Algerian media said the militants struck the fortified In Amenas facility 800 miles south of Algiers near the Libyan border at 4.30 a.m. Wednesday.
It's jointly operated by BP, Statoil of Norway and Algeria's state oil company Sonatrach.
Local reports said 20 foreigners were being held hostage. Algerian officials put the figure at "at least seven."
They reportedly included British, Norwegian and Japanese employees. Several other foreigners were reported to have been wounded by the attackers.
Officials linked the attack to the fighting in Mali, where French ground and air forces have been battling since Friday to block a southward advance by several thousand jihadists who seized control of northern Mali in April 2012. France views them as a direct threat to Europe.
It's not clear what demands, if any, the hostage-holders have made. But al-Qaida in the Islamic Maghreb, al-Qaida's North African offshoot, already holds seven French captives and has threatened to kill them if the French military operation continues.
The Mauritanian ANI news agency, which has regular contact with Islamists, said the attackers were from a group commanded by veteran Algerian jihadist Mokhtar Belmokhtar.
He's a longtime leader of AQIM's southern command in the Sahara. Kidnapping foreigners for ransom has long been one of Belmokhtar's signature tactics.
He's believed to hold the seven French captives abducted before Wednesday's attack.
France's intelligence services have dubbed him "the uncatchable." He's known as Belaouar, or "the one-eyed," because he lost an eye fighting in Afghanistan in the 1980s.
He runs major smuggling operations in the Sahara region and provides escorts for narcotics smugglers moving cocaine and other drugs from Africa's west coast to Europe.
Belmokhtar has strong links to regional Tuareg tribes through marrying women from leading families.
AQIM is well-placed to mount reprisal attacks against Europe.
North African Islamic militants have close links with France's 5 million-strong Muslim population, most of whom hail from Algeria, and have periodically conducted terrorist campaigns in France.
Over the years, the militants built up a cell networks throughout Western Europe. Initially these were support groups for fighters in North Africa, but many of these have since become operational.
AQIM evolved from an Algerian network known as the Armed Islamic Group, known by the French acronym GIA.
It was one of the bloodiest Islamist organizations involved in a decade-long civil war with Algeria's military-backed government that started in 1992.
The GIA was behind a plot to crash an airliner into the Eiffel Tower in Paris on Christmas Eve 1994. French commandos thwarted the plot when
they stormed a hijacked Air France Airbus as it refueled at Marseille.
In June 2012, Pakistani security authorities said they had captured a veteran al-Qaida operative named Naamen Meziche, a French citizen of Algerian origin, in the turbulent Baluchistan province that borders Iran.
Intelligence sources say Meziche has longtime links with jihadist cells across Western Europe, and had spent time in Germany a decade ago.
There he was close to al-Qaida's Hamburg cell that played a central role in the suicide attacks on the United States Sept. 11, 2001, the sources observed.
Officials in Islamabad, Pakistan's capital, say that in 2010 Meziche got together with Younis al-Mauritani, an al-Qaida operations chief who was arrested in Quetta by Pakistani authorities in September 2011.
Al-Mauritani was responsible for al-Qaida's international operations.
He allegedly recruited Meziche and others to carry out a major attack in a European city similar to the three-day carnage by 10 terrorists in Mumbai, India's commercial capital, in November 2008. They killed 171 people.
The German newsmagazine Der Spiegel has reported that Meziche, and an Iranian named Shahab Dashti, were instructed by al-Mauritani to travel to Iran where "they would be told where in Europe they were to be deployed to begin building structures" for the planned al-Qaida attack.
It's not clear why the plan was never carried out. But Meziche was reported to be on his way to Iran when he was captured in Baluchistan.
Dashti was killed in a U.S. drone attack in northern Pakistan in October 2010 after European security authorities got wind of the plot.