to be the case here with the unconditional supply guarantee undertaken by the Egyptian government vis-à-is the Israeli government, not to mention the:

Article 151 The President of Republic shall conclude international treaties and forward them to the People’s Assembly with the necessary explanations. The treaties shall have the force of law after their conclusion, ratification and publication in accordance with the established procedure. However, peace treaties, alliance pacts, commercial and maritime [treaties] and all the treaties involving modifications in the national territory or affecting the rights of sovereignty, or imposing charges on the State treasury which are not provided for in the budget must be approved by the People’s Assembly.

The 2005 MoU was never ratified by Egypt’s People’s assembly, so it might possibly have been ratified by the Egyptian governement in breach of its own Constitution, raising the possibility to invoke its invalidity in accordance with article 65 of the 1969 Vienna convention. Another possibility would be to invoke the material breach clause – (article 60 of the 1969 Vienna convention) – as the official reason invoked by state-owned EGAS – Egypt’s gas company – is that EMG hadn’t paid its dues for months on end:

The contract was terminated after the Egyptian side sent notifications to EMG five times, but EMG did not commit to its financial obligations as per the contract terms, while the deadline was 31 March (Egypt Independent)

It seems however that the Egyptian government, or what passes for it, has decided on presenting the gas deal termination as a purely commercial decision, based on non-payment of dues by the Israeli buyers:

Egyptian engineer Hani Dahi, executive director of the Egyptian General Petroleum Corporation, said on Monday that the military council and the government had no part in the decision to terminate Egypt’s agreement to provide natural gas to Israel.

According to Dahi, the decision was made following a business dispute with Israel, and has nothing to do with politics. He added that the Israeli side has not fulfilled its economic obligations, despite repeated requests.

Mohamed Shoeb, head of the Egyptian Natural Gas Holding Company, announced Sunday evening that the company will terminate its agreement to provide natural gas to Israel, after a decision had been made on Thursday due to what he termed “Israel’s repeated breaching of the agreement.” (Haaretz)

This was confirmed by Egypt’s infamous minister of international cooperation, Fayza Abulnaga:

Egypt confirmed that it is not opposed to continuing gas exports to Israel if the two countries reach a new agreement based on new prices.

The Egyptian Natural Gas Holding Company (EGAS) has notified the Israeli side of the decision, said Planning and International Cooperation Minister, Fayza Abouelnaga, in a briefing Monday after a cabinet meeting at the General Authority for Investment. She added that the Egyptian government or the Ministry of Petroleum has nothing to do with the trade contract between EGAS and the East Mediterreanean Gas Company. (Egypt Independent)

Notice by the way Abulnaga’s blatant lie ("the Egyptian government or the Ministry of Petroleum has nothing to do with the trade contract between EGAS and the East Mediterreanean Gas Company"): she was part of the cabinet when the 2005 MoU was signed, and irrespective of whether she knew about its contents then surely these must be known to her today, and they are crystal clear: Egypt guarantees the supply of natural gas to Israel for fifteen years, i.e. until 2020.

This leads us to the second legal track: the contractual arrangements between the Egyptian gas suppliers, EMG which acts as an intermediary and the Israeli buyers. I will look into this in a following post.

(1)  The following provisions of the 1969 Vienna Convention could provide a basis for an Egyptian denunciation of the 2005 MoU:

Article 54: Termination of or withdrawal from a treaty under its provisions or by consent of the parties The termination of a treaty or the withdrawal of a party may take place: (a) in conformity with the provisions of the treaty; or (b) at any time by consent of all the parties after consultation with the other contracting States. (…)

Article 56: Denunciation of or withdrawal from a treaty containing no provision regarding termination, denunciation or withdrawal

1. A treaty which contains no provision regarding its termination and which does not provide for denunciation or withdrawal is not subject to denunciation or withdrawal unless: (a) it is established that the parties intended to admit the possibility of denunciation or withdrawal; or (b) a right of denunciation or withdrawal may be implied by the nature of the treaty.

