Egypt's cutoff of natural gas supplies to Israel is escalating a dispute over resources that is wrecking the Jewish state's relations with its Arab neighbor, which, until the fall of President Hosni Mubarak in February, were the linchpin of the Middle East peace process.

Israel has found major natural gas fields off its coast under the eastern Mediterranean, but none is likely to come on-stream before 2013, leaving Israel facing a serious energy crisis.

The military-led interim government in Cairo has been distancing Egypt from the historic peace treaty that Mubarak's predecessor, Anwar Sadat, signed with Israel in March 1979, reflecting the deep and abiding opposition to the pact felt by most of Egypt's 80 million people.

The dispute has been complicated by the fact the new rulers in Cairo have to be seen getting tough with Israel on this issue because they have to show Egyptians they're serious about unraveling the high-level corruption within the former regime.

The gas supplies to Israel from Egypt have been cut off since April 27, when an explosion damaged a gas terminal at El Arish in the Sinai Peninsula. It's a key link in the pipeline that carried the gas from Egypt's Nile Delta.

The pipeline was damaged in a Feb. 5 bombing. Another sabotage attempt was reportedly thwarted March 27. The attacks were apparently carried out by Bedouin tribesmen in the long-neglected Sinai demanding a bigger share of pipeline revenues, rather than opponents of Israel.

But whoever the perpetrators were, the 20-year gas deal negotiated in 2005 has become highly politicized.

The Egyptians had repaired the pipeline by mid-May but refused to resume deliveries until Israel agreed to pay double for the gas. Israel refuses.

Cairo says the gas was sold at preferential, below-market prices by officials close to Mubarak and his family who allegedly pocketed millions of dollars from the deal.

Former Energy Minister Sameh Fahmi and five other ministry officials were detained in Egypt April 21 on charges of cheating the state out of $700 million from the gas deal.

Officials in Cairo said authorities had stepped up efforts to detain Egyptian tycoon Hussein Salem, who had business dealings with Mubarak and his sons and is suspected by the prosecutor general's office of managing transactions for lining their pockets, including the gas agreement.

Mubarak and his sons face corruption charges and are to go on trial in August, underlining the interim military government's drive to recover plundered state assets.

Salem, believed to be in Switzerland or Israel, was a major shareholder in East Mediterranean Gas, the company that built the $460 million gas pipeline from El Arish in northern Sinai to the port of Ashkelon in southern Israel.

That EMG facility extended a pipeline that ran across Sinai from the Nile Delta. Deliveries to Israel began in May 2008.

By 2010, Egypt was supplying 40 percent of Israel's gas requirements, used to fuel the country's power stations.

U.S. shareholders of the Ampal-American Israel Corp., which has a 13.5 percent interest in EMG, have threatened to sue Egypt for $8 billion on the grounds that politics lie behind the cutoff of gas to Israel.

Ampal's chairman and chief executive officer is Yosef Maiman, who owns the Israeli company Merhav, which also has a stake in the EMG operation.

Under the 2005 deal, Egypt agreed to supply Israel with 60 million cubic feet of gas per year. In 2009, that was increased to 74.13 mcf.

"By pushing for a revision of the gas deal, the Egyptian military aims to both increase its revenue to help pay Egypt's budget deficit and debt, which could make the Egyptian economy even more vulnerable while it is trying to recover from the ongoing political turmoil, and to legitimize itself in the eyes of the Egyptian public by distancing itself from the former regime," the U.S. global security consultancy Stratfor observed.

In May, Egypt's Al-Ahram newspaper quoted Israel Radio as saying the Persian Gulf emirate of Qatar had offered to sell liquefied natural gas to Israel to help its energy crisis.

"Though Qatar's offer does have long-term potential to make Israel less dependent on Egyptian energy supplies, in the near term, Israel will have little choice but to accede to Cairo's demands," Stratfor noted.

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