Egypt's national gas company EGAS announced Sunday that it will be cancelling its natural gas supply deal with Israel.

Ampal-American Israel Corporation, a partner in the East Mediterranean Gas Company (EMG), which operates the pipeline, said the Egyptian companies involved had notified EMG they were "terminating the gas and purchase agreement."

Open gallery view One of the Egypt pipeline blasts. Credit: AP

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The company said in a statement that the Egyptian General Petroleum Corporation and Egyptian Natural Gas Holding Company had notified them of the decision, adding that "EMG considers the termination attempt unlawful and in bad faith, and consequently demanded its withdrawal."

It said EMG, Ampal, and EMG's other international shareholders were "considering their options and legal remedies as well as approaching the various governments."

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Sources close to EMG said in response, "Egypt does not understand what it is doing. This move will bring back the country - politically and economically – by 30 years. This is a breach of the peace agreement with Israel."

Diplomatic officials in Jerusalem, however, said that the cancelation was done as a result of a business dispute.

"In talks between Israeli and Egyptian diplomatic officials, it was made clear that the cancelation of the deal was part of a business dispute between a private company and Egyptian government companies – a dispute that is currently found in legal proceedings abroad," a diplomatic source said. "This has nothing to do with the diplomatic relations between Israel and Egypt."

Moreover, Mohamed Shoeb, the head of the Egyptian Natural Gas Holding Company, said the decision to cancel the deal was not political.

"This has nothing to do with anything outside of the commercial relations," Shoeb told The Associated Press.

He said Israel has not paid for its gas in four months. Foreign Ministry spokesman Yigal Palmor denied that.

Shoeb told Egyptian TV that the decision to cancel the contract was made

Thursday because "each side has rights and we are representing our rights."

Finance Minister Yuval Steinitz’s office responded to the news on Sunday, saying that, the finance minister was "very worried" about the cancellation of the gas deal with Israel, "both in political and in economic terms," and describing the cancellation as "a dangerous precedent" that threatens ties between Egypt and Israel.

Opposition leader Shaul Mofaz said also responded on Sunday that the cancellation was an unprecedented low point in relations between Egypt and Israel. “This is a blatant violation of the peace treaty,” he said. “This unilateral step requires an immediate American response,” as the U.S. was present at the signing of the Camp David Accords.

A deal was reached in 2005 between the Israeli and Egyptian governments as part of a political agreement according to which Cairo undertook to allocate 7 billion cubic meters (BCM) of Egyptian gas to the Israeli market for 20 years, with an option to double the supply.

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Ampal, Israeli businessman Yossi Maimon's company, controls 12.5% of EMG, which sells Egyptian gas to customers in Israel, primarily the Israel Electric Corporation. It exports the gas by means of a pipeline that runs through Sinai. That pipeline has been attacked more than 14 times since the popular uprising that ousted longtime Egyptian leader Hosni Mubarak.

Before the sabotage, Egypt supplied about 40 percent of Israel's natural gas, which is the country's main energy source.

Israeli officials have said the country was at risk of facing summer power outages due to energy shortages.

Companies invested in the Israeli-Egyptian venture have taken a hit from numerous explosions of the cross-border pipeline and are seeking compensation from the Egyptian government of billions of dollars.

Ampal and two other companies have sought $8 billion in damages from Egypt for not safeguarding their investment.

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