Secret Talks: Israel and Iran — It’s a Business Arbitration,and It’s Not Friendly

yossi melman, spies against armageddon, iran nuclear

Yossi Melman

by Yossi Melman

Two or three times a year, in what has become a routine for Israeli attorney Avigdor (Dori) Klagsbald in the past 11 years, he packs his briefcase with documents and flies to Paris.

His job is to represent the government of Israel in a secret mission with an unlikely interlocutor: an ongoing arbitration with lawyers for the Islamic Republic of Iran.

You read correctly. Lawyers from the two arch rivals are talking to each other, exchanging both documents and accusations. 

Despite official enmity and plenty of inflammatory rhetoric swirling between the two governments, they in fact are willing to engage with each other.

The meetings  at the International Court of Arbitration in Paris have to do with a Switzerland-based holding company called Trans Asiatic Oil Company (TAOC) and its Israeli subsidiary, The Eilat-Ashkelon Pipeline Company (EAPC).

Actually, there are two arbitrations which have stretched on for 27 years. One is in Switzerland, where the two governments are represented by Swiss lawyers who work with a Swiss arbitrator.

The other set of talks is at the international court in Paris, where Israel is represented by Dori Klagsbald. At stake: up to three billion disputed dollars.

To understand the convoluted negotiations, one must know the history of the somewhat mysterious companies involved. Professor Uri Bialer, at Hebrew University in Jerusalem, shed some light on them in a study he published in 2006: “Fuel Bridge across the Middle East – Israel, Iran, and the Eilat-Ashkelon Oil Pipeline.” He based his research on documents that have been declassified in the Israel State Archive and in the British National Archives — supplemented by interviews with people involved in the issue.

Until the mid-1950s, Israel’s main suppliers of oil were the Soviet Union and Kuwait (then under British rule, not shunning the Jewish state as almost all other Arab nations were doing). But in 1955-1956 these ties were severed, and Israel was forced to find new sources.

Israel already had secret ties with Iran and wanted to turn it into its main oil supplier. Iran was then ruled by a pro-Western monarch, Reza Pahlavi. The Shah and his top advisors hesitated, as they did not want to shatter Iran’s relations with the Arab world. But the Shah was apparently impressed by Israel’s military prowess — as demonstrated by the Suez War of 1956 in which the Israelis captured the Sinai Peninsula from Egypt (in a covert partnership with the British-French invasion of the Suez Canal).

The Shah agreed to sell oil to Israel, and the Israelis prepared by building a pipeline from Eilat (at the southern tip of Israel, a port on the Red Sea) to Ashkelon (a major port on the Mediterranean Sea) — using pumps and other equipment confiscated from Italian and Belgian companies that had operated an oilfield in Egypt’s Sinai.

Israel’s costs were covered by Baron Edmund de Rothschild, in a business framework labeled Tri-Continental. Because the Iranians insisted on concealing their involvement with Israel, the parties established a secret partnership called Fimarco, which was registered in July 1959 in the tax shelter of Lichtenstein. Iran owned 10 percent of the partnership.

Tankers transported the oil from Iran to Eilat, and from there it was sent to Ashkelon through the pipeline. Over the years, however, Israel’s needs increased, and its Finance Ministry formulated a plan to replace the original 16-inch diameter pipe with a 40-inch (106 centimeter) pipeline. The plan also called for a more formal, genuine partnership with Iran.

Golda Meir — then Foreign Minister — secretly visited Tehran in August 1965 and brought up the subject with the Shah, with directors of the state owned National Iranian Oil Company (NIOC), and with the Iranian in charge of NIOC’s clandestine ties with Israel.

But the negotiations conducted in Israel, Iran, and Switzerland were slow and seemed to lead nowhere.

According to Bialer’s study, the turning point in the talks came after Israel’s victory in the Six-Day War of June 1967, during which Egypt closed the Suez Canal to shipping.