2. A party shall give not less than twelve months’ notice of its intention to denounce or withdraw from a treaty under paragraph 1. (…)

Article 57: Suspension of the operation of a treaty under its provisions or by consent of the parties

The operation of a treaty in regard to all the parties or to a particular party may be suspended: (a) in conformity with the provisions of the treaty; or (b) at any time by consent of all the parties after consultation with the other contracting States. (…)

Article 60: Termination or suspension of the operation of a treaty as a consequence of its breach

1. A material breach of a bilateral treaty by one of the parties entitles the other to invoke the breach as a ground for terminating the treaty or suspending its operation in whole or in part.

2. A material breach of a multilateral treaty by one of the parties entitles: (a) the other parties by unanimous agreement to suspend the operation of the treaty in whole or in part or to terminate it either: 20 (i) in the relations between themselves and the defaulting State; or (ii) as between all the parties; (b) a party specially affected by the breach to invoke it as a ground for suspending the operation of the treaty in whole or in part in the relations between itself and the defaulting State; (c) any party other than the defaulting State to invoke the breach as a ground for suspending the operation of the treaty in whole or in part with respect to itself if the treaty is of such a character that a material breach of its provisions by one party radically changes the position of every party with respect to the further performance of its obligations under the treaty.

3. A material breach of a treaty, for the purposes of this article, consists in: (a) a repudiation of the treaty not sanctioned by the present Convention; or (b) the violation of a provision essential to the accomplishment of the object or purpose of the treaty. 4. The foregoing paragraphs are without prejudice to any provision in the treaty applicable in the event of a breach. 5. Paragraphs 1 to 3 do not apply to provisions relating to the protection of the human person contained in treaties of a humanitarian character, in particular to provisions prohibiting any form of reprisals against persons protected by such treaties.

Article 61: Supervening impossibility of performance

1. A party may invoke the impossibility of performing a treaty as a ground for terminating or withdrawing from it if the impossibility results from the permanent disappearance or destruction of an object indispensable for the execution of the treaty. If the impossibility is temporary, it may be invoked only as a ground for suspending the operation of the treaty.

2. Impossibility of performance may not be invoked by a party as a ground for terminating, withdrawing from or suspending the operation of a treaty if the impossibility is the result of a breach by that party either of an obligation under the treaty or of any other international obligation owed to any other party to the treaty.

Article 62: Fundamental change of circumstances

1. A fundamental change of circumstances which has occurred with regard to those existing at the time of the conclusion of a treaty, and which was not foreseen by the parties, may not be invoked as a ground for terminating or withdrawing from the treaty unless: (a) the existence of those circumstances constituted an essential basis of the consent of the parties to be bound by the treaty; and 21 (b) the effect of the change is radically to transform the extent of obligations still to be performed under the treaty.

2. A fundamental change of circumstances may not be invoked as a ground for terminating or withdrawing from a treaty: (a) if the treaty establishes a boundary; or (b) if the fundamental change is the result of a breach by the party invoking it either of an obligation under the treaty or of any other international obligation owed to any other party to the treaty.

3. If, under the foregoing paragraphs, a party may invoke a fundamental change of circumstances as a ground for terminating or withdrawing from a treaty it may also invoke the change as a ground for suspending the operation of the treaty.

Article 65: Procedure to be followed with respect to invalidity, termination, withdrawal from or suspension of the operation of a treaty

1. A party which, under the provisions of the present Convention, invokes either a defect in its consent to be bound by a treaty or a ground for impeaching the validity of a treaty, terminating it, withdrawing from it or suspending its operation, must notify the other parties of its claim. The notification shall indicate the measure proposed to be taken with respect to the treaty and the reasons therefor.

2. If, after the expiry of a period which, except in cases of special urgency, shall not be less than three months after the receipt of the notification, no party has raised any objection, the party making the notification may carry out in the manner provided in article 67 the measure which it has proposed.

3. If, however, objection has been raised by any other party, the parties shall seek a solution through the means indicated in Article 33 of the Charter of the United Nations.

4. Nothing in the foregoing paragraphs shall affect the rights or obligations of the parties under any provisions in force binding the parties with regard to the settlement of disputes.

