Broken promises and diplomatic intrigues have kept billions of dollars in natural gas out of Gaza.
By MATTHEW KRIEGERbritish gas 88 298(photo credit: Courtesy)
When Yasser Arafat boarded a small yacht and headed west from the coast of Gaza on a sunny September day in 2000, his motivation for braving the high seas was not just to enjoy the Mediterranean air. His destination, a patch of water 36 kilometers offshore called the Gaza Marine field, had been given to the Palestinian Authority following the signing of the Oslo Accords. There, 600 meters below sea level, lay a fortune with a potential value of billions of dollars.
A year earlier, after paying the PA an undisclosed amount, the British energy company BG Plc, along with its partner Consolidated Contractors Corporations, had acquired the concession to survey for natural gas in 1,000 square kilometers of the Gaza Marine area. The two set about conducting extensive seismic tests to determine if the field contained the valuable gas that they had hoped for and, in early 2000, BG confirmed that the field contained a large quantity.
Tests to determine the size of the field estimated that it held as much as a trillion square feet of natural gas - worth approximately $4 billion. Seven years later, however, the gas is still untapped, with layers of red tape waiting to be cut through before it can flow, as Israel would like, toward a processing station in Ashkelon.
What has prevented the field from being developed, and all those profits from being realized?
FOLLOWING THE discovery of the gas, the Palestinian Investment Fund, under the auspices of the office of current PA Chairman Mahmoud Abbas, reached an agreement with BG and CCC, securing for itself at least 10 percent of the revenue from the sale of the gas, plus a tax and royalty settlement worth an additional 12.5% and also a guarantee that the 25% automatic corporation tax would be sent directly to its bank account.
The problem for BG, however, was that it could not start drilling and constructing a pipeline until it secured a customer, something it is still trying to do.
"The challenge for BG at the time was to find a market for the natural gas," a high-ranking BG official said. "The PA did not then, and still does not now, present a large enough market. It has one power station in Gaza which runs on half capacity - and even if it converts it to gas power, it will still be far too little for us to make the deal worth it."
The most obvious choice was to sell the gas to Israel. However, a few weeks after Arafat's excursion to Gaza Marine, the second intifada spoiled those plans. When Ariel Sharon became prime minister in February 2001, the last thing he wanted was to pad the pockets of those with whom he was at war.
Concurrent with Sharon's rise to power, the government, which had long sought to expand the country's natural gas resources to fuel its power stations, awarded a tender to Yossi Maimon's East Mediterranean Gas Company to provide approximately 7 billion cubic meters of gas a year for 20 years, beginning in 2009. Under terms of the agreement, 5.8 billion cu.m. would go to the Israel Electric Company and the remainder to private companies. Until EMG's gas begins flowing, Yam Thetis, a US-Israel gas company controlled by Yitzhak Tshuva, will remain the sole importer of natural gas.
There were those within Sharon's government - most notably national infrastructure minister Yosef Paritzky - who wanted to purchase gas from Gaza Marine. Paritzky supported BG's role in the country's natural gas system, claiming that EMG proved to be unreliable once negotiations were near finalization. Paritzky fought to get BG into the market, even if it meant paying more for gas from Gaza Marine than it would if it imported it from EMG's fields near Egypt or Yam Thetis's field off the northern coast.
Throughout the negotiations with EMG and Yam Thetis, which ultimately dragged on for more than three years, Paritzky went to London to meet with BG officials in an effort to secure a place for them.
"The British are famous for reading human intelligence and they are experts at blackmail," a gas company official told The Jerusalem Post. "Paritzky was traveling to London by himself, without any staff - something unheard of for a minister."
According to the official, Paritzky's trips abroad raised the suspicion of EMG's Maimon (who was competing with BG for the tender), enough so that he hired a private eye to track Paritzky's actions during his London visits.
"Within 24 hours of word getting back to Israel's government of Paritzky's actions in London - he is suspected of accepting bribes from BG - he was out of the government," the gas official said.
The disappointment of not being awarded the large tender did not stop BG, however, from attempting to get its Gaza Marine gas into Israel. Despite the criticism of various politicians over its business relationship with the PA, BG remained active in the region.
Representatives from the company continued to meet with the National Infrastructures Ministry, but Sharon's adamant refusal to get involved with a project that would fund the PA barred any serious progress in negotiations.
Meanwhile, BG attempted to bring its competitor, EMG, into the Gaza Marine project. EMG, which is co-owned by a group of Egyptian businessmen, was given the go-ahead from Cairo to begin negotiations. However, when Maimon went to meet with BG in Cyprus, he was introduced to Martin Schlaff, a silent partner in the deal. Schlaff, an Austrian businessman who had been under police investigation on suspicion of bribing Sharon not to shut down his Jericho casino, was dubbed "crucial" to the deal by the Lebanese-British family who are the controlling shareholders of CCC.
