Israel and Iran: Enemies in Arbitration over an Oil Pipeline — Exclusive Details After an Oil Spill

[Yossi Melman, co-author of Spies Against Armageddon: Inside Israel’s Secret Wars, has been one of the few journalists tracking unusual business negotiations involving Israel and Iran.  He wrote this article for the Israel-based English-language magazine, The Jerusalem Report.]

To be fair and honest, the greatest environmental disaster in the history of Israel – the oil spill in the Arava desert earlier this month, under the responsibility of the Eilat Ashkelon Pipeline Company (EAPC) – has no direct connection to the convoluted structure of the company, to its owners or its mysterious historical past.

Israel's flag

Israel’s flag

The company is subject to Israel’s Environmental Protection Ministry and is obligated to operate in accordance with that.

A senior official acquainted with the affair told this writer that the disaster occurred as a result of a technical glitch: in the redoubling of a pipe, 5,000 million liters of oil spilled out.

Having said this, the EAPC is one of the most secret companies in Israel, operating under a special legal force since 1968, which gives it immunity from appropriate public control (including from government supervision, from the state comptroller, the Knesset and the media).

Journalists must fight severe censorship appeals to cover any aspect of the company. All of these restrictions only strengthen the sense (whether real or imagined) that the company has something to hide. As the former U.S. Supreme Court Justice and American Zionist leader Louis Brandeis once, said, “Sunshine is the best disinfectant.”

The company’s full name is The Eilat-Ashkelon Pipeline Company, a name which might tie it distinctly and solely to Israel. But in essence, the EAPC is part of a legal entity known as Trans Asiatic Oil, (TAO)  a partnership of the Israeli government (under the auspices of the Finance Ministry) and the National Iranian Oil Company (NOIC).

The Islamic Republic of Iran's flag

The Islamic Republic of Iran’s flag

Following Iran’s de facto recognition of Israel in 1951, the two states during the regime of the Shah – the Iranian monarch – developed special and clandestine cooperation based on four principles: Iranian assistance in the secret emigration of Jews from Iraq, organized by the Mossad; Israeli-Iranian cooperation on matters of intelligence (the Mossad, the Shin Bet security forces and the Israel Defense Forces helped establish, train and operate the Iranian army and Savak – the notorious Iranians security service); in exchange, Savak helped Mossad with documentation and other assistance enabling it to launch operations to recruit and run agents in Iraq, as well as assistance to enhance the Kurdish rebellion. The agreements between the two countries also covered military cooperation and the supply of Iranian oil to Israel.

Until the mid-1950s, Israel received its oil supply from the Soviet Union, from Kuwait (then under British control) and from international oil companies. But in 1955-6, these connections were halted, and Israel was forced to find itself new sources.

Through its secret connections, it turned to the Shah and his aides, and asked them to make Iran into its main oil suppler. The Iranians were hesitant, fearing this would harm their relations with the Arab states, but in the aftermath of the Sinai operation in 1956, which elevated Israel as a strong military power. they relented and agreed to supply oil to Israel.

During the months that Israel controlled the Sinai Peninsula following the military operation, it “expropriated” – meaning, it stole – pumps and pipes from an Italian and Belgian firms operating oil fields in Ras Sudr, in the peninsula. With the help of this equipment, a pipeline was built from Eilat.

Most of the funding for this project came from the bankers of the Rothschild family, the major shareholder of the initiative, called Tri-Continental. At the Iranians’ demands – in order to hide their involvement in the sale of oil to Israel and in the partnership  – a secret company was formed and registered in 1959 within the tax refuge of Lichtenstein, under the name of Pimerco, and in which Iran held 10 percent . The oil was transferred from Iran to Eilat in tankers and channeled through the small pipeline, measuring 40 cm (12 inches) in diameter, to Be’er Sheva.

Following the Six Day War in June 1967 and the closure of the Suez Canal, Israel convinced the Shah (who was codenamed “landlord” in the Israeli documents) to exploit the new situation and establish a joint and expansive oil initiative.

Thus the Trans-Asiatic Oil  (TAO) was established, a company under equal and joint ownership of the Israeli government,, and INOC the Iranian National Oil Company. The Israeli government gave the company an exclusive franchise to transport and store the oil.

The main fear of Iranian supporters of the initiative was that if the cooperation were to be exposed, the Arab countries would use it to bash Tehran. Therefore, in order to maintain secrecy and hide the Israeli partnership, the company and its entities were registered in Switzerland, Canada and Panama – at Iran’s request, as to appear as a foreign company.

The owners of TAO, as they appear in the Israeli Registrar of Companies, were called the Eilat Corporation and Sea Marco — both registered in Panama.

After the Shah agreed in principle, the next obstacle was to secure funding for the joint venture which was estimated to cost $85 million dollars – a huge sum in those days. The Baron de Rothschild refused to fund the new initiative, claiming it would not be profitable. The Israeli representatives were finally able to secure funding from the German Deutsche Bank, through which the financial compensations to Israel were transferred in the 1950s and 1960s.

