UPDATE ON PALESTINIAN VIEWS OF COMMERCIAL

C O N F I D E N T I A L JERUSALEM 001095 SIPDIS SIPDIS NEA FOR A/S WELCH; NEA/IPA FOR WILLIAMS/SHAMPAINE/BELGRADE/HARRIS; NSC FOR ABRAMS/WATERS; TREASURY FOR NUGENT/HIRSON/LOEFFLER/HARRIS; E.O. 12958: DECL: 06/01/2017 TAGS: EPET ENRG EINV PREL KWBG IS SUBJECT: UPDATE ON PALESTINIAN VIEWS OF COMMERCIAL DEVELOPMENT OF OFFSHORE GAZA NATURAL GAS FIELD REF: JERUSALEM 401 CLASSIFIED BY: CONSUL GENERAL JAKE WALLES, REASONS 1.4 (B) AND (D) ¶1. (C) SUMMARY: PA PRESIDENCY ECONOMIC ADVISOR AND PALESTINE INVESTMENT FUND CEO MOHAMMED MUSTAFA SAID THAT AN AGREEMENT CONCERNING THE SALE OF OFFSHORE GAZA GAS BY CONCESSION OPERATOR BG GROUP TO THE ISRAELI GOVERNMENTQD BE COMPLETED IN TWO TO THREE MONTHS. MUSTAFA SAID HE DISAGREED WITH THE HAMAS NATIONAL ECONOMY MINISTERS ASSESSMENT THAT THE PA WOULD NEVER SELL GAS TO ISRAEL AND NOTED THAT THE CONCESSION AGREEMENT HAD ALREADY BEEN APPROVED BY A PA CABINET AND THE PALESTINIAN LEGISLATIVE COUNCIL (PLC). ISSUES STILL TO WORK OUT INCLUDE, DOUBLE-TAXATION CONCERNS ABOUT THE ASHKELON ON-SHORE TERMINAL AND A MECHANISM FOR THE PA TO RECEIVE THE TAXES AND ROYALTIES DUE TO IT UNDER THE CONCESSION AGREEMENT. MUSTAFA BELIEVES ANOTHER TEN MONTHS ARE NEEDED TO COMPLETE ALL OF THE NECESSARY AGREEMENTS BEFORE ACTUAL FIELD DEVELOPMENT WORK CAN BEGIN. END SUMMARY. ¶2. (C) PA PRESIDENCY ECONOMIC ADVISOR AND CEO OF THE PALESTINE INVESTMENT FUND (PIF),MOHAMMED MUSTAFA REAFFIRMED TO ECONOFFS MAY 30 THAT A MAY 23 LONDON SUNDAY TIMES ARTICLE WAS A BIT TOO OPTIMISTIC IN ASSERTING THAT BG GROUP WAS ABOUT TO AGREE TO THE TERMS OF AN AGREEMENT TO SELL GAZA GAS TO ISRAEL. HE SAID HE HAD MET MAY 23 WITH BG GROUP OFFICIALS WHO WERE NEGOTIATING WITH THE GOI. WHILE EVERYTHING "STILL LOOKS POSITIVE," MUSTAFA SAID HE THOUGHT THE PROCESS WOULD TAKE ANOTHER TWO TO THREE MONTHS IN ORDER TO CONCLUDE THE NON-BINDING COMMERCIAL AGREEMENT. MUSTAFA SAID THAT BG IS ALSO NEGOTIATING: -- A HEADS OF TERMS AGREEMENT WITH THE PALESTINIAN ENERGY AUTHORITY FOR DELIVERY OF SOME OF THE GAS TO GAZA FOR THE POWER PLANT AND OTHER INDUSTRIAL USES AND -- A LETTER OF ASSURANCE WITH THE GOI CONCERNING ISSUES, SUCH AS TAX AND EXPROPRIATION. ¶3. (C) MUSTAFA TOLD ECONCHIEF THAT HE DID PLAN TO RESPOND VIA A PRINT PRESS INTERVIEW TO PA MINISTER OF NATIONAL ECONOMY (HAMAS) ZIAD AL-THATHA'S REMARKS THAT THE PA WOULD NEVER SELL GAS TO