Discussing EMG's dialogue with BG, Maimon reportedly said the Israeli-Egyptian group had broken off contact with BG, claiming the "timing" was not right to enter into an agreement. In reality, the Post has learned, Maimon had no interest in getting involved in a deal that involved Schlaff.
AS NEGOTIATIONS came to a standstill, BG turned to Egypt in mid-2005 and began surveying the waters of the Gaza Marine field to determine possible routes for a pipeline to export natural gas there.
"The energy market in Israel wasn't going to be right for us, it seemed," said a BG official. "Even if we could have convinced the prime minister that no money would end up in the hands of terrorists, it became clear that the liberalizations that were supposed to be introduced into Israel's energy market were just not happening."
Egypt had also completed the construction of an export terminal for the shipment of liquefied natural gas, and had begun exporting frozen gas to markets around the world. "Our new plan was to pipe Gaza's gas to a plant at Idku, east of Alexandria. The fuel would be cooled there into liquefied natural gas for transportation by tankers," said the BG official. "Because prices had risen considerably, LNG was going to save us money in the long run."
LNG is natural gas that has been processed to remove either valuable components, such as helium, or impurities, and then is condensed into a liquid at almost atmospheric pressure by cooling it to approximately minus 163 degrees.
LNG, which must be transported by specially designed ships and tanker trucks and stored in specially designed tanks, is about 1/614th the volume of natural gas at standard temperature and pressure, making it much more cost-efficient to transport over long distances where pipelines do not exist.
Plans for construction of the necessary infrastructure and the pipeline from Gaza Marine to Egypt were well under way when Israel suddenly reentered the picture following Sharon's stroke last winter as Ehud Olmert, before he was even elected prime minister following Sharon's illness, reopened talks with BG in February 2006.
According to Hezi Kugler, director-general of the National Infrastructures Ministry, even with the added gas from Yam Thetis and EMG, the country's power demands are expected to exceed supply in the near future. "The additional gas will be enough for only a few years; we need to increase it substantially to meet our power needs," he said.
To meet those needs, Israel once again turned to BG, confident that the gas reserves in the Gaza Marine field, coupled with EMG and Yam Thetis, would be more than enough for at least the next 15 years.
Yet the process of moving the gas from the sea to the shore has proven to be as difficult as ever. Negotiations with BG over the price of the gas have continued haltingly over the last year and a half and, despite the government's clear intentions to make the deal a reality - even going as far as canvassing local companies to determine how much natural gas they would be interested in purchasing from Gaza Marine - last May BG threatened to pull out of the deal permanently. The failure to successfully negotiate a price signaled that the deal would never become a reality, it said, and once again began planning for the Egyptian option.
BG and ministry representatives, however, began talking again in July 2006. This April, the cabinet voted 21-3 to grant a negotiating team formal permission to hold talks with BG on the purchase of gas from the Gaza Marine field, but a price could still not be settled upon.
According to an EMG official, the reason for this stems from Israel's faulty thinking that it can receive the same price that it was quoted by EMG when the tender was first awarded in 2000. Gas prices have risen significantly over the past seven years, making it impossible for BG to offer such a low price.
"At this time, there is a big gap between Israel and BG as to how much the government is going to pay BG per liter of gas," a former BG employee said in late June. "We hope that a deal can be reached soon, but for now we have not gotten any closer to completing it. If Israel does not sign an agreement now, it won't begin receiving the gas, as it would like, by 2011."
The National Infrastructures Ministry, however, is still confident that a deal is imminent. "In this deal there are two chief negotiators - Hezi Kugler, the director-general of the National Infrastructures Ministry, and Yarom Ariav, director-general of the Finance Ministry, and believe me when I tell you that the deal, in principle, is really almost done," a high-ranking ministry official told the Post last month.
He also dispelled rumors about the possible breakup of the deal stemming from stalled negotiations over the price of the gas and said that Kugler met last month with BG vice president Nigel Shaw, and the two made "great strides" toward finalizing the last components of the deal.
"Right now we are at the point where we are ready to sign a deal in principle, which is the first stage of the agreement, and then we will be ready to start talking about the legalities involved," he said.
According to the ministry, a deal in principle includes agreeing to how much gas would be bought, at what price and for how many years - developments that BG is only willing to commit a few more months to before signing an agreement with Egypt, Globes reported last month.
A BG spokesman confirmed the report, saying that "while BG wants to sell the gas to Israel, if we can't make any progress, we will sell the gas to Egypt."