The Shah, referred to be a code name, “Landlord,” in the Israeli correspondence, was impressed yet again — and more so — by Israel’s lightning victory over the combined militaries of the Arab nations. The Shah, by then, loathed the Arab leaders and savored their humiliation.

He ordered the intensification of cooperation between Iran and Israel in intelligence, joint military research and development, and exchanges of information on nuclear issues. The Shah basically created a strategic axis between Tehran and Jerusalem.

The Shah also agreed to establish a fifty-fifty partnership between the Israeli government and NIOC. The company was called Trans Asiatic Oil and was registered in Canada and Switzerland to conceal (somewhat) the Iranian-Israeli cooperative link.

Now the main challenge was finding funding for the initiative, which was expected to cost $85 million, a huge sum in those days. Baron de Rothschild refused to fund the project, claiming that it would not be profitable, but the Iranians thought that he said “no” because he was insulted that Israel had kept him in the dark during two years of contacts with Iran.

An Israeli attempt to interest American oil billionaire David Rockefeller, head of the Chase Manhattan Bank, also failed.

In the end, Israel played what’s sometimes called “the Holocaust card”: playing on Germany’s guilt feelings. Funding for the joint energy project was obtained from Deutsche Bank. Ironically, DB’s chairman was Hermann Josef Abs, who had a Nazi past: He was responsible for the bank’s foreign operations starting in 1938, and after World War Two he was imprisoned for several months. Apparently this did not, however, prevent Israeli representatives from enjoying close, friendly ties with him.

Early in 1968, the German bank agreed to grant a low-interest, $22 million loan to finance the project. On February 29, 1968, a contract establishing the company was signed; its exact details are still kept secret. A year later, the pipeline between Eilat and Ashkelon was completed, and huge tankers were purchased to transport the oil.

In December 1969, Iranian oil began to be shipped from the port of Bandar Abbas, through the Indian Ocean and the Red Sea to Eilat. There it was moved through the large pipe to the Mediterranean port of Ashkelon. A small percentage of the oil was earmarked for use by Israel. Most of it, however, was loaded into tankers at the Ashkelon terminal and sent to consumers in Europe, mainly Romania, the only Soviet-bloc country that did not break diplomatic ties with Israel in 1967.

Naturally, doing business together requires maintaining contact — even after the Islamic revolution in Iran in 1979 meant the end of the partnership. In negotiations and arbitrations with the Iranians, the first Israeli representative was a prominent lawyer, Haim Tsadok (a former Minister of Justice). He was replaced by Klagsblad in 2003.

The Iranians demanded to be paid for all the oil they had supplied — and an initial demand of around 1 billion dollars grew to more than 2 billion as the years went by. That dispute was handled in Switzerland.

In Paris, Iran demanded to be compensated for its participation in the former partnership. Iran is also suing the three leading oil companies in Israel — Paz, Delek, and Sonol — claiming that they did not pay for all the oil they bought from Iran. At the time of the purchases, all three companies were owned by Israel’s government, but now they are privately held.

Since the arbitrations began, Israel’s main tactic has been to delay the process. “As far as we are concerned,” a government source told me, “we hope that the arbitrations will continue forever.”

Indeed the Swiss arbitrator was aging with the process, and a few years ago he died and was replaced by a new Swiss lawyer.

It seems that Israel fears that it may lose and be ordered to compensate Iran. A few years ago, the arbitrator issued an interim judgment that said Israel has to pay a token amount of money to the Iranians. Israel obeyed the ruling, so that the arbitration process would continue.

In recent years EAPC has been enjoying skyrocketing oil prices. It is a thriving company with big plans and ambitions. Just in case, the company running Israel’s pipeline has no assets abroad — neither bank accounts nor property — to prevent Iranian efforts to freeze them. It is hard to believe that Israel will ever agree to Iran’s financial demands.

[This blog post was edited for from an article, “Backdoor Battle,” by Yossi Melman in the July 29 issue of The Jerusalem Report magazine.]
July 26, 2013

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