UAE Deal Boosts Israeli Oil Pipeline Secretly Built With Iran

The Jewish state is about to play a much bigger role in the region’s energy trade and petroleum politics.

BY JONATHAN H. FERZIGER | SEPTEMBER 4, 2020

A desert oil pipeline that Israel once operated as a secret joint venture with Iran could be a major beneficiary from the Trump-brokered peace deal with the United Arab Emirates. With the UAE formally scrapping the eight-decade Arab boycott of Israel—and other oil-rich Gulf neighbors likely to follow suit—the Jewish state is on the cusp of playing a much bigger role in the region’s energy trade, petroleum politics, and Big Oil investments.

It starts with an under-used but highly strategic pipeline. Stepping cautiously out of the shadows, the Israeli managers of Europe Asia Pipeline Co. (EAPC) say their 158-mile conduit from the Red Sea to the Mediterranean Sea provides both a cheaper alternative to Egypt’s Suez Canal and an option to connect to the Arab pipeline grid that transports oil and gas not just to the region, but to the seaports that supply the world. “It opens a lot of doors and opportunities,” the pipeline company’s CEO, Izik Levi, told Foreign Policy. He reckons that the pipeline, which connects Israel’s southern port of Eilat with a tanker terminal in Ashkelon on the Mediterranean coast, could nip off a significant share of the oil shipments now flowing through the nearby Suez Canal.

While much of the hoopla over the UAE-Israel pact has focused on other sectors such as technology, health care, education, and tourism, the Eilat-Ashkelon pipeline brings the deal into the realm of petroleum, the beating heart of the Persian Gulf economy. Now that the Emiratis have broken the ice, opportunities for Arab-Israeli energy deals are broad and lucrative, ranging from investment in the Israeli pipeline itself, to adapting it for carrying natural gas or connecting it to pipelines across Saudi Arabia and the wider Middle East. “If they’re doing partnerships with Israelis, there’s tremendous potential for all kinds of business,” said Marc Sievers, a former U.S. ambassador to Oman, where Israeli Prime Minister Benjamin Netanyahu made a groundbreaking visit two years ago.

Just over 60 years ago when it was built, the Eilat-Ashkelon pipeline was a massive national construction project aimed at guaranteeing Israel’s and Europe’s energy supplies in the wake of the 1956 Suez crisis. Egyptian President Gamal Abdel Nasser had restricted shipping through the canal, triggering an invasion by Israeli, British, and French forces. Subsequent efforts by Egypt to block the 120-mile artificial waterway also played a role in Israeli-Arab wars in 1967 and 1973.

Most of the oil flowing through the pipeline came from Iran, which had close but discreet relations with Israel for decades under Shah Mohammad Reza Pahlavi. In 1968, the Israeli and Iranian governments registered what was then called the Eilat-Ashkelon Pipeline Co. as a 50-50 joint venture to manage the export of Iranian crude through Israeli territory and onward by tanker to Europe.

Much of the early oil flow appears to have been brokered by billionaire commodities trader Marc Rich, who was later indicted in the United States for continuing to trade with Iran after the 1979 Islamic revolution, when it was declared an enemy state. Rich was pardoned in 2001 by former U.S. President Bill Clinton, who said he was moved in part by appeals from Israeli leaders and intelligence chiefs. The rogue trader’s backers, including former Israeli Prime Ministers Shimon Peres and Ehud Barak, said he had repeatedly rescued the Jewish state from efforts to destroy it. Rich, who was never convicted, died in 2013.

A Swiss court ordered Israel in 2015 to pay Iran compensation of about $1.1 billion as a share of profits from the joint ownership of the pipeline since the two enemies broke off relations in 1979, but Israel has refused to pay up.

While the company’s main 42-inch pipeline was built to transport Iranian oil north to the Mediterranean, it now does most of its business in reverse. It can pump oil unloaded in Ashkelon from ships sent by producers such as Azerbaijan and Kazakhstan to tankers in the Gulf of Aqaba for transport to China, South Korea, or elsewhere in Asia. Running parallel to the crude pipeline is a 16-inch tube carrying petroleum products such as gasoline and diesel. The company also makes money from operating storage tanks at its shipping terminals.

