102. Telegram From the Department of State to the Embassy in Algeria1
SUBJECT
- Algerian LNG: Letter to Boussena.
1. Confidential—Full text.
2. Following is text of letter from DOE Acting Assistant Secretary Peter Borre to Sadek Boussena. Talking points are being transmitted septel. French text follows septel.
3. Begin text of letter:
Dear Sadek:
Pursuant to Round VI of the LNG bilaterals in Washington and our recent phone conversations, I have been authorized by my authorities to present the U.S. position concerning the suspended El Paso Algeria LNG project.2 At the outset, I must emphasize that this matter has received a careful, rigorous review by senior officials of the administration. We have carefully developed a position which could permit a constructive negotiation on an issue in which U.S. law and regulatory policy and the realities of the market impose very rigid constraints on us.
— Base Price
I am instructed to convey formally that an FOB price of dols. 3.70/MMBTU, effective on April 1, 1981, for the duration of the entire second quarter, is the limit with respect to pricing, based upon fundamental US gas policy considerations; my instructions on this point are unequivocal.
In the context of understanding on this point, we would be prepared to discuss with you the remaining issues, and advance the following position with respect to them:
— Crude Oil Equivalency for Escalation
We have given very careful consideration to the Algerian objectives with respect to the eventual attainment of crude oil equivalency; we recognize that this is a point of fundamental concern to you. After extensive analysis and review, we are willing to accept an escalation mechanism which is based upon a relationship to the absolute change, rather than to the proportional change, in a basket of crudes defined [Page 226] as: Saudi Arab Light, Algerian Saharan blend, U.K. forties, Mexican Isthmus and Venezuelan Tia Juana medium (26 degree). The operation of this mechanism would be subject to a percentage limitation factor, with only a certain percentage of the absolute increase, translated to gas equivalency, to be applied to the FOB price. Escalation would be phased up to this percentage over the course of the agreement.
— Escalation Mechanism
The FOB price will be adjusted on the basis of the relationship of average quarterly changes in the crude oil basket prices. To illustrate, the July 1, 1981 price adjustment for the third quarter would be calculated by taking the absolute difference between the average second quarter and average first quarter 1981 crude oil basket prices, expressed in U.S. dollars per million BTU, with the result multiplied by the applicable percentage limitation factor. The computed figure would be added to previous quarter’s FOB price (dols. 3.70 per MMBTU in this case) to derive the new quarter’s price.
— Price Ceiling
The escalation provisions would be limited by an alternate fuels price ceiling. Whenever the escalation mechanism for the adjustment of the FOB price yielded a result in excess of the price level yielded by increasing the base FOB price by the change in U.S. alternate fuels prices between first quarter of 1981 and the quarter immediately preceding the date of escalation, the latter would become the ceiling FOB price. The U.S. cities comprising the alternate fuels ceiling are derived from our regulatory review of existing gas imports: New York, Detroit, Chicago, Philadelphia, Boston, Baltimore, Minneapolis/St. Paul, St. Louis, Los Angeles, San Francisco, and Seattle/Takoma. The fuels would be a mix comprised of 20 percent no. 2 fuel oil and 80 percent no. 6 residual fuel oil.
— Sharing of Escalation
The recovery of the U.S. companies proposed 50 cent/MMBTU contribution as well as future increases in operating charges is a commercial issue which Sonatrach, El Paso and the customer companies will have to resolve, provided that all parties remain within the parameters on FOB escalation.
— Duration
Based on a current determination of market need, and on alternative arrangements made by the customer companies since the interruption of loadings, it would be virtually impossible to obtain regulatory approval for an agreement of very limited duration, such as one year. Therefore we propose an agreement for a term of 18 months from the date of first loading, with an automatic renewal for a further comparable period unless both parties agree to replace this agreement with a long-term arrangement for the remaining life of the contract.
[Page 227]During the course of six rounds of negotiations over the past ten months our governments have expended considerable efforts to secure an interim arrangement. The remaining differences between our positions are relatively small as compared to last April. It would be unfortunate if not tragic to continue to incur the sizeable losses which the affected parties have sustained when mutual economic interests call for the resumption of this project and the preservation of the contract which dates from 1969. I look forward to hearing from you via our Embassy confirming the advisability of holding Round VII in Algiers as scheduled early next week.
Sincerely,
Peter Borre
Acting Assistant Secretary
for International Affairs
- Source: Department of State, Central Foreign Policy File, Electronic Telegrams, D810071–0191. Confidential; Niact Immediate. Drafted by Ritzer (DOE); cleared by Poore (DOE), Pierce Bullen (EB/IEP), Dennis Sandberg (S/S–O), and Joseph Twinam (NEA); approved by Deane Hinton (EB/IEP).↩
- See Document 99.↩