The energy giants at most risk in Northern Africa

January 18, 2013, 9:29 PM UTC
An aerial view of the In Amenas gas plant in Algeria.

FORTUNE — The Sahara has suddenly become the most dangerous place in the world to do business. The killing of Western energy workers by Islamic militants in southern Algeria has shocked the financial community and brought long fought tribal and religious battles to the frontlines of the seemingly endless “War on Terror.”

But while this latest battle in Algeria may be over, the war for control of the Sahara has just begun as Western and African troops descend on neighboring Mali. This threatens to further destabilize energy and mining production in the region and could quickly drag the U.S. and its Western allies into yet another expensive and long conflict with wily non-state actors. That might actually be the best case scenario, though, because doing nothing could potentially turn Mali into a hornet’s nest of terror, potentially destabilizing the region for decades.

It has been very difficult to get accurate information out of Algeria in the last 24 hours, with conflicting and unconfirmed reports adding to the chaos and confusion. What we do know is that early Thursday morning, the Algerian military attacked Islamic militants who were holding an unspecified number of Western and Algerian hostages at a gas processing facility at In Amenas, some 800 miles south of Algeria’s capital, Algiers, and some 20 miles west of the Libyan border. The latest reports say that the fighting is still ongoing with the militants entrenched inside the gas facility, which is run by a consortium of three companies, BP (BP), Norway’s Statoil and Algeria’s state energy company Sonatrach. Algerian media claim that 60 foreign workers are unaccounted for, but it is unclear if those workers are among the casualties associated with the raid.

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Whatever the outcome, the shocking and brazen assault on the In Amenas gas facility has managed to bring the Sahara’s issues to the forefront of international concern. Algeria has for decades dealt with instability and insurrection, only emerging from civil war in the late 90s. But during the years of trouble, oil and gas production was undisturbed as the government maintained strong security around its fields. It was somewhat easy to do as the nation’s main oil and gas deposits were located well to the south of the populated northern coast of the country in the desolate and fabled Sahara desert. It was tough, if not impossible, for Algerian rebels to get close to the facility as the government restricted access to the south of the country from everyone, even its own citizens.

So it was a bit of a shock this week when word got out that Islamic militants had overrun the In Amenas gas processing plant. Government forces were apparently overwhelmed by a barrage of weapon fire that they weren’t used to taking. But these weren’t Algerian rebels; they were actually a mix of fighters, many coming from Northern Mali, where they have their base of operations. We do not know for sure which of the three major Islamic militant groups operating in the region was behind the attack but there are signs that Al-Qaida in the Islamic Magreb (AQIM) was behind the assault. They may have been assisted in some form or another by the two other regional Islamic militant groups: The Movement for Oneness and Jihad in West Africa (Mujao) and Ansar Dine.

While the attackers remain somewhat in question, the impetus for the attack seems clear: Mali. The resource rich country bordering Algeria has been caught up in a civil war that has pit the secular government in the south of the country against ethnic separatists, the Touareg, and Islamic militants in the north. Some Touareg separatists are also Islamic militants, adding to the confusion.

The hostage takers said they attacked the gas processing facility after France agreed this week to back the Malian government’s efforts to crush the rebellion in the northern half of the country. The French air force bombarded several rebel controlled cities in the north of the country and has started to send ground troops in to recapture territory previously lost by the government to the rebels. The UN has approved the French intervention in the conflict and has even encouraged other nations, especially African nations, to send troops to the south. Algeria has allowed the French to fly through its territory and has pledged to fight the militants in an effort to secure its borders. This put Algeria in the militants’ bad graces.

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Algeria, though, stormed the gas facility a day after it was taken, without informing Western leaders, saying that the militants were threatening to blow up the facility, which has a production capacity of 9 billion cubic feet of gas per year. It appears as if the Algerians wanted to send the message to the AQIM – hostages be damned, no one messes with our gas.

This incident has raised the stakes on what had originally been an internal Malian affair. Now all nations near Mali should be on alert, in addition to the many multinational firms operating in energy and resource extraction throughout the region from Libya to Nigeria. While the Sahara and the Niger river valley seem like total wastelands, they actually possess a number of lucrative resources, most notably, natural gas, oil, gold, uranium and bauxite.

