Foreign Relations of the United States, 1981–1988, Volume XXIV, North Africa

99. Telegram From the Department of State to the Embassy in Algeria¹

24475.

Washington, January 31, 1981, 0027Z

SUBJECT

• US-Algerian LNG Talks.

Ref:

• (A) Algiers 408,²
• (B) Algiers 453.³

1. (S) Entire text.

2. Reftel A reports El Paso’s January 25 communication to Energy Minister Nabi of its imminent decision to write off its LNG project unless an accord is reached between the USG and the GOA on prices prior to the third week of February. Once El Paso has taken this step, we believe it would be extremely difficult, if not impossible, to resurrect this contract. Unless the basic Algerian position changes subsequently, it would also be very difficult to implement the trunkline LNG project. We, therefore, face a major turning point in our economic/energy relationship with Algeria.

3. Given the very short fuse and magnitude of this decision, we are concerned: (a) that the GOA take seriously El Paso’s decision, (2) that a wider GOA circle than just the Energy Minister be aware of the El Paso decision, and (3) that we do everything possible to limit damage to the US-Algerian relationship should an agreement be impossible.

4. For these reasons we believe that it would be useful for the Embassy to acquaint the MFA and other appropriate GOA Ministers of our views at an appropriate level at an early date. Department suggests Charge see Western Europe and North American Affairs Director Benouniche by January 31 or February 1.⁴ We will be pursuing the same objective through Ambassador Malek in Washington. Obviously, care will have to be taken so that the GOA does not perceive this step as an ultimatum. Nor do we want to politicize what we view as basically an economic issue. For good economic reasons on both sides, an accord may not be possible, but we would not want this failure to result from a miscalculation on the Algerian side or come as a particular surprise to government circles beyond the Energy Ministry.

5. Based on arduous negotiations, six rounds over the past ten months, we have to conclude that given the outstanding differences, Round VII may not be decisive. Nevertheless, given the El Paso decision to withdraw from the project absent a U.S./Algerian governmental accord by the middle of February, a USG team is prepared to come to Algiers if the GOA so desires. Given El Paso’s intended decision, these talks would have to take place the week of February 16 with an outer time limit of February 18 because of El Paso’s corporate procedures to close the books on fiscal year 1980. We will leave it to Boussena to determine advisability and precise timing of seventh round in consultation with DOE’s Borre.

6. In discussing this matter with the MFA, you should make the following points:

— Since April, 1980, American and Algerian negotiators have been making persistent and strenuous efforts to reach an agreement on a framework to permit resumption of LNG supplies to El Paso.⁵ Progress has been made, but significant gaps remain.

— El Paso has now notified the USG that it has decided that it cannot indefinitely sustain the financial drain of maintaining its assets and paying the LNG tanker debt in the absence of assured LNG supplies. It is preparing to write off the project by the third week of February unless an accord is reached.

— We are thoroughly aware of the Algerian pricing goals, although we must question whether they are realistic in relation to the U.S. market and regulatory requirements.

— An interim solution must be consistent with the price provisions of Canadian and Mexican gas trade; regulatory authorities, the Congress and the public simply would refuse to accept an outcome whereby Algeria, after nearly one year of interrupted deliveries, appeared to be accorded better terms than hemispheric trading partners whose reliability is well established.

— Moreover, regulatory precedent constrains the U.S. from approving a price for Algerian LNG that exceeds the ERA’s competitive alternate fuels price test.

— We think it would be unfortunate for the project to fail at this point, especially in view of the substantial investment on all sides. We are prepared to work within our stated policy and framework which Algerian officials understand well, to seek to make one last effort to reach an agreement over next few weeks.

— However, we recognize that the U.S. and GOA views on price and on the economic factors involved may differ so widely that in fact no agreement is reached. In that case, the USG would consider this result a decision reflecting the economic policies and interests of the two parties and not directly related to the favorable evolution in the political relationship between our two countries.

7. (FYI Embassy: Department and DOE are reviewing the interesting approach outlined in ref B. We recommend Embassy not pass draft proposal in ref B to the GOA.) We will be cabling specific instructions in a few days.⁶

Haig

1. Source: Department of State, Central Foreign Policy File, Electronic Telegrams, D810045–0601. Secret; Immediate. Drafted by Edmund Hull (NEA/AFN), David Burns (EB/IEP), and Kritzer (DOE/IA); approved by Edward Morse (EB/IEP).
2. In telegram 408 from Algiers, January 27, the Embassy reported that El Paso Chairman Petty gave Algerian Energy Minister and Chairman of Sonatrach (the Algerian National Energy Company), Belkachem Nabi, a letter which said “as result of the suspension of deliveries of LNG to our company, which is now going into its 10th month, the situation of El Paso is now entering into a critical phrase. I must frankly tell you that we have reached the crossroads. One road leads us to resumption of deliveries of LNG to our customers in the United States and the other leads us to a cessation of this project.” Petty said that if an agreement to resume deliveries were not reached by February 15, “we will have no other choice but to write off the considerable investment that our company has made in the LNG project for the reason that we do not have any assurance that the LNG deliveries will be resumed in the near future.” (Department of State, Central Foreign Policy File, Electronic Telegrams, D810039–1079)
3. In telegram 453 from Algiers, January 28, the Embassy cautioned that “the El Paso/Sonatrach LNG price problem must be solved within the next few weeks or El Paso will walk away from the deal. This would cost U.S. companies and the U.S. Treasury many hundreds of millions and would create serious new problems in U.S. relations with Algeria at a time when Algeria is being widely praised for its role in the hostage affair. The Embassy recommends a course of action and suggests a draft USG/GOA agreement on LNG pricing under the El Paso contract.” (Department of State, Central Foreign Policy File, Electronic Telegrams, D810041–0776)
4. In telegram 476 from Algiers, February 1, the Embassy reported that during a January 31 meeting “Benouniche paid careful attention and restated our points completely and clearly to confirm that he understood the essentials. There is not the least doubt that he did understand the problem, including the fact that El Paso’s deadline is neither arbitrary nor tactical.” (Department of State, Central Foreign Policy File, Electronic Telegrams, D810048–0553)
5. In telegram 87426 to Paris, April 3, 1980, the Department reported that “El Paso’s efforts to extend the March 31, 1980, expiration date of their May 11, 1979, LNG price amendment with Sonantrach have failed to produce agreement.” (Department of State, Central Foreign Policy File, Electronic Telegrams, D80168–1066)
6. No further instructions were found.