BG Group is poised to agree the terms of an historic $4 billion (£2 billion) deal to supply Palestinian gas to Israel from a discovery off the Gaza coastline, The Times has learnt.

Representatives from the British energy company are scheduled next week to meet a team of negotiators chosen by the Israeli Cabinet to thrash out a 15-year contract. Despite the violence in Gaza, the Israeli Foreign Ministry has insisted that it wants to conclude a deal “as soon as possible”.

It would enable BG Group, the former owner of British Gas, to begin to develop an offshore field that is the Palestine Authority’s only natural resource. The move would mark an unprecedented milestone in Middle East relations. There would be enough gas to provide 10 per cent of Israel’s annual energy requirement, and the Palestinians would receive total royalties of $1 billion. Sources in the Middle East note that the sensitive talks could be derailed at any time by the acute political tension that surrounds the deal.

However, Nigel Shaw, the BG Group vice-president in the region, said: “We are making progress. There are commercial issues to be completed and we also require bilateral agreement between the two governments to get this project across the line. But this is a chance for greater economic prosperity in Palestine and that is only good for peace.”

The signing of heads of terms would mark an amazing turnaround, given the political and legal disputes that have dogged the project since BG Group discovered the Gaza Marine field in 2000. It holds one trillion cubic feet of gas, the equivalent of 150 million barrels of oil, equivalent to a large North Sea field.

Six years ago Ariel Sharon, the Israeli Prime Minister at the time, vowed that Israel would never buy gas from its neighbour. The project also was held up by a legal challenge in the Israeli Supreme Court to establish whether the Palestinians had any right to the discovery. Last year BG Group was close to signing a deal to pump the gas to Egypt before Tony Blair intervened and asked the company to give Israel a second chance. Three weeks ago the Israeli Cabinet approved a proposal by Ehud Olmert, the Israeli Prime Minister, to buy gas from the Palestinian Authority. The Cabinet recognised the need for new energy sources to feed Israel’s rapidly growing economy.

Under BG Group’s plans, gas from the field would be transported by an undersea pipeline to the seaport of Ashkelon. Although Israeli insiders are confident of a deal,significant questions remain, not least how payments to the Palestinian Authority will be made. Israeli defence authorities want the Palestinians to be paid in goods and services and insist that no money go to the Hamas-controlled Government.

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