Nearly every major oil and gas company has some sort of operation in North Africa. Algeria is the third-largest exporter of natural gas in the world, funneling gas via pipeline to Spain and Italy and liquefying it for transport to the UK and elsewhere. While natural gas prices are depressed in the US do to the explosion on onshore shale drilling, they remain relatively strong in Europe, making it a good investment for multinational energy companies. BP is the largest foreign investor in Algeria with operations in country’s two main gas fields, In Amenas in the southeast near the Libyan border and In Salah further west near the Malian border.

BP said it has evacuated some of its personnel out of the country as well as hundreds of other energy workers who were most likely contracting with BP. Its partner at In Amenas, Norway’s Statoil, said it has evacuated 40% of its personnel from the country. Spain’s Compania Espanola de Petroleos (CEPSA), which is wholly owned by the Abu Dhabi Investment Fund, has also evacuated some of its personnel. The company has operations to the north of In Amenas in the Berkié basin where it produces oil and gas for export to Europe. Anadarko (APC) also operates in the Berkié basin and is the largest US-based company operating in the country. In 2011, Anadarko reported revenues of $2.3 billion from its Algerian operations, making it a major source of cash for the company. It is about to start operations at its latest mega project in Algeria at El Merk, where it plans to produce 65,000 barrels of oil and 600 million cubic feet of natural gas per day. It has yet to comment on whether or not it has evacuated its personnel.

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There are also a number of foreign engineering and construction companies working alongside the major oil companies. Employees from Houston-based Kellogg, Brown and Root (KBR), the former Halliburton subsidiary, and Yokohama-based JGC Corp, were among those captured. The firms are working with oil companies at In Amenas to expand operations. KBR also has operations at In Saleh and the Berkié basin. UK-based Petrofac has a presence at three of Algeria’s large fields, including In Saleh, but does not have operations at In Amenas.

It is unknown how the evacuations will end up impacting Algerian oil and gas production but all of the western firms are in joint ventures with the Algerian state energy company, Sonatrach. Personnel from Sonatrach could ostensibly run the facilities for a while until things cool down but expansion and exploration will most likely grind to a halt.

Inside Mali, French troops have started to engage the rebels, and have retaken the central town of Konna for the government, according to Al Jazeera. It was the fall of Konna that sparked the French military intervention. The US government said it will assist the French by airlifting supplies to the country. Meanwhile, Nigerian troops have started to arrive in Mali, part of a pan-African military contingent that will eventually include over 3,300 troops from Niger, Ghana, Senegal, Togo, Benin, Chad and Burkina Faso. The combined Western and African forces will be a formidable power to be reckoned with. It is unknown at this point if the US could get involved on the ground, but it will most likely play a logistical role at this time.

Mali doesn’t have any significant hydrocarbon operations up and running but it does have large mining operations throughout the country, focused mostly on gold extraction. But most of the mines are located in the far western half of the country, far from the rebel-controlled north and all the fighting, so Western miners, like Randgold Resources (GOLD), Africa’s third-largest gold producer, which operates three mines in the country, as well as South Africa’s AngloGold Ashanti and Canada’s IAMGOLD, say that their operations have not been impacted.

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While Mali’s gold may be safe, for now, the nations within striking distance of the north should remain on high alert. Libya’s porous border should be of major concern given the large oil and gas operations in the country. Many of the Malian rebels were mercenaries for the defunct Gadhafi regime and know Libya very well. If the rebels are pushed out of Mali, they might just return to Libya to cause trouble there. Oilfields in Libya controlled by ExxonMobil (XOM) and Eni are on high alert in case the Algerian mess spills over the border, but no evacuations have taken place, according to a person with knowledge of the situation. The same goes for Exxon’s operations in neighboring Chad, another person said.

The biggest worry is if the Malian situation explodes and spreads to neighboring Nigeria. Islamic militants in the north of Nigeria could team up with their brothers in Mali to wreak havoc on oil and gas installations around the region. Shell’s massive liquefied natural gas export facilities in the Niger Delta would be a juicy target for terrorists, as would the dozens of pipelines that move crude oil throughout the country.

Last year when Mali fell into civil war it barely made the papers here in the US. The subsequent coup in March was hardly, if at all, reported here, either. The US election was a major distraction for the White House and Congress, pushing the Mali situation to the bottom of the policy totem pole. But like Afghanistan under the Taliban, Mali has slowly become a major breeding ground for terrorists and displaced mercenaries. This assault in Algeria is a wakeup call to Western leaders that West Africa cannot be ignored.