The ministry official, nevertheless, stood by his comments but said he could not speak for BG.
In early June, Uri Schusterman, energy coordinator in the Finance Ministry's Accountant General's Office, confirmed that a dispute over prices is the official cause for the delay in the signing of a contract. That statement was the first comment by a government official about the negotiations with BG.
"Despite the disagreement, the government is determined to buy gas from the company's reserves offshore from Gaza, as an alternative to Egyptian gas [from EMG]," Schusterman said.
He added that Israel is seeking to diversify its supplies of gas to ensure a competitive market. He noted that the country planned to buy 1.5 billion cu.m. to 1.8 billion cu.m. of natural gas per year from BG over 12-14 years.
Assuming that a final price can be negotiated, there are still two roadblocks that need to be negotiated before the deal can be completed.
BG faces a High Court petition from Yam Thetis seeking to block the government's plan to buy BG gas. The company contends the government is seeking to negotiate the purchase of additional natural gas without first opening a tender, but rather negotiating solely with BG, said Delek Drilling LP, one of the partners in Yam Thetis, in a June 25 statement.
"The petition asks that the court rule that all negotiations or any contact made at any time between government representatives and British Gas International Ltd. concerning the purchase of natural gas were done without proper authority and against the law," added Yam Thetis.
The National Infrastructures Ministry disputes the suggestion that a tender was necessary.
"There is a question if we need a tender at all," said a ministry official. "In this case, BG approached us to sell us the gas. Who are we going to do a tender with?"
He did say, however, that if the court were to issue an injunction to stop the deal from proceeding, the ministry would respect that decision.
"I don't think it will come to this though, because we have a strong case," he said.
Expectations are that the High Court will rule on the case within the next few weeks.
THE VIOLENT Hamas takeover of the Gaza Strip in mid-June has provided the saga with one additional twist. The gas field, claims Hamas, now belongs to it, prompting its leaders to demand a larger share of the revenues.
"It is unreasonable that the owner of the gas, Palestine, gets 10% only [of the revenues]," Muhammad al-Madhoun, director of ousted prime minister Ismail Haniyeh's office, told the Palestinian Information Center, a Hamas Web site. "The government has no problem cooperating with the British Gas company, but only after modifying some points of the 1999 contract."
To prevent the money from funding Hamas, a former BG official said BG and Israel have arrived at an "understanding" that will transfer funds intended for the PA's Palestinian Investment Fund into an international bank account, where they will be held until the PA can retake control of the Gaza Strip.
"Both Israel and BG intend that until the PA is able to remove Hamas from power in the Gaza Strip, the money will be held in an international bank account," the source said. "Neither side wants the money to go to fund terror-related activities."
The Infrastructures Ministry confirmed that, indeed, Israel and BG are proceeding with the deal, circumventing the possibility that Israeli money will end up in the wrong hands.
"I cannot deny that Israel and BG are making attempts at arranging a payment plan to accommodate the PA [and completely exclude Hamas]," a ministry official said, adding that negotiations are still under way.
But Ronen Moshe, spokesman for the National Infrastructures Ministry, said he doesn't know anything about an "understanding" with BG regarding payments to the PA, but did say that the two sides are negotiating over the price of the gas.
Similarly, the Finance Ministry spokesman's office claimed no knowledge of an arrangement with BG concerning the transfer of funds to an international account, while the Prime Minister's Office said nothing new has happened since the cabinet decided earlier this year to form a negotiating team to meet with BG representatives.
"However, now that the PA is no longer in control of the Gaza Strip or the marine area off its coast, Israel, should it purchase the gas, would no longer be making payments to the PA, but rather, as Hamas claims, it would be the rightful recipients of the funds," explained the BG source.
"There are already clear intentions as to how to handle the Hamas situation, and plans have already been worked on regarding the construction of the pipeline. Now we just need to finalize a price," said Schusterman.
IF AND WHEN BG and Israel come to terms on a price, the pending petition from Yam Thetis is settled and a suitable arrangement is made to transfer the funds, the seven-year saga of the Gaza Marine field will finally be heading toward a conclusion and pipeline construction will get under way.
The project, once it is completed, will be a technological marvel and the entire infrastructure will be constructed on the sea bed by remote-controlled machines, with the pipeline stretching dozens of kilometers from the drill site directly into the processing station in Ashkelon.
"The job will be an almost exact replica of what we have constructed in other locations around the world, such as in the North Sea," a BG official said.
The National Infrastructures Ministry expects to start receiving gas from Gaza Marine by 2011, but the project will take at least 36 months to construct.
Until the moment that BG begins assembling the equipment for the massive project, which could happen by the end of the year, the fortune under the Mediterranean will continue waiting to be directed toward its final destination.
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