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