The story of Iranian oil and Israeli pipes

By Yossi Melman - Oct 11, 2007

In recent months, Israel and Iran have been playing a game of cat-and-mouse. This is not the predictable game of intelligence, counter-espionage and field security. Such games have been taking place for years. Israel's intelligence community tries to obtain information about the development of Iran's nuclear program, and is preparing in case it has to attack Iran; while Iran tries frustrate these efforts.

But alongside this routine game, Israel and Iran are working feverishly in an entirely different area: Iran is trying to locate property and assets belonging to the Israeli government and three Israeli oil firms abroad, and Israel is trying to thwart it. This affair arises from an international arbitration that determined more than three years ago that the Paz, Sonol and Delek oil companies must compensate the National Iranian Oil Company (NIOC) hundreds of millions of dollars.

The three companies were government-owned in the 1970s, but since then have been privatized. The oil companies have appealed the arbitration decision and are trying to create a delay, and are succeeding for now. The NIOC has not yet succeeded in enforcing the ruling and in collecting the debt. Parallel to this appeal, legal proceedings are still continuing in another two arbitrations on similar issues.

All these legal proceedings have been taking place in Europe (in Switzerland and Holland) for more than 20 years, and are related to the activity of a legal entity called Trans-Asiatic Oil. This was a top-secret partnership that existed between the Israeli government and the NIOC during the period of the Shah. This partnership operated the Eilat-Ashkelon Pipeline Company, the oil terminals in Eilat and Ashkelon, and a large fleet of giant tankers for transporting oil. After the Shah was expelled from Iran and Khomeini came to power, in February 1979, the Islamic Republic cut off all ties with Israel and stopped shipping Iranian oil.

In 1985, the NIOC filed huge lawsuits (today worth several billion dollars) against Israel and the oil companies. The lawsuits were discussed in three separate arbitrations. The NIOC claims that Israel owes it huge sums for the partnership. Haaretz first reported on the Iranian victory in December 2006, and now Prof. Uri Bialer of Hebrew University in Jerusalem is publishing a study on the circumstances under which Trans-Asiatic Oil was established.

Bialer's study, "Fuel Bridge across the Middle East - Israel, Iran, and the Eilat-Ashkelon Oil Pipeline," is based on documents that have been declassified in the Israel State Archive and in the British National Archives, and on interviews with leading figures involved in the issue. It provides a rare glimpse at a particularly interesting chapter in the history of the State of Israel. The study was published in the latest issue of the periodical Israel Studies.

Until the mid-1950s, Israel received its oil from the Soviet Union, Kuwait (under British rule) and international oil companies. But in 1955-1956 these ties were severed, and Israel was forced to find new sources. Israel maintained secret ties with Iran, and wanted to turn it into its main oil supplier. Iran hesitated, for fear of undermining its relations with the Arab world, but after the 1956 Sinai Campaign, the Iranians were convinced and agreed to supply oil to Israel.

With the help of pumps and pipes "confiscated" - meaning stolen - from an Italian company and a Belgian company operating an oilfield in Ras Sudar in Sinai, Israel built a pipeline from Eilat to Ashkelon. The pipe, 40 centimeters in diameter, was paid for by Baron Edmund de Rothschild. The initiative was called Tri-Continental. By demand of the Iranians, who wanted to conceal their involvement in selling oil to Israel and in the joint company, 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.

But over the years Israel's needs increased, and the Finance Ministry formulated a plan to replace the small pipe with a large 40-inch (106 centimeter) pipe and to set up a genuine partnership with Iran. Foreign minister Golda Meir, who secretly visited Tehran in August 1965, brought up the subject with the Shah and with Fatollah Nafici, one of the directors of the NIOC and the person in charge of the company's clandestine ties with Israel. In order to demonstrate the seriousness of its intentions, Israel appointed Felix Shinar, one of the architects of the reparations agreement with Germany, as the project manager. Working with him were deputy defense minister Tzebi Dinstein; Dov Ben Dror, who was involved in the energy market; and Mossad operative Avigdor Bauer. NIOC president Manuchar Akbal joined the negotiations on behalf of Iran. The talks were conducted in Israel, Iran and Switzerland.

According to Bialer's article, the turning point in the talks came after Israel's victory in the Six-Day War and the closing of the Suez Canal. The Shah, who was referred to by the code name "Landlord" in the Israeli correspondence, was persuaded to establish a fifty-fifty partnership between the Israeli government and the NIOC. The company was called Trans-Asiatic Oil and was registered in Switzerland, at Iran's request, in order to conceal the Israeli partner and to make it appear to be a foreign company.

After the Shah gave his consent, the main problem 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 Israeli representatives had kept him in the dark about two years of contacts with Iran. An Israeli attempt to interest American oil billionaire David Rockefeller, the Chase Manhattan Bank president, also failed.

In the end, thanks to his connections, Shinar obtained funding from the German Deutsche Bank, through which some of the reparations money had been transferred to Israel in the 1950s and the 1960s. Shinar and Nafici met in Geneva and Zurich with Hermann Josef Abs, chairman of the board of Deutsche Bank, and discussed the loan conditions with him. Abs had a Nazi past: He was responsible for the bank's foreign operations from 1938, and after World War Two he had been imprisoned for several months. Apparently, however, this did not prevent Israeli representatives from enjoying close, friendly ties with him.

Early in 1968, the German bank agreed to give 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 considered a state secret. The contract was signed by then-finance minister Pinhas Sapir on behalf of the Israeli government and by Akbal on behalf of the NIOC. The operational contract was set for a period of 49 years. In 1969, the pipeline between Eilat and Ashkelon was completed, and huge tankers were purchased to transport the oil. In December 1969, Iranian oil began flowing through the large pipe. A small percentage of the oil was earmarked for Israel. Most of it, however, was loaded onto tankers at the Ashkelon terminal and sent to consumers in Europe, mainly Romania, the only Soviet bloc country to continue maintaining diplomatic ties with Israel.

In 1970, 162 tankers brought 10 million tons of oil to the pipeline. That was the pipeline's peak year, but the ambitious goal of 50 million tons a year was never achieved. At the end of 1978, with the fall of the Shah, the oil stopped flowing, and the ties between the two countries deteriorated into the hostility that characterizes them to this day. The NIOC has sued for payment for the last three months of oil and for the value of shared assets, such as oil tankers; Israel counters that it is owed money because Iran broke its contract.

For the Shah's Iran, the initiative had financial value only and was even a political burden. But for Israel it was a national enterprise, another vision produced by the Mapai government (the forerunner of Labor), and its main importance was strategic.

Trans-Asiatic, which still operates the pipeline, informed Haaretz that the arbitration decision concerns the oil companies. The oil companies, for their part, refused to respond to this article.