A dispute between Israel and Egypt over a natural-gas deal is threatening to derail ambitious but controversial plans by Israeli leader Benjamin Netanyahu to turn his country into a fossil-fuel powerhouse.

Egypt has frozen plans to import Israeli gas after an international arbiter ruled that the North African country’s state-owned energy companies owed $1.76 billion to state-owned Israel Electric Corp., or IEC, demanding that Israel drop this and another arbitration case over gas. Mr. Netanyahu says he is sending a special envoy to Egypt to mediate the quarrel.

“We will find a solution because it is in both countries’ strategic interests,” Mr. Netanyahu said at a meeting of a parliamentary commission aired on public radio.

The conflict has demonstrated how difficult it will be for Israel to become a natural-gas exporter in a region where the Jewish state has few friends. Unlike oil, which can be transported around the world with relative ease, natural gas is harder to move long distances and tends to be sold in regional markets where politics can make a difference in a deal’s terms.

After fighting three wars, Israel signed peace agreements with Egypt in 1979 and Jordan in 1994, and the countries now coordinate extensively on security issues. Conducting business with Israel has proved divisive in the Middle East, with Egypt as one of its few reliable partners.

“Israel needs Egypt,” a person close to the Egyptian government said. “It will be a big buyer and it is a door to other markets in Europe, so Egypt can use this as a card to avoid paying compensation,” the person said, adding that Egypt wants Israel to drop the arbitration.

That has roiled Israel’s attempts to bring two huge natural-gas finds in the Mediterranean Sea to the export market. With 25 trillion cubic feet, the fields can fulfill much of Israel’s domestic energy needs with enough left over to export to Egypt, Jordan, the Palestinian Authority and potentially other countries for many years, if Israel can physically transport the gas to them.

BG Group, a British oil and gas company, and Union Fenosa Gas—a joint venture between Spain’s Gas Natural and Italy’s Eni SpA—both signed deals last year to import 9.5 billion annual cubic meters of natural gas from Israel’s fields for 15 years to their facilities in Egypt. Dolphinus Holdings, which is a company that represents non-governmental, industrial and commercial consumers in Egypt, also last month signed a preliminary deal to import up to 4 billion cubic meters of natural gas for up to 15 years.

Those agreements were thrown into turmoil last week, when the Paris-based International Chamber of Commerce ruled for Israel and against Egypt in a three-year-old arbitration case.

At issue were Egyptian exports to Israel that abruptly stopped in 2012 because of militant attacks on a pipeline through the restive Sinai Peninsula. Israel’s state-owned electricity company argued it had suffered as a result and won compensation on Sunday from the International Chamber of Commerce, which acts as an arbiter on international commercial disputes.

After the decision in favor of Israel, Egyptian Prime Minister Sherif Ismail said his country would appeal and froze commercial discussions.

Israel has the potential to export to other countries such as Turkey and also Europe, but there are no practical ways currently to transport the gas, says Robin Mills, the Dubai-based head of consulting at Manaar Energy.

Meanwhile, Egypt is a huge consumer of natural gas and already has infrastructure in place to accept Israel’s gas. It currently imports gas and liquefied-natural-gas products from Algeria and Russia.

“Really the only accessible market at the moment is Egypt,” Mr. Mills said. “This looks problematic for Israel.”

A spokesman for Mr. Netanyahu declined to comment.

Ahead of the spat with Egypt, Mr. Netanyahu had already faced stiff opposition to the framework of development for two fields, known as Leviathan and Tamar.

Israel’s economy minister Aryeh Deri resigned last month after he had refused to waive Israeli antitrust rules for the two main stakeholders in the fields, U.S.-based Noble Energy Inc. and its Israeli partner, Delek Group Ltd. A regulator last December determined the companies held a monopoly.

Thousands of Israelis took to the streets in recent weeks to protest the framework. They complain it lines the coffers of big business and offers Israeli consumers uncompetitive pricing compared with other Western countries.

Mr. Netanyahu’s willingness to push through the deal at all costs has also raised questions about whether he is too cozy with the corporate sector.

“Who are you protecting with the natural gas deal? Certainly not the citizens of Israel,” Isaac Herzog, leader of the opposition said in a recent Facebook post, after Mr. Netanyahu’s comments at the parliamentary commission.

Israel’s economy ministry predicts the framework will save industry and consumers $500 million each year in lower gas and electricity prices. Unless Israel’s supreme court intervenes legally to block the framework, Mr. Netanyahu will get what he wants domestically and only have to work on winning Egypt over, said Gadi Wolfsfeld, a political scientist at the Israel-based IDC Herzliya.

“Eventually people will go home and stop protesting,” he said. “[Mr. Netanyahu] always has time on his side.”

Source: www.wsj.com

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