It is understood a 36-year-old married man, from Northern Ireland, was among British, Japanese, Norwegian and French nationals who were taken captive this morning.
They are being kept in a compound by their abductors and it is believed there have been injuries among the oil-workers.
The man was working on the In Amenas gas field in east central Algeria
The Algerian interior ministry outlined the scale of the attack.
In a statement a spokesman said: "A terrorist group, heavily armed and using three vehicles, launched an attack at 5:00am against a Sonatrach base in Tigantourine, near In Amenas, about 60 miles from the Algerian and Libyan border."
The Foreign and Commonwealth Office (FCO) has confirmed that British nationals were involved in the hostage taking.
In a statement the FCO said: “There is in an ongoing terrorist incident near the town of Ain Amenas at an oil installation near the Algerian border with Libya.
“We can confirm that British nationals are caught up in this incident.
“The FCO has political and consular crisis teams working on this incident. The British Embassy in Algiers is liaising with the local authorities.”
BP confirmed in a statement there had been a "security incident this morning" at the
It said: "BP has activated its emergency response system and is setting up a helpline for relatives. We have no more confirmed details at this time. We will provide further updates,"
Ireland's Tanaiste (deputy prime minister) Eamon Gilmore has called for the Irish man's immediate release.
He said: "The Government stands ready to use all the resources available to us to ensure that our citizen is released as soon as possible.
"I would ask that the family be allowed privacy at this difficult time."
The Department of Foreign Affairs said it was providing consular assistance to the family and was in close contact with its international partners and a wide range of other contacts in order to establish the facts of the situation.
A spokesman added: "At this stage, the identity and motives of the kidnappers is unknown."