Sharon vetoes BG Group deal to supply Israel with gas from Gaza

Ariel Sharon, the Israeli Prime Minister, yesterday vetoed a multimillion-pound deal for Britain's BG Group to supply Israel with natural gas from a field off the Gaza coast.

The offshore exploration arm of the former British Gas is developing the field on behalf of the Palestinian Authority, which would receive 40 per cent of the profits. BG offered to lay a pipeline directly to Israel's Mediterranean port of Ashqelon. The gas would then be piped to Israeli power stations, which have started to convert to natural gas for generating electricity.

Mr Sharon is reported to have preferred to buy gas from Egypt, which already sells Israel oil from its Sinai fields. The Israeli Prime Minister was reluctant to put money into the Palestinian treasury without knowing what it would be used for.

The ceasefire is very fragile and the Palestinians are still building up an arsenal of weapons, which the Israelis say could be used against them.

John Field, the general manager of BG in Israel, said last night that the company still hoped Mr Sharon would reconsider his options. The Israeli Prime Minister set a deadline of one month for Egypt to demonstrate its readiness to negotiate an alternative deal. If Cairo does not come through, BG would be ready to resume discussions.

The Gaza field has reserves of 35 to 40 billion cubic metres of gas. BG would expect to pipe 1.5 to 2 billion cubic metres a year into Israel and smaller quantities into the future Palestinian state. This could meet at least one-third of Israel's needs.

BG estimates that the project could pump revenues of $50m (£31m) a year into the Palestinian economy. According to Mr Field, the Palestinians have agreed that it would be paid into a central account audited by the international community. All foreign aid - as well as Israeli tax transfers - goes through that account. It should, therefore, be impossible for the Palestinians to siphon off the gas revenues.

There are no precise estimates of anticipated profits for BG, though they would clearly be in the hundreds of millions of dollars. BG is investing up to $500m in infrastructure to exploit the gas reserves and deliver it to Israel. It argues that because the fuel would go straight from the field to Israel, it would represent an extremely secure source.

Tony Blair lobbied for the deal, which was signed in November 1999 when the Palestinian leader Yasser Arafat visited London. British officials thought that Mr Sharon had committed himself to it, though he backtracked at the beginning of this year when Israeli-British relations were at low ebb. Relations improved after the Iraq war and Mr Sharon's recent visit to London.

The officials accept that it is now the Palestinian factor that has turned Mr Sharon against the Gaza option, which had the enthusiastic support of his National Infrastructure Minister, Yosef Paritsky. The Finance Ministry advocated buying gas from both the Palestinian field and Egypt in order to create competition in the market.

Cairo, meanwhile, is in no hurry to seal a contract until it sees how the Israeli-Palestinian peace negotiations develop. Israel could yet be left having to buy gas at a higher price from more remote suppliers.