By Mona Salem

CAIRO — Egypt has scrapped a 2005 gas export deal with Israel, which relies on Egyptian natural gas for 40 percent of its supplies to produce electricity, the chairman of a government holding firm said on Sunday.

The accord was "annulled on Thursday with the East Mediterranean Gas Co (EMG) which exports gas to Israel because the company failed to respect conditions stipulated in the contract," Mohamed Shoeib of Egyptian Natural Gas Holding Co (EGAS) told AFP.

The sale of gas to Israel, which signed a peace treaty with Egypt in 1979, has always been controversial in the Arab world's most populous country. It was the largest trade deal between the two former foes.

A pipeline in the Sinai Peninsula that has been used to supply Egyptian gas to Israel and Jordan was hit by a bomb blast on April 9, in the 14th such attack since the uprising which toppled president Hosni Mubarak in February 2011.

Egypt has been gripped by security-related problems since the revolt.

Gas deliveries to Israel, agreed under Mubarak, have come under heavy criticism in Egypt. Israel generates 40 percent of its electricity using natural gas, and Egypt provides 43 percent of its gas supplies.

While there was no immediate reaction from Israel on the termination of the gas accord, a holding company with a share in EMG, an Israeli-Egyptian consortium, said it was considering legal action against EGAS.

"EMG considers the termination attempt unlawful and in bad faith, and consequently demanded its withdrawal," Ampal-American Israel Corp said in a statement.

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

"EMG is seeking compensation from EGPC and EGAS for damages resulting from their contractual breaches."

Exports to Israel were launched in 2008, three years after the accord which came in for heavy criticism from Egypt's Muslim Brotherhood. Under the 15-year deal worth $2.5 billion, EMG was to sell 1.7 billion cubic metres a year.

In January, a lawyer defending Mubarak told a Cairo court that there was not a shred of evidence linking the ousted Egyptian strongman to the controversial gas deal.

Farid al-Deeb said Egypt's spy agency negotiated the deal in line with international norms.

"There isn't an ounce of evidence that Mubarak was involved in the deal to import gas to Israel," costing the state $714 million (553 million euros) in losses, Deeb told the court.

"The negotiations concerning the export of Egyptian gas to Israel were carried out in accordance with international norms," he insisted.

After the many disruptions to the supply of gas over the past year, Israeli ministers have urged the speedy exploitation of recently discovered gas fields off the country's northern coast.

Israeli officials believe that exploitation of two major natural gas fields could compensate for the loss of Egyptian gas.

Israel has already moved to begin exploiting the fields, signing a deal with Cyprus to mark out maritime borders, but it faces challenges from Lebanon, which claims that the gas fields lie in its territorial waters.

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Photo AFP