The chairman of Deutsche Bank, Hermann Josef Abs, who acceded to the Israeli-Iranian request for funding, had a Nazi past – he had been responsible for bank’s foreign deals from 1938 onward, and following World War II, was imprisoned for a few months by the Allies.

This aspect of Abs’s past did not seem to bother the Israeli representatives, nor did it stop them from conducting tight and friendly contact with him.

In Israel, TAO operated as though it were a foreign company. It acquired the pipeline to Be’er Sheva from the Rothschild family and laid a larger pipeline, with a diameter of 42 inches (just over one meter), alongside it, from Eilat to Ashkelon, where they also built terminals for loading and unloading the oil. The construction of the terminals was completed in 1969.

The Israeli government granted the exclusive concession for 49 years, set to expire in 2017, enabling the flow of oil and its storage. The closing of the Suez Canal made it difficult to supply oil to Europe from the Persian Gulf. The tankers were forced to sail on a long route around the Cape of Good Hope.

The idea behind the establishment of the company was to shorten the sailing routes and the supply time, and thus of course earn more money.

The tankers loaded oil in the ports of Iran, sailed to Eilat, where they unloaded the cargo at a special terminal that was built for that purpose, and the oil was transported through the pipeline to Ashkelon. Most of it was then loaded onto tankers bound for Europe, and a small percentage was used for Israel’s energy economy. INOC sold the oil to TAO below the market price and granted it credit for three months.

In its heyday, TAO was an economic empire with a turnover of billions of dollars. It established a subsidiary, EAPC, which owned the two pipelines, and a storage container farm to store the oil in Ashkelon and Eilat. It purchased or leased a fleet of 160 tankers. Its goal was to reach a transport average of 50 million tons per year. – a target that was not achieved.

But after 10 years of prospering business came the crisis. The Shah’s rule was weakened. About two months before Ayatollah Khomeini came to power in 1979, INOC stopped selling to TAO — in effect paralyzing it. One of Khomeini’s first acts when he came to power was to cut relations with Israel completely.

During the first years, the Israeli managers of Trans-Asiatic tried to conduct secret talks with representatives of the Iranian National Oil Company to dismantle the partnership voluntarily and in an orderly manner. But the Iranians broke off contact and refused to hear from Israel.

TAO sold the oil tankers, mostly at a loss, dismissed dozens of employees and closed operations and offices abroad. What saved it from bankruptcy was the 1979 peace treaty with Egypt, in the context of which Egypt promised to sell Israel oil as a substitute for the loss of the oil wells in Sinai. The Egyptian oil, an average of about 1.5 million tons annually, arrived in tankers to Eilat, and from there it was transported via the pipeline to Ashkelon and then to refineries in Haifa and Ashdod.

Today, Israel’s oil is supplied by brokers from various sources including Azerbaijan, Mexico, the Gulf Emirates and even Iran.  

The Iran connection was revealed by the U.S. government three years ago, when it added to its blacklist a Singapore-based tanker company owned by the Israeli brothers Sammy and Yuli Ofer. The company’s tankers, the U.S. learned, had been loading cargo at the Bandar Abbas port and thus breaching American sanctions against Iran.

Surprisingly enough, the man who rushed to defend the Ofer brothers then was the same person who would lead Israel’s international efforts against the Iranian nuclear program and who pushed for very strong international sanctions against the Islamic Republic: Mossad Chief Meir Dagan.

In 1985, the Iranians suddenly began to show a renewed interest in Trans-Asiatic. Via attorneys in Europe they demanded the company pay its debts to their national oil company. The direct debt of TAO, for transporting the oil in the pipeline on credit for three months, was estimated then to be $400 million – a sum that has since inflated to an estimated $4 billion dollars.

When the Iranian claims were made, attorney Elhanan Landau, who in the past had served as the legal adviser of the Finance Ministry and was very familiar with the subject, was appointed to handle the case for Israel representing EPAC.

After Landau’s death he was replaced by his partner, Zvi Nixon, who continues to serve as the legal adviser of the company. The line of action that was decided upon was that the responsibility for the situation lay with the Iranian National Oil Company, because it had unilaterally stopped honoring its commitments to Trans-Asiatic and EPAC, ceased taking an interest in the company and caused it severe damage.

Over the course of the years, arbitration services and litigations were carried out in Switzerland, in the International Court of Commerce in Paris, as well as in another European state, apparently Holland.

The approach Israel adopted since the start of the discussions on the various issues is one of deliberate foot-dragging, fearing that it would have to pay hundreds if not billions of dollars. For years Israel even refused to pay the salaries and expenses of the arbitration.

Representing Iran in the arbitration are its legal advisers who operate in Europe, including its legal adviser at the International Court of Justice in The Hague. Lawyers from Switzerland have been conducting the arbitration sessions.

There have been developments in the case of late, when the arbitrators ruled that the Iranian claims carried some weight, and that Israel must compensate Iran — by paying some tens of millions of dollars.

Not exactly the billions Iran demanded. Still Israel appealed the ruling, claiming that there was no legal basis to force it to pay the sums at this time. The arbitration and legal procedures, to Israel’s relief, will continue: the longer, the better.

December 16, 2014

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