ISRAEL. A JUNE 1 FINANCIAL TIMES STORY QUOTES MUSTAFA AS SAYING, "I UNDERSTAND THE (HAMAS) FRUSTRATIONS IN LIGHT OF RECENT AGGRESSIVE ISRAELI ACTIONS. BUT THE CONCESSION ALREADY HAS CABINET AND PLC (PALESTINIAN LEGISLATIVE COUNCIL) ENDORSEMENT." MUSTAFA TOLD ECONOFFS THAT "WE WILL HONOR THIS AGREEMENT." HE SAID THAT HE CONTINUES TO REGULARLY BRIEF PLC ENERGY AND NATURAL RESOURCES COMMITTEE CHAIR AYMAN DARAGHMEH (WHOM MUSTAFA DESCRIBED AS CLOSE TO HAMAS) ON THE PROJECT'S PROGRESS. ¶4. (C) MUSTAFA SAID THAT HE REMAINS CONCERNED ABOUT DOUBLE-TAXATION ISSUES WITH REGARD TO THE PROCESSING TERMINAL IN ASHKELON THAT WILL RECEIVE THE OFF-SHORE GAS VIA PIPELINE SINCE THAT PLANT WILL REPRESENT ONE-THIRD OF THE TOTAL PROJECT INVESTMENT. MUSTAFA SAID HE HOPED IT COULD BE CONSIDERED A DUTY-FREE ZONE OR HAVE A SPECIAL WAIVER FROM THE ISRAELI TAX AUTHORITIES, SIMILAR TO THE ZONE IN EGYPT THAT RECEIVES THE OFF-SHORE EGYPTIAN GAS BEFORE PUTTING IT INTO THE PIPELINE TO ISRAEL. MUSTAFA SAID THAT BG IS STILL DEVELOPING A PLAN FOR HOW IT WILL PAY THE TAXES AND ROYALTIES DUE TO THE PA FROM THE CONCESSION AGREEMENT ONCE COMMERCIAL PRODUCTION BEGINS. HE SAID THAT ANY SUCH ARRANGEMENT MUST BE SATISFACTORY TO BOTH THE PA (SO THAT IT WILL RECEIVE THE TAXES AND ROYALTIES DUE TO IT) AND THE GOI (SO THAT THERE WILL BE NO FLOW OF FUNDS TO HAMAS-LED/CONTROLLED ENTITIES). (COMMENT: WE ANTICIPATE THAT IT WILL BE DIFFICULT TO RECONCILE THE DIVERGENT INTERESTS OF THE TWO SIDES ON THIS POINT. END COMMENT.) ¶5. (C) MUSTAFA EXPLAINED THAT BG MUST PREPARE A DEVELOPMENT PLAN FOR THE PA'S APPROVAL AFTER THE HEADS OF TERMS AGREEMENTS ARE COMPLETED. MUSTAFA, IN HIS PRESIDENCY ECONOMIC ADVISOR ROLE, HAS APPROVAL AUTHORITY FOR THAT STEP, HE SAID. HE ESTIMATES COMPLETION OF THIS STEP BY YEAR'S END. AFTERWARDS, THE DEVELOPERS (BG, PIF, AND THE CONSOLIDATED CONTRACTORS COMPANY (CCC)) MUST SIGN A FINAL AGREEMENT WITH THE GOI. HE ANTICIPATES THIS THAT WILL TAKE PLACE EARLY NEXT YEAR. ¶6. (C) ACCORDING TO MUSTAFA, IT WILL BE AT LEAST ANOTHER 10 MONTHS BEFORE ALL OF THE AGREEMENTS ARE COMPLETED, AND THEN THE ACTUAL FIELD DEVELOPMENT WORK CAN BEGIN. HE SAID THE PROJECT'S DEVELOPERS ARE APPROACHING THE INTERNATIONAL FINANCE CORPORATION (IFC),THE EUROPEAN INVESTMENT BANK (EIB),AND OPIC ABOUT PROJECT FINANCING. HE STRESSED THAT THEY WOULD LIKE TO MAKE THE PROJECT "AS INTERNATIONAL AS POSSIBLE." WALLES