PA DECISION TO BREAK TIES WITH ISRAELI FUEL

C O N F I D E N T I A L JERUSALEM 004427

SIPDIS

SIPDIS

NEA FOR FRONT OFFICE; NEA/IPA FOR
WILLIAMS/SHAMPAINE/STEINGER; NSC FOR ABRAMS/DORAN/WATERS;
TREASURY FOR SZUBIN/LOEFFLER/NUGENT/HIRSON

E.O. 12958: DECL: 10/06/2016
TAGS: ENRG PGOV ECON ETRD KCOR KWBG IS
SUBJECT: PA DECISION TO BREAK TIES WITH ISRAELI FUEL
SUPPLIER PROMPTS SUPPLY CUT AND FATAH COMPLAINTS

REF: JERUSALEM 1884

Classified By: Consul General Jake Walles, Reasons 1.4 (b) and (d).


1. (SBU) Summary: In late September 2006, the PA's Ministry
of Finance advised its long-time petroleum product supplier,
the Israeli company Dor Alon, that the PA will not renew its
contract with the company after its December 31, 2006
termination date. The PA Acting Minister of Finance
announced publicly October 5 that his ministry had signed a
new agreement with another Israeli supplier, PAZ. Since the
PA failed to make full payment of invoices due September 30,
Dor suspended shipments October 1, resulting in serious
shortages of petroleum products in several Palestinian
cities, but then resumed shipments October 5. The
Fatah-aligned head of the PA General Petroleum Corporation
complained publicly that he was not consulted about the
change in petroleum suppliers. End summary.

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PA Strikes New Fuel Deal
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2. (SBU) The Acting Minister of Finance and Minister of
Planning in the Hamas-led government Samir Abu Isheh notified
the Dor Alon company in a September 28 letter that the PA
would not renew its contract with the company after it
expires at the end of the year, according to press reports.
(Note: Dor has been the sole supplier of petroleum products
to the West Bank and Gaza since 1994.) Abu Isheh announced
publicly October 5 that his ministry had signed a new
contract with the Israeli petroleum company PAZ. Abu Isheh
asserted that the PAZ contract would save the PA NIS 75
million (USD 23 million) a year and also allow the PA to
purchase crude oil from foreign sources for processing at
PAZ's refinery. Abu Isheh also said that the PA had paid
only NIS 90 million of the NIS 142 million due to be paid to
Dor by September 30. He added that the PA owes Dor a total
of NIS 350 million.

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Fuel Shipments Cut
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3. (SBU) Dor suspended petroleum shipments to the West Bank
and Gaza October 1, according to press reports. In
conversations with Econoff and Econspecialist October 5,
gasoline retailers attributed the cutoff to both Dor's anger
over the PA decision as well as its desire to secure payment
of still outstanding invoices prior to the termination of the
supply contract. (Note: Dor has previously suspended fuel
shipments due to nonpayment of invoices (reftel). According
to press accounts, Dor derives as much as 40 percent of its
revenue from sales to the PA. End note.) Palestinians
reacted to the news by rushing out to purchase as much
diesel, gasoline and LPG as possible, thus quickly
exacerbating the situation. Several gas stations in
Bethlehem and Ramallah closed October 4 for lack of fuel.
Petroleum products, however, remained available in some areas
through black market sales, according to one
retailer/distributor.

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Flow Resumes as Competition Looms
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4. (SBU) Dor resumed shipments on October 5. Palestinian
petroleum retailers suggested to Econoff that Dor may have
reversed itself out of concern about immediately losing
business to PAZ. They explained that PAZ had not only
expressed interest in filling the void left by Dor's
stoppage, but had actually sent truckloads of petroleum
products to West Bank crossings. The Palestinian General
Petroleum Corporation (GPC),however, refused to allow PAZ
products to be enter and be distributed, according to
petroleum retailers.

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Another Venue for Fatah-Hamas clashes
--------------


5. (SBU) GPC Director General Hosam Abu Al-Rob (Fatah)
complained on Palestine Radio October 4 that the GPC had not
been involved in the decision not to renew Dor's contract.
He said that the Ministry of Finance had not coordinated with

the GPC on the matter nor had it informed the GPC directly of
its decision. The Fatah-affiliated Union of Public Employees
issued a statement October 3 holding the government for the
fuel shortages because of its decision to change suppliers.


6. (C) Suhail Jabr, a Ramallah gasoline retailer and diesel
distributor, suggested to Econoff October 5 that Abu Isheh's
move to sever ties with Dor and the GPC's subsequent refusal
to allow PAZ shipments into the West Bank amounted to yet
another chapter in the conflict between Hamas and Fatah.
Jabr and fellow fuel dealer Mohammed Abu Al-Hassan reported
that they had declined PAZ offers for immediate deliveries of
fuel during the Dor cut-off out of fear of getting caught up
in the Hamas-Fatah feud. Jabr claimed that efforts are
underway to transfer authority over the GPC from the Ministry
of Finance to the President's Office as a means of blocking
the PAZ deal. Both dealers characterized the contract with
PAZ as a positive development, particularly given allegations
of corruption against some of the beneficiaries of the
current system.

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President's Office Staying Out
--------------


7. (C) Muhammad Mustafa, Economic Adviser to President
Abbas, told EconChief October 5 that Acting Finance Minster
Abu Isheh had advised him on September 24 that his ministry
was considering changing petroleum suppliers. Abu Isheh
added that, since the existing contract with Dor required
three months notice of non-renewal, the PA would have to make
a decision by September 30. Mustafa said that he complained
to Abu Isheh of the short notice, but volunteered to engaged
four consultants to examine the Dor and PAZ contracts. Based
on this review, Mustafa sent a letter to Abu Isheh --
subsequently leaked to the press -- raising a number of
concerns but not stating a Presidency position on the matter.
Nevertheless, Abu Isheh went ahead and signed the contract
with PAZ without going back to the Presidency or the GPC.


8. (C) Mustafa advised that the PA owed Dor a NIS 130
million payment by September 30, but the Ministry of Finance
paid only NIS 70 million of this amount, so Dor suspended
shipments. Mustafa said that, in a goodwill gesture, the
president of Dor later called Abu Mazen from the U.S. and
expressed his company's interest in maintaining a positive
relationship with the PA. Mustafa suggested that Dor, likely
aware of PA Presidency interest in privatizing the petroleum
procurement and distribution network, has concluded that it
needs to preserve its ties to the PA if it hopes to re-enter
the market once privatization allows for multiple suppliers.

WALLES