Peace in Algeria May Get Boost From New Oil Deals With US

Scott Peterson

Tuesday, July 15, 1997 | 1:12 a.m.

HASSI MESSAOUD, ALGERIA -- The key to peace in Algeria may be largely untapped, and lying beneath the scalding sands of the Sahara Desert.

This is Algeria's Wild West oil town: Black smoke from fiery gas burn-offs clouds the sky, pipelines crisscross the oil-stained sand between 600 working wells, and men sweat to retrieve boiling black gold from wells thousands of yards deep.

Vast oil-and-gas reserves have helped shape modern Algeria since French companies began drilling in the 1950s, and billions in new investment - much of it from American companies - appear set to improve a stagnant economy.

There is a link between Algeria's rich oil fields and finding a solution to the vicious Islamist insurgency here, in which 60,000 people have been killed since 1992.

But just as a Bedouin named Messaoud discovered oil here in 1910 by digging a water well and finding greasy, useless "dirty water" instead, today the tie between this desert oasis and easing the political frustration in the capital, Algiers, is not immediately evident.

The link is not found in Algeria's economic indicators alone, which are impressive for a one-horse economy. Oil-and-gas revenues hit $13 billion last year. Exports are expected to grow 5 to 7 percent by 2000.

Instead, unemployment and housing figures tell the story. They underline the frustration that has spawned unrest: Unemployment rates hover at 30 percent, and are closer to 70 percent for those under 30 years old. Housing built by the government only satisfies a fraction of the need.

Last year, for example, only 110,000 new housing units were built when 300,000 were necessary. To catch up, the government would need to build 800,000 a year for the next five years - a goal that will take a major political decision, along with high oil revenues.

The frustrated find outlets. "Some are easily recruited by organizations that promise them Paradise, by the sword or otherwise," says a Western economist.

Algeria's guerrilla war began in 1992, when the military stepped in to prevent the popular Islamic Salvation Front (FIS) party from winning a landslide victory in elections.

FIS and its armed offshoots have fought back, but FIS has been banned and security forces have retaliated in their own brutal style.

The war is often described as primarily Islamist in nature. But no one doubts that FIS's popularity has been founded more on poverty and public anger at the government's corruption and economic mismanagement than on a genuine wish to turn Algeria into an Islamic state.

The military-led regime of President Liamine Zeroual, a former general, is adhering to IMF and World Bank requirements to reform the economy, but privatization of hundreds of poorly managed state enterprises has hardly begun.

"The government is doing the right things, but not enough and not fast enough," he says. "Radical change" will be required: "They have made it so that some of the population is better off, but it is not enough to keep the lid on the pot. How long can they do it?"

American policymakers have been torn between their wish to foster democracy, their fear of an Islamic state in Algeria, and their interest in letting US companies compete with Europeans to exploit Algeria's oil and gas reserves.

They have sided with the Zeroual regime, but called for "inclusion" of opponents in the political process.

The parallel track is to help boost the economy, which would need to expand by 6 percent a year to absorb the new workers. So far it is only growing at half that, but American investments alone - primarily by ARCO and by Bechtel engineering - total some $2.5 billion.

American companies now rank third or fourth on the list of Algeria's "partners," but US officials say that by the end of the century, the US - much to the chagrin of France, Algeria's old colonial ruler - will likely be the government's chief oil partner.

Improving the economy also depends on high oil prices, though fluctuations could limit the regime's maneuvering room. More Iraqi oil in the next year or higher production from Iran could lower prices.

An additional worry is that rescheduled debt is coming due in 1998, which Algeria must pay $4.5 billion to service - more than one-third of its entire GDP. The country's infrastructure has also been ravaged by 30 years of centralized socialist mismanagement.

But analysts say a bigger problem is that the regime is unwilling to open up more, though this could ease the hardship. Selling off state companies to the private sector could create a new bourgeoisie, says one, that could be "independent of the powers that be."

In the Hassi Messaoud desert, though, where camels chew their cud amid the pipes and valves of the oil oasis, there is a growing pride. Algerian engineers at the state-of-the-art refinery completed by a Japanese consortium in January show off their shiny new toy.

Engineer Mohammed Zahzouh is unshaven, with the ruddy tan of roughnecks the world over. "We're all Algerians working here," he says, a smile lighting up his face.