Implications of the U.S.-Algerian Liquefied Natural Gas Price Dispute and LNG Imports

Gao ID: EMD-81-34 December 16, 1980

In April 1980, Sonatrach, the Algerian national oil and gas company, stopped delivering liquefied natural gas (LNG) to the El Paso Algerian Corporation due to a price dispute. In May 1979, the firms had renegotiated their 1969, 25-year supply contract to provide for LNG at a price based on a negotiated base price and agreed upon escalators. Early in 1980, Algeria demanded that its gas be priced according to a price equivalent to the energy content of Algerian crude oil at the point of export. Because shipping gas in liquid form is more expensive than shipping oil and because the liquid must be regasified, the delivered gas would be higher in price than the price agreed to in May 1979. When the firms could not reach a new agreement, the Department of Energy, with the assistance of the State Department, began negotiating with Algerian officials. Five negotiating sessions have occurred between the United States and Algeria. A settlement has not been reached, because the United States will not accept the Algerian price since they will not agree to a delivered price higher than the cost of alternate fuels in the consuming area.

The United States should be able to maintain a firm bargaining position because its dependence on Algerian LNG is minimal and its current gas supply condition is good. Negotiators also realize that Canada and Mexico might raise their gas export prices if the United States agreed to higher-priced Algerian LNG. However, because Canada is concerned about the marketability of its gas, it would probably be more likely to restrain its immediate price increases. Mexico is more likely to react in the short run. Due to price escalation clauses, the two countries could currently raise their prices by about 17 percent. At such price levels, GAO believes that the demand for the imported gas would drop significantly as consumers switched to cheaper fuels and increased their conservation efforts, and the actual dollar impact of the increase would be substantially less. Agency and gas industry officials interviewed did not believe that the high-priced LNG would set a precedent for domestic prices.

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