Chronicle of the Middle East and North Africa

Gaza Gas Production: Will Israel Allow it?

Despite the potential positive aspects surrounding Gaza gas production, there are several pressing issues and challenges that remain unaddressed.

Gaza Gas Production
Palestinians off the coast of Gaza City. Mohammed ABED / AFP

Ali Noureddine

This article was translated from Arabic to English

In June 2023, Israel announced its initial agreement to develop the “Marine” gas field situated some 30 kilometers off the coast of Gaza. Following this announcement, it is expected that the Palestinian Authority will pursue the associated investment opportunities given its rightful ownership of the legal economic field and the gas reserves located within the marine area of the Gaza Strip.

As part of the Israeli approval conditions, Egypt will engage in security coordination with Israel before commencing the field development process.

These events have sparked numerous questions regarding their underlying causes and context, especially given the timing, some 23 years after Israel decided to ban gas production from the waters off the Gaza Strip.

At the same time, significant doubts persist regarding the sincerity behind Israel’s initial approval and the feasibility of the PA in successfully executing such an ambitious project, particularly in light of the recurring military tensions within the region.

In the event that the project is completed, extensive examination of the political implications surrounding the transformation of the Gaza Strip into a gas-producing region will become imperative, particularly with regard to the Palestinian-Israeli conflict.

Moreover, the Palestinians will have to explore optimal economic strategies for using gas export revenues, considering the longstanding conflict between the PA and Hamas, which controls the Gaza Strip.

History of gas reserves in the Gaza Strip

After the signing of the peace agreement between the PA and Israel in 1993, the two sides established financial and economic understandings in 1994 under the Paris Economic Agreement. These understandings not only granted Israel the authority to approve and oversee the exploration of natural resources in areas under the control of the PA, but any investments or resource extractions also required approval from the Israeli side.

Despite the PA’s limited powers for investing in oil wealth, in 1994 it took the initiative to establish the Palestinian Petroleum Corporation. This body was tasked with supervising and managing the oil sector, demonstrating the Authority’s recognition early on of the potential opportunities and its commitment to protecting its oil rights.

In 1999, the PA awarded an exclusive contract to British Gas and the Union of Arab Contractors to explore and extract gas from the offshore waters of the gas sector, which led to the discovery of the “Marine 1” and “Marine 2” gas fields. The combined reserves of these fields were estimated to be 1.4 trillion cubic feet of gas, representing a significant commercial quantity, most of which could be exported after meeting the gas requirements of the West Bank and Gaza Strip.

On this basis, the two companies began preparing to develop the two gas fields in 2000, but Israeli Prime Minister Ariel Sharon swiftly halted the operations in response to the Second Palestinian Intifada. The reasoning behind this decision was the fear that the PA would use the proceeds from this investment to finance “terrorist operations” against Israel. Later on, Shell acquired British Gas, including its share in the gas extraction license in the Gaza Strip’s waters, effectively transferring British Gas’ stake in the project to Shell.

Due to Israeli obstacles, the investment in gas reserves has remained stagnant since 2000. Shell eventually lost hope in implementing the project and announced its intention to withdraw by 2017.

Following failed attempts to find another international company interested in purchasing Shell’s share, the company relinquished its share in 2018 to the Palestine Investment Fund and the Union of Arab Contractors. From that point onward, these two parties took on the responsibility of seeking international companies willing to complete the project.

Revival of the Palestinian gas reserves investment file

In 2021, the PA initiated efforts to revive offshore gas fields in the Gaza Strip through an agreement with the Egyptian Natural Gas Holding Company. Since then, the PA has relied on Egypt’s involvement to mediate with Israel for the exploitation of Palestinian gas reserves and secure the necessary financial and technical capabilities for gas extraction. Prior to that, in 2019, the PA joined the Eastern Mediterranean Gas Forum to expand cooperation with regional parties in investing and discovering offshore gas fields.

After two years of Palestinian-Egyptian coordination, in June 2023 the PA obtained the final Israeli approval to develop the “Marine 1” gas field, although the agreement did not include the “Marine 2” field. The “Marine 1” field alone is expected to hold approximately 1 trillion cubic feet of natural gas, making it the largest field in size. The PA anticipates commencing gas production within 18 to 20 months after initial developments. Studies suggest that annual gas field production could exceed 1.5 billion cubic meters, equivalent to $705 million in revenue per year.

