BP-led group to build gas pipeline linking Caspian with Europe

A BP-led consortium has signed a landmark deal to transport gas from a vast field in the Caspian Sea to the heart of Europe, loosening Russia's grip on energy markets in the region.

BP, the operator of the Shah Deniz group, signed an agreement with Azerbaijan yesterday to expand the development of Shah Deniz, one of the biggest gas and condensate fields in the world.

The decision will trigger construction of a 3,500km network of pipelines known as the "southern energy corridor" that will carry Azerbaijani gas to Turkey, Greece, Albania and Italy by a route that bypasses Russia. Combined investment in the Shah Deniz expansion and the pipeline project will amount to about $45 billion (€32.7 billion).

Signing ceremony
UK foreign secretary William Hague, who was in Baku, the Azerbaijani capital, to attend the signing ceremony, said the projects would add to "Europe's energy security and competitiveness by opening up a new source of gas for southern Europe".

There was potential to expand the southern corridor to bring in gas from the Middle East that could bring huge additional benefits to the project in future, he added.

The EU has been promoting the southern corridor as part of a campaign to reduce reliance on Russia that accounts for about a quarter of the continent's total gas imports. Disputes between Russia and Ukraine in the winters of 2007 and 2009 led to a disruption in gas deliveries to Europe, hardening determination in Brussels to establish alternative sources of supply.

For its part Russia has tried to undermine the southern corridor by building new pipelines to Europe and offering to buy all the gas Azerbaijan can produce.

Valery Nesterov, oil and gas analyst at Sberbank Investment Research, said the deal was a “significant step forward to diversify gas supplies to Europe,” but would not “fundamentally change the regional energy map”.

At least half of the gas produced at Shah Deniz would be consumed in Azerbaijan or Turkey, he said, leaving only about eight billion cubic metres a year for shipment to Europe, less than 5 per cent of the region’s total imports.

In contrast, Russia sits on the world’s biggest conventional gas reserves and can supply “virtually unlimited volumes” to Europe, he added.

To be competitive, the southern corridor will need to scale up and attract gas from additional sources, said Mikhail Krutikhin, head of RusEnergy, a Moscow-based oil and gas consultancy.

“It’s a good idea to build transport infrastructure in this part of the world. But the decision on the southern corridor is only the first step. It is not yet competition.”