* 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 (Reuters) - BP is delaying two majorAlgerian gas projects as foreign energy firms seek securityguarantees after a deadly Islamist attack, and press thegovernment to soften its investment terms.
BP's decision to review plans for the gas fields - includingIn Amenas where more than 70 people died in January's siege -complicates Algerian efforts to reverse a decline in energyoutput, which accounts for 60 percent of its budget revenue.
Despite the deaths of four BP employees, the company saidafter the militants' attack that it remained committed toAlgeria. Africa's third biggest oil producer also supplies afifth of Europe's gas imports and is the United States' chiefally in countering Islamist militancy in north Africa.
However, Chief Executive Robert Dudley made clear this weekthat the four-day siege deep in the Sahara desert had affectedBP's plans.
"Good progress is also being made on our planned 2014project start-ups although the timing of work on our In Amenasand In Salah projects in Algeria is being reassessed followingthe tragic incident at In Amenas in January," he told analysts.
An industry source familiar with the plans said BP does notexpect significant new production from the fields in 2014,contrary to its initial ideas. "It is the security situationthat is affecting existing projects. The Algerians still haven'tdone enough on the security side to reassure BP," the sourcetold Reuters.
Since the siege, which ended when Algerian forces stormedthe plant, security costs have soared for international oilcompanies (IOCs) operating in the country. This issue hasreinforced their demands that the Algiers government shouldoffer foreign energy investors a better deal, especially asother countries will soon step up gas production sharply.
"Most IOCs are reviewing their security postures, which willbe costly, so they need reassurance that further investment isworthwhile - it requires a shift in Algerian thinking," a sourceat a European oil infrastructure company said.
No one was available for comment at the Algerian oilministry or the state energy firm Sonatrach.
Terms vary from project to project but Algeria stipulatesthat Sonatrach should hold a controlling stake and take morethan half an oil or gas field's output, a requirement of stateinvolvement 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 toughcontract terms. A corruption investigation at Sonatrach resultedin the dismissal of its senior management team in 2010.
On top of that, the government slapped a windfall tax onforeign oil producers in 2006 for whenever the oil price exceeds $30 per barrel - far below the current market level forAlgeria's benchmark Saharan Blend crude of around $100.
U.S. oil firm Anadarko took Algeria to court overthe tax, winning the $1.8 billion case. However, the levy wasreplaced by new taxes which oil firms believe are also harsh.
Foreign investors have been lukewarm on Algeria for severalyears. In March 2011, the government awarded only two out of 10oil and gas permits on offer in the third licensing round in arow to attract lacklustre interest.
BP and Norway's Statoil operate the In Amenas gasplant together with Sonatrach. The three firms had planned toinvest over $1 billion in the In Salah project alone.
Expatriate BP staff have yet to return after being pulledout following the attack and this is slowing the projects, whichare central to maintaining Algerian gas production. Industrysources say security bills in the country may have tripled to 15percent of operating expenses following the attack.
CHIEFS TALK SECURITY
Discussions between energy companies and Algeria have beenstepped 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 sourcesaid. "There is much more dialogue going up to very seniorguys." One source added that talks have been taking place among chief executives at several oil majors.
Even before the attacks, oil firms believed that Algerianproduction terms had become unattractive at a time of risingglobal competition. Australia, the United States, East Africaand other Mediterranean countries such as Cyprus and Israel areall expected to raise gas output sharply as new projects startup in the next few years.
"I understand that oil companies recognise that there areenough opportunities apart from Algeria that they can forceAlgeria to ease its terms," said a source at an internationalconsultancy firm in Algeria.
An industry source told Reuters last month that Hess Corp of the United States will sell one of its two Algerianoil stakes to Spain's Cepsa due to expected poor returns.
Britain's BG Group is also leaving, sources said, asits licence for the Hassi Ba Hamou block expired in Septemberand negotiations have stalled. One major U.S. company, which hadstudied Algeria, has decided to focus on projects elsewhere, asource familiar with the matter said.
MISSED OPPORTUNITY
Such departures follow years of complaints about Algeria's production sharing terms, which led to a decline in its oil andgas output in the last few years.
Several sources at oil firms still active in Algeria saidthey had hoped a visit by oil minister Youcef Yousfi to Britainin April would address some of the worries.
"Sadly, it was a missed opportunity," one of the sourcessaid, following a meeting hosted by the UK foreign officebetween the Algerian delegation and oil firms such as BP, Shell, ExxonMobil, Hess, OMV andPetroceltic.
Sources at the companies said they were keen to hear howAlgeria would address the concerns about security and productionterms, whereas the Algerians focused on promoting unconventionaldevelopment of reserves such as of shale oil and gas.
Algeria amended its law in January to encourage exploitationof oil and gas with new technologies such as hydraulicfracturing - known as "fracking" - while leaving terms forconventional resources unchanged.
The next test will come later this year when the governmentrelaunches a licensing round for 20 oil and gas blocks.
However, the government's attention is likely to beelsewhere due to concerns about the health of veteran PresidentAbdelaziz Bouteflika, who was flown to a Paris hospital lastweekend, and presidential elections next year. "I am notexpecting any change of the law in 2013, the focus will be on... the presidential campaign," one source at Sonatrach said.