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As Security Costs Rise, Oil Firms Stay Put in Algeria

In Amenas road sign, Algeria.
Kjetil Alsvik | Statoil
In Amenas road sign, Algeria.

It has been a harrowing start to 2013 for the global energy industry. BP, Statoil and the joint operators of the In Amenas natural gas plant in Algeria are slowly coming to terms with last week's brutal 4-day occupation of the isolated desert facility where 38 mainly foreign hostages were killed by Islamist militants.

Governments and the industry have a grim and arduous task ahead in the immediate aftermath - accounting for still missing personnel, clearing the site of explosives and munitions left by the attackers and finally returning to some semblance of normality by resuming production at the plant, which accounts for 10 percent of Algeria's natural gas.

Then, investigators need to determine what led to such a serious security breach at a high-profile strategic installation - a shock to many security observers - and will need to form a coherent strategy to eliminate the shortcomings.

(Read More: Algeria Hostage Crisis Death Toll Hits 80, Could Rise)

"Attacks on energy infrastructure were rare during the 1991-2002 civil war in Algeria, and were generally confined to minor pipeline bombings," wrote Virginia Comolli, research associate for Transnational Threats at the International Institute for Strategic Studies on January. 18. "This makes the January 16 assault all the more shocking. Questions will be asked about the security arrangements that allowed a group of heavily armed gunmen to enter the plant's housing compound and take dozens of foreign workers hostage."

Ultimately, security will unquestionably be tighter in Algeria's energy industry, if not the Middle East North Africa region as a whole. That in turn will raise the cost of production, adding to a challenging backdrop for energy producers as bills for labor, raw materials and environmental protection also spiral.

"In the most basic terms, operating in Algeria has just become more expensive," said Philippe de Pontet, Africa director at political risk consultancy Eurasia Group. "The impact on security costs as deployment levels rise, on insurance rates and on the costs of moving expatriate personnel in and out of the country will all affect operators."

Projects coming to the market in North and West Africa will need to "beef up" security, added Tom Price, global commodity analyst for UBS said. "The issue here is that some people are talking about the cost-push factor."

(Read More: US Crude May Test $100 After Algeria Attack)

And for owners of assets in Algeria seeking prospective buyers, "a recalculation is now unavoidable; assets sold in the coming 12-18 months will have a significant discount applied," de Pontet said.

Meanwhile, questions are being asked about whether BP will think twice about expanding in North Africa. Citing unnamed industry sources, the Independent on Sunday reported that the oil giant may be forced to reconsider further gas exploration in the region as a result of the hostage crisis.

Committed to Algeria

While it is unlikely that BP will scale back operations in Algeria, further expansion across the region will need careful consideration, owing to the threat from al Qaeda in the Islamic Maghreb, an industry source told the newspaper.

But officially BP appears to be standing firm. A spokesman told CNBC last week that it will review security in Algeria but maintained "our commitment has been solid in Algeria over a number of years" and intended to return to normal operations there as soon as the circumstances safely allow.

Some security experts are questioning whether that may be wise.

"It's wholly irresponsible for any company to put workers in an active Al-Qaeda zone without the proper protection. Even if AQ is not constantly on the march in a specific sector, they can target it any time," said Jeff Moore, CEO of Muir Analytics, a risk consulting firm specializing in analyzing threats in conflict zones with 15 years of experience as a defense consultant.

Many energy companies "simply disengage in the face of high security risks," Moore explained, "but it seems as if they have to get pummeled in order to disengage." Inevitably, "some other oil or gas company is almost always willing to take their place. These companies should smarten up. They can still do business in a lot of these areas, but their overhead costs will increase in order to do so, and there are risks involved."

But an overall strategic shift in direction is unlikely, experts said. "The Algerian incident will prompt the energy industry to properly review security protocols," said Tom Weber, senior commodity advisor at Portfolio Managers Commodity Futures & Options in Los Angeles. "Other than increased armed protection, not a whole lot will change. The oil companies won't pull out of dangerous areas and governments don't want them to, either. Drilling will continue."

(Read More: Global Miners Face Rising Risks in South Africa)

Fereidun Fesharaki, chairman of consultancy FACTS Global Energy and a former energy advisor to the Prime Minister of Iran in the late 1970s, said last week's raid was "very Algeria specific" and didn't have major regional implications.

"Algeria violence and battle with Islamist groups goes back a long time and the last big confrontation left tens of thousands dead but people went back to Algeria after a few years," Fesharaki said. "This would temporarily impact Algeria but after two or three years people will be back. I do not see a lasting impact."

Dr. Gal Luft, co-director of the Institute for the Analysis of Global Security and a former lieutenant colonel in the Israel Defense Forces, said energy companies have "high risk tolerance" and "understand that MENA (Middle East and North Africa) is not Scandinavia."

Chinese nationals "have been on the receiving end of numerous attacks and kidnapping in Sudan -- as recent as last week -- but still continuing to drill there," Luft said. "Iraq has been messy for the past decade and the big oil companies are still interested. In the end those companies will have to follow the product, carry the risk and pass the cost to all of us."

Much is at stake for OPEC-member Algeria. The country holds more proven natural-gas reserves than Iraq and about the same amount of oil as Angola, the International Institute for Strategic Studies Virginia Comolli said. "However, with 97 percent of its exports and about 60 percent of its GDP coming from energy, it also knows that it is over-reliant on the industry."

Finally, an open-ended question for all stakeholders in the Algeria's energy industry is whether the In Amenas attack is a one-off or the first in a series of repeat attacks.

The Islamists who held several hostages last week threatened last Friday to stage more attacks, according to a spokesman cited by the Mauritanian news agency, Agence France-Presse reported on January 18.

"Taking into account the suffering of the Algerian people, we promise the regime in place that there will be more operations," a spokesman for the 'Signatories in Blood' told ANI. He asked Algerians to "clear out from sites belonging to foreign firms (as) we will emerge in places where nobody is expecting us."

(Read More: IEA Boosts Oil Demand Forecast, Warns on Supplies)

Veteran Islamist fighter Mokhtar Belmokhtar, a one-eyed Algerian jihadist with Al-Qaeda ties, has claimed responsibility for launching last Wednesday's attack on the remote desert complex near the Libyan border, AFP reported.

"Such operations take considerable time and preparation, however, and it is unlikely that follow-on attacks on this scale would be successful in the current security environment," global intelligence group Stratfor said in a report.

"Nonetheless, the threat is heightening fears over Algeria's ability to secure its energy sector, as evidenced by BP's decision to remove its employees from the country," according to Stratfor. "Even if the operation has resulted in some setbacks for Belmokhtar and his followers, they are succeeding so far in tarnishing Algeria's most strategic economic sector."

Across the border, fellow OPEC member Libya - worried about potential spill-over effects from Algeria - is tightening security at its oil installations, according to a report in The Wall Street Journal on Wednesday, citing the Libyan deputy oil minister.

Libya will also send more troops to police its border with Algeria, which runs close to the gas field attacked by the Islamist militants, Libyan Deputy Oil Minister Omar Shakmak told The Journal.

IAGS' Luft said the "public-private partnership" was central to effective security. "More focus on perimeter defense" of strategic oil and gas fields was key but more importantly "better coordination of energy companies with local militaries including joint exercises, open lines of communication and intelligence sharing."