Will the Algeria hostage crisis affect the oil industry?

The hostage crisis unfolding at BP’s In Amenas gas field in Algeria and the ensuing military operation has cast a shadow over Algeria’s oil and hydrocarbon production, according to the International Energy Agency (IEA).

That conclusion was part of the agency’s monthly report, published on Friday.

The hostage incident has indeed caused a halt in activity at the site, where both gas and 50,000 barrels a day of liquid hydrocarbons similar to crude oil are produced. Compared to the 1.18 million barrels of crude oil produced daily by Algeria, the production at the gas field seems relatively insignificant. “It can create a bit of volatility, but one attack in itself is not going to lead to a long-term price hike,” said Céline Antonin, an economist specialising in oil industries at the French Economic Observatory.

The risk is that the terrorists’ “ability to strike so boldly is likely to spook the Western oil operators who run facilities across the region”, according to British weekly magazine The Economist. If oil operators get jittery, The Economist assessed, speculation could result in higher prices.

But it would be a bit early to anticipate such a trend, Antonin noted. “One isolated incident is not enough for there to be significant speculation,” she said.

Political risks alter oil industry

For the IEA, however, the hostage taking is symptomatic of the way politically charged events like armed conflict and terrorist attacks have changed the oil sector, becoming the decisive factors in production level and crude prices. In other words, oil production is no longer dictated by the demand of developed countries or the economic crisis, as it has been since 2007.

Indeed, the war in Libya had a very clear impact on oil prices, which rose by 20 to 25 dollars per barrel during the conflict.

“Political tensions were always a determining factor in this sector”, noted Antonin, recalling the 1973 oil crisis (in which an Arab embargo sent prices skyrocketing) and the rise of prices after the 1979 revolution in Iran.

The difference today stems from the risks linked to terrorist or rebel attacks on oil facilities. “There is, in effect, a growing realisation by certain groups that oil and gas production sites are particularly important,” Antonin said.

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That new awareness could impact oil prices doubly, according to the economist. First, investors can withdraw from oil companies located in countries with elevated terrorist risks. Secondly, multinationals can invest more in security for their facilities, which would lead to a rise in production costs and then, in turn, a hike in prices.

This political factor is only really important because “we have reached or passed ‘peak oil’ [the point at which the maximum level of oil production is reached and then expected to decline],” Antonin explained.

The novelty of today’s situation, according to the specialist, is the combination of fewer resources, higher demand (from countries like China, most notably), and geopolitical risk and uncertainty.

According to that analysis, targeted attacks like the one in Algeria could be just the beginning of a whole new era in the oil industry.