The pipeline’s advantage over the Suez is the ability of the terminals in Ashkelon and Eilat to accommodate the giant supertankers that dominate oil shipping today, but are too big to fit through the canal. Known in oilspeak as VLCCs, or very large crude carriers, the ships can transport as much as 2 million barrels of petroleum. The 150-year-old Suez Canal, on the other hand, is only deep and wide enough to handle so-called Suezmax vessels, with just half the capacity of a VLCC. Oil traders thus have to charter two ships through the canal for every one they send via Israel. With one-way fees through the Suez reaching $300,000-$400,000, Levi says the pipeline allows Israel to offer a significant discount.

The company’s business has always been one of Israel’s most closely guarded secrets. Even today, EAPC releases no financial statements. Levi says he can’t disclose the names of customers—though he says they include “some of the biggest companies in the world.” What little information that is publicly known only came to light as the result of legal battles following a 2014 rupture in the pipeline that caused the worst environmental disaster in Israeli history, spilling more than 1.3 million gallons of crude oil into the Ein Evrona desert nature preserve.

If EAPC’s books are opaque, the lengths to which its customers go to obscure their identities through multiple registrations and other corporate cloaking techniques are legendary. The boycott enforced by Saudi Arabia, the UAE, and their oil-producing neighbors meant that tankers acknowledging their docking in Israel would be barred from future loadings in the Persian Gulf, effectively destroying their business. The details are highly confidential—but generally the ways ships can obscure their activities include turning off their transponders, repainting, reflagging, reregistering, and faking their docking records.

Levi, a retired captain in the Israeli navy, told Foreign Policy that the required secrecy made the pipeline route too expensive for most shipments. “Many ships that came to Eilat and Ashkelon had to do such and such operations in order that they would not be boycotted in one or another port. If the ship fears it will be blacklisted and boycotted, that gets priced in. All that costs me money so the price for transportation will go up.”

EAPC’s business model improves dramatically with the erosion of the Arab boycott. “If the concerns [with secrecy] go down significantly, the price will drop significantly,” Levi said. “Then it becomes economically feasible and even more worthwhile.” Once political barriers to using Israel as a transshipment hub are removed, business could boom. After the Israeli-UAE deal is formalized, other members of the Gulf Cooperation Council are likely to follow, most likely Bahrain and Oman. Saudi Arabia has indicated it won’t establish formal links until the Palestinian conflict is resolved, although its business connections with Israel are plentiful and growing.

Levi says his goal is for the pipeline to capture somewhere between 12 percent and 17 percent of the oil business that now uses the Suez. Because of the canal’s limitations, much of the Gulf crude bound for Europe and North America gets pumped through Egypt’s Suez-Mediterranean Pipeline, in which Saudi Arabia and the UAE hold a stake. Egypt’s pipeline, however, operates in only one direction, making it less useful than its Israeli competitor, which can also handle, for example, Russian or Azerbaijani oil heading to Asia.

The loser will be Egypt, which will see business siphoned off and have less control over prices now that there is competition. Even as it makes new friends in the Gulf, the Israeli company needs to be careful about biting too deeply into the revenue sources of Egypt, the first Arab state to make peace with Israel in 1979, and one of the poorest. “I don’t think it will make the Egyptians happy,” says Sievers, the former ambassador.

Israeli-Emirati cooperation in shipping is not entirely new. A precedent to smoothen the way is Israel’s Zim Integrated Shipping Services, which has been docking at ports managed by Dubai shipping titan DP World for more than 20 years, and has invested in joint ventures with the Emirati company. The relationship between Zim owner Idan Ofer and DP Chairman Sultan Ahmed bin Sulayem is so strong that the Israeli billionaire lobbied the U.S. Congress on the Dubai company’s behalf in its unsuccessfully 2006 bid to buy terminal operations in the United States.

Even more possibilities arise from Israel’s discovery of a bounty of natural gas deposits off its Mediterranean coast that can supply far more than Israel’s own needs. Bringing in Gulf investors in addition to Israel’s current partners such as Chevron, and the possibility of connecting to the Middle East’s gas pipeline grid, would open yet another new horizon for Israel’s nascent energy industry.

As the Eilat-Ashkelon pipeline emerges from its carefully nurtured obscurity, the UAE peace deal offers Israel a gateway into the high-stakes club of oil trading where hiding its flag was until now the price of admission.

Jonathan H. Ferziger is a Jerusalem-based non-resident senior fellow at the Atlantic Council and a former Middle East correspondent for Bloomberg News.