In a key step toward starting natural gas exports to Egypt, Israel’s Delek Drilling and the U.S. firm Noble Energy said Thursday they were acquiring, together with Egyptian East Gas Company, a 39% stake in the Egyptian company that owns a pipeline running between Israel and Egypt.

The two — partners in Israel’s Tamar and Leviathan gas fields — said they were paying $518 million for the stake in Eastern Mediterranean Gas and expect to complete the deal and related transactions by early next year.

EMG’s pipeline, which connects the Israeli national pipeline network from Ashkelon to the Egyptian pipeline network near El-Arish, has not been functional for several years following a series of terror attacks on it when it carried gas from Egypt to Israel.

“This is a historic transaction, that renders Egypt a regional energy center and positions it in line with significant global energy centers,” said Delek Drilling CEO Yossi Abu.

Shares of Delek Drilling, the Delek Group unit involved in the deal, rose 3.1% to 10.79 shekels ($2.99) on the Tel Aviv Stock Exchange. Nobel shares were up 1% at $31.41 midday local time in New York.

Buying an interest in the pipeline will enable the Tamar and Leviathan partners to deliver their gas to Egypt as they agreed under an agreement reached in February to supply 64 billion cubic meters of gas for $15 billion over 10 years.

The gas will initially come from Tamar, which is in production, and later from the much bigger Leviathan field, now in development. The buyer for the gas is Dolphinus, an Egyptian company that supplies gas to industrial and institutional users.

But with the delivery infrastructure in place, the EMG pipeline could be used to deliver gas to other customers in Egypt, including to currently idle plants for liquefying natural gas for export.

“Today’s announcements mark significant steps forward in supplying natural gas from the world-class Tamar and Leviathan fields to regional customers through existing infrastructure,” said J. Keith Elliott, Noble’s senior vice president for offshore operations.

Open gallery view Yitzhak Tshuva Credit: Gideon Levin

“They also represent another major milestone toward Egypt’s goal to become a regional energy hub, providing access to both growing domestic markets and existing LNG export facilities.”

The deal marks a major breakthrough for Delek and Noble and their partners, who have been searching for a major export market for their gas. They already sell gas to Jordan but that market is small and other big ones, like Turkey and Europe, remain for now distant prospects due to political or logical obstacles.

It also marks a historic reversal. The EMG pipeline, which runs 90 kilometers mostly offshore Sinai, was originally built to export Egyptian gas to Israel. A series of terror attacks on the pipe halted deliveries and finally in 2012, the Egyptian government, then controlled by the Muslim Brotherhood, canceled the contract.

The cancellation was the subject of legal disputes that finally ended in February with an arbitrator awarding EMG $1.03 billion in damages plus interest. Thursday’s agreement also calls for EMG to drop the claims, Delek said.

When production at Leviathan begins, which is anticipated in late 2019, Noble says it expects to sell at least 350 million cubic feet of natural gas per day, in gross terms, to customers in Egypt.

Another beneficiary from the deal will be the bondholders of the Israeli company Ampal American, which was an EMG shareholder and went bankrupt when the pipeline was shut down. Ampal wound up defaulting on over 1 billion shekels in bondholder debt, though it belatedly repaid $70 million owed to banks. Ampal still owes its bondholders 210 million shekels on Series A bonds, 645 million on Series B and 250 million on Series C. The stake in EMG changing hands comprises an 8.6% holding owned by Ampal.

Other sellers include Yossi Maiman, who had controlled Ampal and personally held another 8.2% of EMG; American billionaire Sam Zell (12.8%); Israeli institutional investors (8.2%) and Egyptian businessman Hussein Salem. The remainder of EMG’s shares will continue to be held by Hussein Salem’s company (28%) the Thai company PTT (25%) and the Egyptian government (about 10%).

At its height EMG had been worth around $3 billion, but its value was damaged together with the pipeline by terrorist activity in Sinai.

Had Thursday’s deal not been reached, there were two alternatives to using the EMG pipeline. One was to use the Jordanian pipeline, called the Pan-Arabian pipeline; the other was to build a new pipeline. But using EMG’s will enable the companies to begin exporting gas sooner.