Quantum matters – $2.1bn loss for Egyptian companies

Daniel Turner Daniel Turner

On 30 November 2018, an International Chamber of Commerce (ICC) award was made public in which two state-owned Egyptian natural gas companies were ordered to pay USD2.1 billion in damages to the operator of a pipeline and its Israeli client for failure to supply them with the contractually agreed gas quantities.


In 2005, two state-owned Egyptian energy companies (EGPC and EGAS) agreed to supply significant quantities of natural gas for 15 years to the operator of a pipeline, East Mediterranean Gas S.A.E. (EMG), for onward sale to Israel Electric Corporation Ltd (IEC), which used it to produce electricity. The contract was for a 15-year period with an option to extend for a further five years.

This was formalised through bilateral agreements as well as a tripartite agreement between the Egyptian government, EMG and IEC. Commercial deliveries of gas started in July 2008. The EMG pipeline cost approximately USD500 million.

From the beginning of 2011, gas supply was disrupted by terrorist activity in the Sinai region, which led to a significant reduction in volumes delivered. Subsequently, and following the non-payment of invoices by EMG, the gas supply agreement with EMG was terminated on 18 April 2012 and the tripartite agreement on 6 February 2013. Around April 2013, new gas reserves were found near Israel, although this source was more expensive than Egyptian gas.

Position of the parties

EMG and IEC claimed damages of USD2 billion and USD4 billion respectively. Their claims included compensation for the shortfall in the quantities of gas delivered up to the date of termination (assumed for convenience at 30 April 2012), and lost profits / cost incurred for the period following termination. This article focuses on the post-termination claims.

Claimant’s approach

EMG claimed compensation for the reduction in EMG’s enterprise value, calculated as the difference between EMG’s value had the Egyptian energy companies continued to deliver the agreed quantities of gas until the end of the contract including a five-year extension period (June 2028), and EMG’s actual liquidation value, assessed by the Claimant’s expert at USD50 million.

EMG calculated a but-for value using the Discounted Cash Flow (DCF) method and a discount rate of 9.56%, incorporating a country risk premium of 4.4% as the weighted average of Egypt’s and Israel’s country risk.

IEC claimed additional costs incurred for purchasing gas from alternative suppliers and for producing electricity from other fuels until June 2028.

Respondent’s approach

Regarding EMG’s claim, the Respondents’ expert criticised the use of a DCF method given the lack of record of EMG’s profitability. Instead, the Respondent’s expert used a Monte Carlo analysis to simulate several scenarios and their respective probabilities. They also considered that cash flows should be reduced to take account of political risks and technical malfunctions. The country risk premium should be the sum of Egypt’s and Israel’s country risks and result in a total discount rate of 13.3%. The Respondent did not submit an alternative calculation of EMG’s actual value.

The Respondents argued that IEC had not suffered any loss as any additional costs incurred by having to purchase gas from an alternative source were passed on to Israeli consumers through an increase in electricity tariff.

Approach taken by the Tribunal

Regarding EMG’s claim, the Tribunal considered the use of the DCF method appropriate in the context of a 15-year long gas supply deal, secured by an interlocking mesh of contracts. It concluded that cash flows should not be reduced for political or technical risk as the purpose of creating a but-for scenario is to isolate EMG’s value from the Respondent’s breaches.

The Tribunal considered that Egypt’s country risk premium should have a higher weight and concluded on a discount rate of 12% incorporating a country risk premium of 7.9%. In the absence of any alternative actual valuation of EMG by the Respondent’s experts, the Tribunal had no reason to reject the Claimants’ experts’ opinion of EMG’s actual value.

After considering the remaining assumptions, the Tribunal found that EMG’s value at 30 April 2012 had the agreements not been terminated was USD280.9 million, and that its actual (liquidation) value after termination was USD50 million, so it awarded EMG compensation of USD230.9 million plus interest.

The Tribunal considered that should IEC receive compensation, it was likely that the electricity regulator would lower electricity tariffs to off-set this hypothetical amount. While IEC’s loss was transferred, at least temporarily, to the Israeli consumer, the Tribunal considered that it could still be compensated given the two-way pass-on mechanism. The Tribunal therefore awarded IEC USD1.7 billion in compensation for the additional fuel costs incurred.


This case illustrates the approach taken by a Tribunal to assess the appropriate method to calculate quantum and to decide on the various assumptions that underpin the calculation. It shows the Tribunal’s reasoning when considering a regulated business’ ability to pass additional costs onto its clients. It also illustrates how a Tribunal can rely on the actual valuation put forward by the Claimants where the Respondents have not provided an alternative.

By Marion Lespiau and Ellen Chamberlain.

Case information

Claimant: East Mediterranean Gas S.A.E. (Egypt)

Respondents 1 and 2: Egyptian General Petroleum Corporation and Egyptian Natural Gas Holding Company (Egypt)

Respondent 3 and Counterclaimant: Israel Electric Corporation Ltd (Israel)

Case ref: 18215/GZ/MHM

Tribunal: ICC

Members of the tribunal: 

Juan Fernández-Armesto (President)

John MalTin QC (Co -arbitrator) Osman Berat Gürzumar (Co -arbitrator)

Secretary to the Arbitral Tribunal:

Deva Villantia



Quantum matters – Third loss for Spain in solar power case Find out more
Technical Quantum matters – US$2 billion oil award in Venezuela Find out more
Technical Quantum matters - Loss of profit claim in Bolivian mining case Find out more