UFG to Drop Egypt Lawsuit if Israel Import Deal Cleared

Spain's Union Fenosa Gas (UFG) may drop a lawsuit against Egypt if it approves a deal for the company to import Israeli gas into its idle liquefied natural gas (LNG) export plant in Egypt, a source close to the talks said.

UFG, a joint venture largely owned by Spain's Gas Natural and Italy's Eni, had to suspend exports from its Egyptian plant at Damietta in 2012 when gas shortages led the government to divert supplies to its growing domestic needs.

As a result, UFG launched a multi-billion dollar lawsuit against Egypt in the International Chamber of Commerce for breach of contract last year, while also starting talks that May to bring in replacement gas from Israel's newly discovered gas field, Tamar.

"The arbitration has not been suspended but UFG would be ready to talk about it under certain circumstances ... it's on the negotiation table," said the source, requesting anonymity due to the sensitivity of the matter.

UFG's willingness to drop the lawsuit may help unlock the Israeli import deal after Egyptian authorities in May said that approvals could not otherwise be granted.

Egypt's oil ministry did not respond to a Reuters request for comment.

With Egypt facing its worst energy crunch in years, access to Israel's 10 trillion cubic feet Tamar gas field via a sub-sea pipeline offers the best hope of restarting LNG exports from UFG's Egyptian plant, and drawing a line under its heavy financial losses.

"They are confident that the Egyptian government will not block this project because it makes economic sense and it has some compelling long-term benefits for Egypt and its people," by restoring investor trust and freeing up more gas for domestic use, the source said.

Egypt owes around $5.9 billion to foreign oil and gas firms operating in the country, including UFG, after diverting energy supplies earmarked for export.

Three-way talks with the Tamar partners and Egypt on securing a 2.5 trillion cubic feet gas import deal over 15 years are progressing, the source said, but technical, commercial and legal issues still have to be ironed out, he added.

BG Group (BRGXF), which owns Egypt's other LNG export plant at Idku, is in talks to import gas from Israel's giant Leviathan offshore field in order to revive exports from its own plant which have declined sharply.

Texas-based Noble Energy (NBL) holds a 36 percent stake in Tamar, Isramco Negev has 28.75 percent, and Delek Drilling and Avner Oil both have 15.625 percent. Dor Gas Exploration holds the remaining 4 percent.

(By Oleg Vukmanovic, Additional reporting by Lin Noueihed in Cairo; Editing by Dmitry Zhdannikov and Mark Potter)