* Security costs jump after deadly desert attack
* Company sources say better contract terms needed
* Amended hydrocarbon law unattractive - energy firms
* Global competition due to grow as gas projects start
By Julia Payne and Peg Mackey
LONDON, May 2 BP is delaying two major
Algerian gas projects as foreign energy firms seek security
guarantees after a deadly Islamist attack, and press the
government to soften its investment terms.
BP's decision to review plans for the gas fields - including
In Amenas where more than 70 people died in January's siege -
complicates Algerian efforts to reverse a decline in energy
output, which accounts for 60 percent of its budget revenue.
Despite the deaths of four BP employees, the company said
after the militants' attack that it remained committed to
Algeria. Africa's third biggest oil producer also supplies a
fifth of Europe's gas imports and is the United States' chief
ally in countering Islamist militancy in north Africa.
However, Chief Executive Robert Dudley made clear this week
that the four-day siege deep in the Sahara desert had affected
"Good progress is also being made on our planned 2014
project start-ups although the timing of work on our In Amenas
and In Salah projects in Algeria is being reassessed following
the tragic incident at In Amenas in January," he told analysts.
An industry source familiar with the plans said BP does not
expect significant new production from the fields in 2014,
contrary to its initial ideas. "It is the security situation
that is affecting existing projects. The Algerians still haven't
done enough on the security side to reassure BP," the source
Since the siege, which ended when Algerian forces stormed
the plant, security costs have soared for international oil
companies (IOCs) operating in the country. This issue has
reinforced their demands that the Algiers government should
offer foreign energy investors a better deal, especially as
other countries will soon step up gas production sharply.
"Most IOCs are reviewing their security postures, which will
be costly, so they need reassurance that further investment is
worthwhile - it requires a shift in Algerian thinking," a source
at a European oil infrastructure company said.
No one was available for comment at the Algerian oil
ministry or the state energy firm Sonatrach.
Terms vary from project to project but Algeria stipulates
that Sonatrach should hold a controlling stake and take more
than half an oil or gas field's output, a requirement of state
involvement that is common in resource-rich nations.
Foreign oil firms also complain that official red tape and
graft are exacerbating what they regard as already tough
contract terms. A corruption investigation at Sonatrach resulted
in the dismissal of its senior management team in 2010.
On top of that, the government slapped a windfall tax on
foreign oil producers in 2006 for whenever the oil price
exceeds $30 per barrel - far below the current market level for
Algeria's benchmark Saharan Blend crude of around $100.
U.S. oil firm Anadarko took Algeria to court over
the tax, winning the $1.8 billion case. However, the levy was
replaced by new taxes which oil firms believe are also harsh.
Foreign investors have been lukewarm on Algeria for several
years. In March 2011, the government awarded only two out of 10
oil and gas permits on offer in the third licensing round in a
row to attract lacklustre interest.
BP and Norway's Statoil operate the In Amenas gas
plant together with Sonatrach. The three firms had planned to
invest over $1 billion in the In Salah project alone.
Expatriate BP staff have yet to return after being pulled
out following the attack and this is slowing the projects, which
are central to maintaining Algerian gas production. Industry
sources say security bills in the country may have tripled to 15
percent of operating expenses following the attack.
CHIEFS TALK SECURITY
Discussions between energy companies and Algeria have been
stepped up since the attack and are now held at a high level,
sources at several oil firms said.
"The intelligence picture is very difficult," one source
said. "There is much more dialogue going up to very senior
guys." One source added that talks have been taking place among
chief executives at several oil majors.
Even before the attacks, oil firms believed that Algerian
production terms had become unattractive at a time of rising
global competition. Australia, the United States, East Africa
and other Mediterranean countries such as Cyprus and Israel are
all expected to raise gas output sharply as new projects start
up in the next few years.
"I understand that oil companies recognise that there are
enough opportunities apart from Algeria that they can force
Algeria to ease its terms," said a source at an international
consultancy firm in Algeria.
An industry source told Reuters last month that Hess Corp
of the United States will sell one of its two Algerian
oil stakes to Spain's Cepsa due to expected poor returns.
Britain's BG Group is also leaving, sources said, as
its licence for the Hassi Ba Hamou block expired in September
and negotiations have stalled. One major U.S. company, which had
studied Algeria, has decided to focus on projects elsewhere, a
source familiar with the matter said.
Such departures follow years of complaints about Algeria's
production sharing terms, which led to a decline in its oil and
gas output in the last few years.
Several sources at oil firms still active in Algeria said
they had hoped a visit by oil minister Youcef Yousfi to Britain
in April would address some of the worries.
"Sadly, it was a missed opportunity," one of the sources
said, following a meeting hosted by the UK foreign office
between the Algerian delegation and oil firms such as BP, Shell
, ExxonMobil, Hess, OMV and
Sources at the companies said they were keen to hear how
Algeria would address the concerns about security and production
terms, whereas the Algerians focused on promoting unconventional
development of reserves such as of shale oil and gas.
Algeria amended its law in January to encourage exploitation
of oil and gas with new technologies such as hydraulic
fracturing - known as "fracking" - while leaving terms for
conventional resources unchanged.
The next test will come later this year when the government
relaunches a licensing round for 20 oil and gas blocks.
However, the government's attention is likely to be
elsewhere due to concerns about the health of veteran President
Abdelaziz Bouteflika, who was flown to a Paris hospital last
weekend, and presidential elections next year. "I am not
expecting any change of the law in 2013, the focus will be on
... the presidential campaign," one source at Sonatrach said.