Algeria: El Paso Gas Deal Falls Through

The year-old pricing dispute between Algeria, the El Paso Natural Gas Company, and the U.S. Department of Energy has ended in a deadlock in mid-February. Algeria broke off negotiations after it was unable to win a desired price increase for its liquefied natural gas (LNG).

Algerian negotiators had held out for a price of U.S.$6.11 per 1000 cubic feet, nearly a threefold price hike since the nation's last contract with El Paso in May, 1979. Algeria claims it lost $290 million on its contract with E1 Paso-the largest single purchaser of Algerian LNG-from May 1978 to July 1979, due to rising costs of liquefaction. During this period, the major U.S. suppliers, Canada and Mexico, were selling LNG at a price two and a half times that of Algeria.

The U.S. Department of Energy (DOE), which regulates the price of natural gas in the United States, refused to allow El Paso to contract with Algeria at Algeria's requested price level, claiming that the cost of shipping and regasification, when added to the higher contract price, would cause price increases in the U.S.

The direct effects of the proposed increase on the U.S. energy bill would, however, be slight. Algeria supplied only 1.3 percent of U.S. natural gas consumption in 1979.

DOE officials were perhaps more concerned that agreeing to Algeria's price would invite similar increases by Canada and Mexico. "Such an increase could lead to price `leapfrogging," said a recent report by the U.S. General Accounting Office.

The break-off in negotiations has hurt both El Paso and Algeria. El Paso closed its LNG operations in late February, writing off $365 million in losses. "We think the possibility of renewing the project is slight," said John McFall, El Paso's director of public relations.

Algeria, which is also involved in price disputes with European importers, is suffering from the loss of the U.S. market. The U.S. imported $512.7 million worth of Algeria LNG in 1979. Algeria was counting on LNG revenues to help finance its current five-year development plan and pay debts incurred in building liquefaction facilities.