Desert massacre threatens Africa’s largest gas industry

The killing of foreign workers in the Algerian desert threatens production from North Africa’s largest oil and gas industry, the main source of revenue for a country that avoided unrest when the Arab spring swept away regimes across the region.

Yesterday’s bloody action to end a hostage-taking by Islamist rebels at a BP Plc-operated natural gas field supplying 12 percent of Algeria’s output will make foreign explorers wary about working in the country, said Ahmed Amdimi, a professor of political science at the University of Algiers. Spain’s Cia. Espanola de Petroleos SA, Statoil ASA (STL) and BP yesterday became the first oil companies to evacuate workers.

“The oil and gas installations were even more secure than the army barracks, they were oases in an unsafe country,” said James Le Sueur, a history professor at the University of Nebraska in Lincoln and author of “Algeria Since 1989: Between Terrorism and Democracy.” “That they finally got to them indicates a very substantial threat.”

Report: Houston man among Algerian hostages

Algeria is the third-largest gas supplier to the 27-nation European Union, piping fuel under the Mediterranean. Energy accounts for 70 percent of tax revenue and 98 percent of exports, according to the African Development Bank. Worsening security in the Sahara desert may slow drilling by producers including France’s Total SA (FP), Italy’s Eni SpA (ENI) and Statoil.

Gas Prices

“Algeria lives off oil and gas,” Amdimi said. “To strike against that is to strike against Algeria as a whole. If other operations take place, this will have a very dangerous effect on the Algerian economy.”

Gas prices rose yesterday in Italy, which gets 33 percent of its supply from Algeria after gas flows from Algeria declined. Fuel for next-day delivery gained as much as 1.7 percent, the most in more than a week, to 27.75 euros a megawatt-hour. Gas inflows “are returning to normal”, a spokesman for Italian distributor Snam SpA (SRG) said today.

Algeria also produces about 1.2 million barrels of oil a day and benchmark New York crude futures rose to $96.04 a barrel yesterday, the highest since September. They traded at $95.42 at 11:48 a.m. in London today.

There were conflicting reports about the fate of as many as 41 foreign workers at the In Amenas plant following a raid by Algerian forces. Reuters reported 30 hostages died, including at least seven foreigners, citing an unnamed Algerian security source.

“We are urgently coordinating with British and Western oil companies in the region, and additional security measures will be put in place as necessary,” U.K. Prime Minister David Cameron said today in London. He also said Algerian security forces were still at the gas complex searching for terrorists and any remaining hostages.

’Bargaining Chips’

Algerian forces moved against the complex after indications the terrorists were planning to try to take their hostages to another country as “bargaining chips,” Algerian Communications Minister Mohamed Said said on TV yesterday.

BP said in a statement it plans to fly some non-essential staff out of Algeria. Statoil, BP’s partner at In Amenas, said today nine of its 17 employees at the plant are safe. The company is bringing home 40 other employees from Algeria. Cepsa evacuated foreign employees from two sites within 250 kilometers (155 miles) of the In Amenas gas development.

Anadarko Petroleum Corp. (APC) and ConocoPhillips (COP), two U.S. oil and natural gas producers with assets in Algeria, said they’re watching developments there. Production from Algeria accounted for about 8 percent of Anadarko’s output in the third quarter, and the company is a partner in the El Merk development that’s expected to ramp up, according to Alembic Global Advisors.

Total, Repsol

Other operators in Algeria including Total and Spain’s Repsol SA (REP) declined to comment on the security situation.

“Given the importance of Algerian exports to Europe, and particularly Italy, the major players are vigilant,” said Nicolo Sartori, energy and defense analyst at Rome’s Institute of International Affairs. “If an internal conflict should erupt in Algeria, then we’d be looking at a different scenario that would pose a serious risk to gas supply.”

While Algeria, a democratic republic where the army remains a powerful political force, largely avoided the unrest that started two years ago in Tunisia and overthrew regimes in Egypt, Tunisia and Libya, this week’s attack may signal the country is becoming embroiled in a regional conflict with Islamist fighters allied with al-Qaeda.

French Invasion

France sent troops to Mali, Algeria’s southern neighbor, to support the regime in a conflict with rebels in its northern, Saharan region. The kidnappings on Jan. 16 at In Amenas were a response to President Francois Hollande’s intervention, according to a report from Mauritania’s private ANI news agency.

A worsening conflict in the Sahara also poses a threat to Libya, where oil and gas production only recently recovered from the conflict that overthrew the regime of Muammar Qaddafi in 2011, according to estimates compiled by Bloomberg.

Libya has several major oil and gas installations close to the Algerian border, including the Wafa gas treatment plant 540 kilometers southwest of Tripoli, and the El Feel, or Elephant, field, jointly run by Libya’s National Oil Co. and Italy’s Eni.

Officials at Eni declined to comment on the security situation in Algeria and Libya.

The inadequacy of government security in Libya was underlined on June 5 when a militia complaining about an alleged kidnapping occupied and closed Tripoli International airport by driving armed jeeps past perimeter security and blocking the runways.

Export Decline

“Libya seems to be more at risk, simply because the government doesn’t have the same strength as the Algerian authorities,” said Sartori.

The closure of In Amenas, where Sonatrach and Statoil are the other partners, will compound a seven-year decline in Algerian exports driven by higher domestic energy demand, said Thierry Bros, a gas-market analyst at Societe Generale SA. The field accounts for 2 percent of Europe’s gas imports, bringing in $3.9 billion a year in revenue, he said.

“Europe would have to turn to Russia,” Bros said in a note to clients, as other sources of supply are committed elsewhere. “If In Amenas were to stop, OAO Gazprom (GAZP) would be likely to seize the opportunity and increase its exports to Europe.”