The Paz energy company has struck a deal to refine fuels for the Palestinian Authority at its refinery in Ashdod, TheMarker has learned. This deal marks the first major business transaction between an Israeli firm and the Hamas-led Palestinian government.

"This is the first formal agreement the current government has signed with an Israeli company," said Ismail Mahfouz of Hamas, the Palestinian deputy finance minister.

The Palestinian Authority will import crude oil straight to the Ashdod refinery, which Paz bought just last week for NIS 3.5 billion.

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Paz will refine the crude oil and deliver the products and distillates to the Palestinian Authority.

Paz, which belongs to Zadik Bino, confirmed that negotiations with the Palestinians were taking place.

"There are 3 million Palestinians, who regardless of their political views need water, electricity and fuel," said Moudi Ben-Shach, Paz's chief executive. "We for many years wanted to do this, and now we have."

Israel is the main supplier of dairy products, food items and fuel to the Palestinians, while state-run monopolies such as the Israeli electricity and water companies also
continue to serve them.

Under the deal, Paz will become the exclusive supplier of gasoline in the West Bank and Gaza Strip on January 1. Paz will replace Dor Alon, the company that has been providing fuel to the Palestinians under a contract reached before Hamas took power.

On Sunday morning Dor Alon informed the Tel Aviv Stock Exchange that the PA would cease buying gasoline and gas from it at the end of 2006, after the company refused to meet the PA's demand for improved terms and conditions. Sources in the energy industry believe Dor Alon suspended sales PA when its negotiations with Paz kicked into high gear.

Ben-Shach declined to release details of the deal, but said the terms are more favorable to the Palestinians than the previous arrangement. "It's very positive for them and us," he said.

Dor-Alon had been supplying the Palestinians with fuel since 1994. Two years ago the parties extended their agreement by five years and at present, Dor-Alon is the sole supplier of fuels to the Palestinian Authority.
Each month the Palestinian Authority buys 50 million liters of gasoline and diesel from Israel.

The PA used to represent about 40 percent of Dor Alon's revenues, with annual sales estimated at NIS 1.5 billion on average. According to company reports, it sold NIS 1.19 billion in distillates to the PA in the first half of 2006. If supplies are not renewed for the remainder of the year, Dor Alon stands to lose NIS 600 million.

In the West Bank city of Ramallah, the Palestinians' acting finance minister, Samir Abu Eisha, trumpeted the Paz deal as a victory in Hamas' campaign to clean up the government.

"I am always ready to sit with any Israeli counterpart to discuss services for our people," he said at a news conference, claiming the fuel deal would save the government close to $18 million a year.

Israel and the West imposed its sanctions on Hamas after the group won legislative elections and took power last March. Israel, the U.S. and European Union consider Hamas, which has killed hundreds of Israelis in suicide bombings, a terrorist group.

Government spokeswoman Miri Eisen said in response to the deal that "There are no restrictions on Israeli private companies doing business with the Palestinian Authority or government or anything. Those are private companies."

The Iranian connection
Most of the crude oil for the PA will be imported from the Gulf states and Iran, which are expected to offer good terms.

During the U.S. Secretary of State Condoleezza Rice's visit, Prime Minister Ehud Olmert was expected to ask her to increase the American pressure on Iran with diplomatic and economic sanctions.

Diplomatic sources suggest an awkward situation could develop in the event that Israel asks for increased pressure on Iran at the same time that an Israeli refinery is processing crude oil from Iran. According to a source in the energy industry, "a refinery doesn't distinguish between crude sourced from Iran and from anywhere else, and crude from that type of source could be marketed in Israel."

The source called the developments of the past days "a predictable by-product of Paz's purchase of the Ashdod facility. The energy economy is expected to face a shock with the completion of the floating of the Haifa refinery. As a consequence, a duopoly will be created in the industry, and the ones who will be hurt by it will be the consumers."

Senior Finance Ministry officials said yesterday that the treasury did not care about the source of the crude oil processed by the refinery.