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The Tigantourine crisis is over, but new ones await Algeria

The murder of oil workers in Algeria was a shocking, barbarous act. The dead men at the Tigantourine wet-gas complex, near In Amenas, were not politicians or soldiers. They were innocent oilmen doing their job. That they are now targets of terrorists in the Sahel opens a disturbing new chapter for the oil industry in the Middle East and North Africa (Mena), with serious ramifications for the region's governments and investors alike.

The most surprising thing about the tragedy in the Sahara was that it happened in Algeria. Its government fought a brutal civil war in the 1990s to quash Islamists. Algeria's armed forces were as ruthless as their enemy: 200,000 people perished. More recently, Algeria's rulers appeared impervious to the upheavals elsewhere in Mena. 

Some were also surprised by the target. During the civil war, energy infrastructure was left largely untouched; recognition by both sides that oil and gas were their country's lifeblood. The same was largely true next door, where Libya's oil and gas industry survived relatively unscathed as the civil war shattered much else. 

But the attack on the Tigantourine complex near In Amenas, where at least 38 workers were killed alongside almost all of the 40 terrorists who held them hostage, has demolished these illusions. For investors in Algeria's upstream, including BP and Statoil (joint operators, with Sonatrach, of the Tigantourine project) and other shell-shocked partners, the events of last month will stain their view of North Africa.

In retrospect, the signs of deteriorating security in the region have been obvious for months. Post-Qadhafi Libya, where Islamists reportedly helped the terrorists in their dark plans and from where some of them may have passed into Algeria, has become a weapons bazaar. Hillary Clinton, the US secretary of state, said last month that Libya's conflict had opened a "Pandora's box" in North Africa. Large parts of the country, and most of its desert border, cannot be policed. Libya was unable to close the crossing into Algeria near In Amenas after news of the attack broke. Its state oil company, Petroleum Economist understands, only learned of the incident 12 hours after it began, and even then only because Western diplomats told a senior executive.

Algeria's response to the hostage-taking was brutal and decisive. It is unclear how many of the innocents were killed as special forces stormed the compound, though it seems the terrorists may have been planning to murder all of the expats, prompting the intervention. (One report said the terrorists had assured their Algerian captives, whom they identified by asking for recitations from the Koran, that they would be safe.)

In Algeria, the siege-break was considered a victory: more than 700 hostages were freed; one Algerian died; and all of the terrorists, barring three taken alive, were killed.  "The priority for the Algerians was to make sure none of the terrorists got out of the country," said one Western diplomat. "So for them it was a success." 

The crisis may be over, but new ones now await Algeria and the region.

Oil companies will continue to work in risky areas. As Dick Cheney once said, "the good Lord didn't see fit to put oil and gas only where there are democratically elected regimes friendly to the US". But the In Amenas attack will inevitably shift some investors' view of Mena.

For Algeria, where oil production is waning and the gas-export industry has struggled amid project delays, soft European demand and soaring domestic consumption, the perception of political stability was one of the few lures for its upstream. Last month, its parliament passed amendments to the hydrocarbons law that were designed to sweeten terms for investors. The Tigantourine attack totally overshadows that effort. Algeria has vast unconventional oil and gas potential - but where would you rather send your money and your drillers: the Sahara or Canada?

Next door, Libyan oil minister Abdulbari al-Arusi says his country will increase oil output to 2 million barrels a day (b/d) in the next two years. Much of the growth will depend on enhanced oil recovery and new exploration, as well as foreign investment. But can the country's Petroleum Faculty Guard, ex-rebel soldiers commissioned to protect oil installations, do a job that Algeria's military could not? Algeria and Libya both insist that private security firms will not be tolerated.

The violence stains reputations further afield, too. North Africa's turmoil may have nothing to do with Iraq's or Syria's, but in the minds of investors the entire region is tarnished with each bomb blast or Al Qaeda strike, whether in Benghazi or Mosul.

Consider Kirkuk, where the Iraqi government hopes BP and possibly Halliburton or Schlumberger will soon begin work to double production to 600,000 b/d. Terrorists have killed dozens there in the past two months. Outside the city, Kurdish and Iraqi army troops have amassed weaponry in a tense stand-off in disputed areas. Iraq is on edge elsewhere, too, amid protests against prime minister Nuri al-Maliki and dark warnings of renewed sectarian conflict.

Meanwhile, Syria's civil war drags on, the US has stepped up drone attacks in Yemen, Jordan's shaky government is struggling under the weight of a looming energy-supply crunch, the Iranian nuclear crisis rumbles in the background, France is leading a military intervention in Mali, providing motivation for terrorists in the Sahel, according to the Tigantourine attack perpetrators, and UK prime minister David Cameron believes the West is now fighting against a North African terror threat that could last 'decades'.

The good news is that however daunting these risks seem, the oil market has already priced them in. Brent barely reacted to the terror in Algeria. Unlike Cameron - whose rhetoric was not remotely in line with advice from his own foreign ministry, say diplomats - oil companies operate with more stoicism. Provided Mena governments can offer them incentives to keep investing, they will.

But those governments need to understand the urgency of this. The Arab Petroleum Investment Corporation reckons that upstream spending in Mena countries must average $100bn a year between now and 2035 if the region is to meet the supplies envisaged in the International Energy Agency's long-term forecasts.

For all its petroleum wealth, though, Mena can no longer expect to dominate the ambitions of foreign investors. The rise of unconventional energy has opened vast new resources in the countries that would Dick Cheney's approval, including the US. Those countries are not going to replace the Middle East, but as destinations for capital, and people, they look a lot safer.

The tragedy in Algeria will not send all the Middle East's investors to the exit door. Some canny companies will even see competitive advantages in the heightened risk. But for others, the fallout of Tigantourine will be akin to that for the State Department after last year's murder of the US ambassador to Libya. Spending on security will soar. Expat oil workers, like US diplomats, will become increasingly detached from people outside their compound walls, exacerbating some problems by making engagement with locals even more difficult. 

In short, the cost of doing business in Mena has risen again. The sickening attack was a tragedy for the families of the innocent victims and a terrible reminder of the political instability in the region. No one knows if similar attacks will happen again. It is another blow for brand Mena, just when it could least afford it.

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