Under the agreements between Egypt and Palestine, the Egyptian company will receive a 40 per cent share of the production, while the PA will share the remaining portion with the Union of Arab Contractors, which also holds ownership in the field. Egypt aims to direct most of the gas production to its existing liquefaction stations, where it will be processed into liquefied natural gas, shipped and sold in markets. Egypt will then transfer its share of the revenues to the PA. The remaining portion of the gas production will be used locally to generate electricity in the Gaza Strip and the West Bank.

Israel’s motives for agreeing to invest in the “Marine 1” field

There are various analyses and reasons that explain Israel’s recent shift in approach toward the Palestinian gas issue, particularly in granting initial approval for investment in the “Marine 1” field. This move is noteworthy considering the current Israeli government’s strict stance on other matters involving Palestinians.

One significant reason is Israel’s desire to establish stability in the Gaza Strip through economic means. By creating financial interests contingent on Palestinian factions avoiding security escalations, Israel aims to foster calm in the region.

The Palestinians’ reliance on gas from the “Marine 1” field for electricity generation in the Strip, along with the financial gains from gas sales, would give them strong incentives to refrain from military conflicts that could jeopardize investment and production operations. Consequently, Israel emphasizes the need for “security guarantees” in coordination with Egypt before proceeding with the development of the “Marine 1” field.

In this regard, Israel appears to be leveraging the “Marine 1” field as a long-term bargaining chip against Hamas and the PA, making security stability a prerequisite for the Palestinians to continue benefiting from gas production and revenues. This strategy resembles Israel’s approach with Lebanon, where it facilitated border demarcation with U.S. guarantees and mediation to ensure security stability resulting from Lebanon’s gas field investment.

Furthermore, it seems that Israel is also responding to pressure from the United States, which seeks de-escalation measures in the region. Despite US dissatisfaction with Israel’s settlement expansion policy, Netanyahu aims to mitigate the American reaction by displaying some flexibility regarding Palestinian gas reserves. The Biden administration is actively pursuing progress in normalizing Israel’s relations with its Arab neighbors, particularly Saudi Arabia, which necessitates Israel taking steps to reduce tensions within its Arab surroundings.

Lastly, the decisive factor in this matter was pressure from the European Union member states, which are currently purchasing liquefied gas shipments at Egyptian stations. By investing in Palestinian gas reserves, the gas can be transported via pipelines to Egyptian liquefaction stations, increasing the supply of liquefied gas available for the European market, which needs additional gas supplies following the energy crisis triggered by the disruption of Russian gas deliveries to Europe.

Problems and outstanding issues

Despite the potential positive aspects surrounding the investment of Palestinian gas reserves, there are several pressing issues and challenges that remain unaddressed. One prominent concern is the risk of reverting back to square one if the Israeli government decides to freeze the investment process as a collective punishment against the Palestinians, similar to what occurred in 2000.

To date, Israel has not offered any assurances to dismiss the possibility of such a scenario. On the contrary, Israel’s insistence on security guarantees in its favor suggests that it may withdraw from the initial agreement if these guarantees are not met.

Moreover, gas extraction requires a host of expensive and complementary logistical services, which are expected to be provided by foreign companies as petroleum expertise is lacking in the Gaza Strip. However, there is a possibility that the PA or its Egyptian partner will be unable to secure these essential services because foreign companies might be deterred by the high security risks associated with operating in the Gaza Strip, given the history of Israeli attacks on the region.

Additionally, the division between the PA in the West Bank, responsible for overseeing this investment, and Hamas, which controls the Gaza Strip, poses a significant challenge. This rift could impede the sector from benefiting fully from the gas field or its revenue, particularly if the two parties fail to reach a consensus on these matters. It is worth noting that Hamas has not participated in discussions related to the investment of the “Marine 1” field yet, but it anticipates future benefits for the Gaza Strip resulting from this investment.

Considering these factors, there are valid reasons to be concerned about when it comes to the challenges associated with this undertaking, prompting the PA to develop a comprehensive strategy to tackle the forthcoming issues. Specifically, the PA should establish clear local understandings with Palestinian factions regarding the utilization of the gas and the expected revenues.

At the same time, it needs to assess the necessary infrastructure required in the Gaza Strip and the West Bank to maximize the benefits derived from the gas in energy production.

Finally, the PA must formulate a plan for its relations with influential regional countries to exert pressure on Israel to provide guarantees that ensure the successful completion of the investment in this field.

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