Donor aid to Palestine masks the real problem

During its latest meeting on the Middle East peace process, the Council of the European Union repeated its warning that the emergence of a viable Palestinian state living peacefully beside Israel was in jeopardy. Perhaps angered by reports that more than 60 development projects funded by the European Commission and several EU states had been deliberately demolished by Israel, the Council blamed the Israeli government for threatening to make a two-state solution "impossible" through increased settlement construction, house demolitions, forced population transfers, and revoking Palestinian residency rights in Jerusalem. The EU urged the donor community — especially donors from the Middle East — to do more to assist the Palestinians by providing financial assistance for donor-funded projects in areas under Palestinian Authority (PA) control. 

But, it is difficult to take the EU Council’s conclusions about the need for further donor aid from "donors in the region" seriously. In particular, donors from the Middle East have a long history of providing financial support to the Palestinians since Israel’s establishment in 1948.  More aid — wherever it comes from — is surely not going to create a Palestinian state, which the EU said it is avowedly committed to. The call for further aid to the PA is all the more incongruous because a truly independent Palestinian state with sovereignty over its population, territory, and natural resources would not need to survive on handouts from the "international community." As the EU acknowledged, "the majority of the Palestinian Authority’s budget is met by its own customs and tax revenues." Beyond the proceeds the Palestinians receive from taxation, they could raise money from a plethora of other economic activities from tourism to exporting natural gas.

Yes, you read that right. There are two natural gas fields in Palestinian territorial waters off the coast of Gaza. Gaza Marine, the main field, is located 603 meters below sea level, 36 kilometers west of Gaza City. The second smaller field, the "Border Field," straddles the boundary separating Gaza’s territorial waters from Israel’s territorial waters. According to the British Gas Group website, which is the operator of the fields, the reserves found in the two wells are estimated to amount to 1 trillion cubic feet (TCF) of natural gas. Consolidated Contractors Company (CCC), BG Group’s partner in the Gaza Marine project, believes that there are 1.4 TCF. Although this is not a huge quantity of gas compared to some countries’ reserves, it is still more than sufficient to meet Palestinian needs for the next 15 years at current consumption levels in the West Bank and Gaza.

The failure to develop the gas fields are a potent illustration of why more donor aid is not the answer, especially when Israel has made a habit of destroying various European development projects. That the gas fields belong to the Palestinian people is clear under international law.  Even Israel does not dispute this. Indeed, when Israel gave the development consortium the go-ahead to explore for gas off Gaza’s coast in the late 1990s, it was envisaged that Israel would be the main buyer of the Palestinian gas.

If the gas off the shore of Gaza were sold at market price, the PA would earn huge windfalls in revenue, even after the investors have recouped their initial investments. Moreover, in addition to the direct revenue that the PA would generate from the commercialization of the gas fields, the Palestinian economy could save more than $8 billion in energy costs over the life of the project, if the gas were used for generating electricity in Gaza and in the West Bank. In other words, an independent Palestinian state would not, in the future, have to survive on aid from the international community, but would have sufficient resources to be able to finance its own development. 

And yet, 13 years after two commercially viable gas fields were discovered, efforts to develop them remain deadlocked despite the international backing the project enjoys. Meanwhile, the besieged Gaza Strip suffers prolonged power cuts and the Palestinian economy bears a huge financial cost — as do the Western taxpayers keeping it afloat.

According to CCC, the failure to develop and commercialize the gas in Gaza is due to the Israeli government’s insistence that it purchase the gas at prices below market value.  Apparently, Israel wanted to negotiate a contract with the consortium whereby it would only pay $2 per cubic foot rather than the market price of $5 to $7. As a source inside CCC told me: "The biggest resource in Palestine is being held up by the Israelis. If this is resolved it would reduce the subsidy the EU and U.S. gives the PA."

Up to 2009, Israel viewed the gas fields off Gaza as essential to its energy security even though it discovered the Yam Tethys (Tethys Sea) gas fields around the same time as those off the Gaza coast because that field was nearing depletion. However, since 2009, Israel has made large discoveries of gas in the Tamar and Leviathan fields. Tamar, which holds about 9 TCF of gas, is currently under development and is expected to start generating gas by 2013. It will provide sufficient gas to meet Israel’s needs for the next 25 years. Leviathan holds larger gas quantities (~17 TCF), but is further from Israel’s coast, and much more expensive to develop. There is no clear development plan for Leviathan, but when development goes ahead, it would turn Israel into a net gas exporter. Thus, Israel has its own quantities of gas, and does not need the fields off Gaza. One can only conclude that Israel continues to block the development of the gas fields as part of its blockade against the Gaza Strip.

According to Dr. Muhammad Mustafa, chairman and CEO of the Palestine Investment Fund — which is one of the partners of the Gaza Marine project — it would cost $800 million to develop Gaza Marine. No energy company is going to make this financial commitment unless it can find a buyer who will agree to a long-term contract where the price of the gas is set at a price representing market value. And for a credit worthy buyer to agree to sign a contract with the consortium, the developers would need political and security clearance from Israel to export the gas. Unfortunately, successive Israeli governments have been unwilling to provide this. Thus, the developers are faced with an ultimatum: either agree to sell the gas to Israel at below market price or don’t sell it at all.

The moral of the story is that the EU, which invests hugely in the Palestinian economy, would be better off assisting the PA with the development of the gas fields by publicly calling on Israel to allow for their development, rather than calling on third states to donate more funds for specific EU approved projects. This is especially salient as more than a quarter of all Palestinian structures demolished by Israel in 2011 were funded by international donors including European governments and the EU. Electricity is a necessity for the Palestinians, and especially for the residents of the beleaguered Gaza Strip where power cuts are a normal and everyday occurrence. The proceeds received from the sale of the gas and the savings to the Palestinian energy sector would give a huge financial boost to the PA and would allow it to provide the foundations for a truly independent Palestinian state. Finally, it would save substantial sums of money for the EU, which is by no means a small matter, especially in a time of financial austerity.

Victor Kattan is the Program Director of Al-Shabaka: The Palestinian Policy Network.