A oil worker works on a oil pump
An oil worker in Baku, Azerbaijan

A BP-led consortium has signed a $28bn deal to develop a massive Azeri natural gasfield, paving the way for Caspian gas to be delivered directly to European markets for the first time.

The group said they had taken a final investment decision on the second phase of Shah Deniz, a huge gas deposit in the Azeri sector of the Caspian Sea. Pipelines will ship the gas 3,500km across Turkey, Greece and Albania into Italy.

However, the consortium also made the surprise announcement that Statoil, the Norwegian oil major, was selling 10 per cent of its stake in the project to partners BP and Socar, the Azeri national oil company, for $1.45bn. The divestment showed the project has “lower returns than others in Statoil’s portfolio”, analysts at RBC Capital Markets said.

The decision to press ahead with Shah Deniz 2 marks the fulfilment of a long-held dream of Brussels policy makers, who have pushed for years for a southern energy corridor to bring gas into Europe from the Caspian and so reduce the continent’s dependence on Russian gas.

William Hague, UK foreign secretary, who was in the Azeri capital Baku to witness the signing, said it “adds to Europe’s energy security and competitiveness by opening up a new source of gas for southern Europe”.

But some analysts have questioned how much difference the project will make. Shah Deniz 2 will provide Europe with 10bn cubic metres a year of gas – a small fraction of total European demand. Privately, managers of Gazprom, the Russian state-owned group that provides about a quarter of Europe’s gas, have said the Azeri exports were “just about enough for a barbecue”.

The project also comes with a huge price tag. The cost of developing Shah Deniz 2 and expanding export infrastructure in Azerbaijan and Georgia will come to $28bn while the pipelines bringing the gas to Europe – one through Turkey, known as Tanap, and the other into Italy, called TAP – are expected to cost $15-$17bn.

The plan is to ship some 16bn cubic metres of gas a year (bcm/y) from Shah Deniz 2, with some of that going into the Turkish market and the rest into Europe. First gas is to start flowing into Turkey in late 2018, and into Europe about a year later.

Bob Dudley, BP’s chief executive, said gas production from Shah Deniz would immediately be expanded by 1.4 bcm/y. The partners also agreed terms for extending the production-sharing agreement for the field to 2048.

Under another deal signed on Thursday, Norway’s Statoil reduced its stake in the Shah Deniz consortium by 10 per cent from 25.5 per cent, selling 6.7 per cent to Socar and 3.3 per cent to BP.

Statoil’s Knut Rostad said the company thought 15.5 per cent was the “right exposure”. The decision to reduce the stake had come as part of a process of “prioritising the portfolio”, which had begun in 2011, he said.

Get alerts on BP PLC when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article