5. Without prejudice to article 45, the fact that a State has not previously made the notification prescribed in paragraph 1 shall not prevent it from making such notification in answer to another party claiming performance of the treaty or alleging its violation.

Article 66: Procedures for judicial settlement, arbitration and conciliation

If, under paragraph 3 of article 65, no solution has been reached within a period of 12 months following the date on which the objection was raised, the following procedures shall be followed: (a) any one of the parties to a dispute concerning the application or the interpretation of article 53 or 64 may, by a written application, submit it to the International Court of Justice for a decision unless the parties by common consent agree to submit the dispute to arbitration; (b) any one of the parties to a dispute concerning the application or the interpretation of any of the other articles in part V of the present Convention may set in motion the procedure specified in the Annex to the Convention by submitting a request to that effect to the Secretary-General of the United Nations.

Article 67: Instruments for declaring invalid, terminating, withdrawing from or suspending the operation of a treaty

1. The notification provided for under article 65, paragraph 1, must be made in writing.

2. Any act of declaring invalid, terminating, withdrawing from or suspending the operation of a treaty pursuant to the provisions of the treaty or of paragraphs 2 or 3 of article 65 shall be carried out through an instrument communicated to the other parties. If the instrument is not signed by the Head of State, Head of Government or Minister for Foreign Affairs, the representative of the State communicating it may be called upon to produce full powers.

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2 Réponses

  1. Well…if that document is the only legal one available to both israelis and egyptians today …it might be better for both to refer to a cosa nostra godfather’s assembly in their NY headquarters try to fix their litigation…and why not put some contracts on some people’s heads to make sure clear the case once for all !!

    but apparently, this was a MOU and not a treaty, both parties clearly and intentionally engaged to limit and determine the terms of that agreement, as well as make it ambiguous and legally inconsistent despite of the mention of the respective governments as being the "parties" ! the worst is the spirit of such agreement that sounds more like an Israeli injunction to Egyptians to deliver their natural gas with no reservation during 15 years as being a good faith precedent to reestablishing the economic relations !

    now, such intentional legal inconsistency is due to both parties not willing to make their agreement public in full or subject to regular "state" legal procedures as it involved or designated two Egyptian corporation representing the Egyptian Ministry of petroleum only …while a formal intergovernment treaty would involve more parties..and the question arises : have egypt ever been able to assume in full it’s pretention to official and open relations with Israel ? if the answer is officially yes, that natural gas agreement document suggest that none of other agreements in other sectors like agriculture or trade could be ratified by the People’s Assembly or have ever been subject to large consensus or acceptation by Egyptians…

    good to remember that "Egypt" was Moubarak, and Moubarak only was Egypt untill 2011 !

    after all, ‘m not surprised ! I even presume that many oil and natural gas export agreements between Arab Golf states and the US must be similar if not worst and relying on "verbal" agreements since the 50’s !

    Good job Ik… and good luck to Egyptians !

  2. Ik, I reread my comment, and it is a frightening truth that I got back in the face:

    Before Mubarak, Sadat was there, and before him, Nasser …etc, then I realized that the entire Arab world has never had any power in the hands of people historically! the Arab Spring in 2011 was actually the first time in history the people of Arab or Muslim World attempts to monopolize the political decision!

    in the West, it was the same thing until the French Revolution comes to change everything! and even with it, we can afford to say that "democracy" in its current form could emerge only during the second half of the twentieth century!

    Several issues plaguing the makers of this Arab spring of Western democracy precisely because seeing it in no way guarantees the people’s access to power in reality !

    The Egyptians have plenty of choice to address the issue of natural gas with Israel: they can simply void and déclare all previous Moubarak agreements and deals outdated, "caduques", and contrary to Egyptian laws ! they may even cancel camp david, or Egypt engagement in Oslo, Madrid, Charm Echeikh or Doha! At worst they may even declare war on Israel on an official level, and involve the international community to decide on new balances that should govern the interests of Arab peoples in the region! and can even do all Arab dictatorships!

    I wonder if this is really realistic! but after all, why not!

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