Nicholas Watson in Prague -

2013 promises to be a key year for the second phase of Azerbaijan's giant Shah Deniz gasfield, with final decisions to be made on investment for the multi-billion-dollar project expansion as well as the pipeline that will carry the gas the final leg into the EU markets.

BP, which is the operator of the consortium developing the field, and its partners (Azeri state oil and gas firm Socar, Statoil, Total and ENI) are targeting 2018 for the first gas from the second phase of Azerbaijan's Shah Deniz gas project, whose 16bn cubic metres a year (cm/y) of gas is crucial to the EU's plans to reduce the continent's reliance on Russia for its energy supplies. The first phase of the gasfield, estimated to hold total reserves of 1.2 trillion cm of gas and 240 million tonnes of condensate, has been pumping gas since 2006 at a rate of 8bn cm/y.

Al Cook, BP Azerbaijan's vice-president for Shah Deniz, told a news conference in the Azeri capital Baku on January 23 that a final investment decision (FID) on the expansion is due later this year, provided the consortium can put in place all the necessary agreements. Costs of the second phase have been put in the region of $28bn-30bn. "We will target 2018 for first gas [from Shah Deniz 2]... and that means BP, Socar and our partners have to prepare not just Shah Deniz, we have to prepare the wells, offshore facilities, we have to prepare the South Caucasus Pipeline Expansion, the Trans-Anatolian pipeline system and the European pipeline system - all this has to be ready in 2013 for a final investment decision," Cook said.

So far the signs are encouraging. Cook noted that the December 18 meeting between BP's chief executive Bob Dudley and Azerbaijani President Ilham Aliyev resulted in a series of agreements being signed that will underpin the economics of Shah Deniz 2. This was followed on January 27 by the news that the Azeri government had agreed to extend the production-sharing agreement (PSA) for the Shah Deniz gas project from 2031 to 2036, which Elshad Nasirov, vice-president of Socar, called a "green light" for proceeding with the second phase of the field and accompanying construction of a pipeline to transport the gas exports.

Analysts say the extension of the PSA by five years gives BP and its partners ample time to recoup their multi-billion-dollar investments in the field, as well as signalling a major improvement in relations between BP and the Azerbaijan government following criticism last October by Aliyev over a steady decline in oil production from the BP-operated Azeri-Chirag-Guneshli (ACG) project. An extension to the PSA covering ACG - which expires in 2024 - is still up in the air.

In a year that Cook describes as one with "many targets and many milestones," he picked out the selection between two competing pipelines that will carry the gas from the second phase of Shah Deniz from the border of Turkey into the EU as one of the most crucial. "One of the most important milestones is the selection between the Trans Adriatic Pipeline and the Nabucco West pipeline to be made in June for our gas sales to Europe," Cook said.

On TAP

After years of wrangling, the Shah Deniz consortium decided in 2012 to send the gas to the Georgian-Turkish border via an existing pipeline, from where it will hook up to the planned Trans Anatolia Natural Gas Pipeline (TANAP), which will transport the gas to the Turkish-European border. Construction of TANAP, estimated to cost $7bn, is scheduled to start in 2014 and will be completed by 2018.

BP's Cook believes that TANAP is one of the most strategic pipelines in the world, carrying as it will initially 16bn cm/y of Shah Deniz gas to Turkey and beyond, but eventually as much 60bn cm/y of Azeri and other Central Asian gas. This would give Europe huge leverage in its negotiations with Russia's Gazprom, which dominates the export of gas to Europe, and is looking to extend that influence with the construction of the giant South Stream pipeline, which from 2016 will transport up to 63bn cm/y of Russian gas through Bulgaria, Serbia, Hungary, Slovenia, Austria and Italy, with offshoots to Greece and Croatia.

The key decision for Azerbaijan and the Shah Deniz consortium will be to pick which pipeline will carry the 10bn cm/y earmarked for Europe (6bn cm/y will be kept for Turkey's domestic use) from the Turkish border to the EU markets.

Ahead of this decision, the Shah Deniz partners have been finalising agreements with the rival pipeline builders that would allow them to take a 50% stake in each should it be picked.

On January 22, the shareholders building the Trans Adriatic Pipeline (TAP), which will run from the Turkey-Greece border via Greece and Albania and onward across the Adriatic Sea to southern Italy, agreed an option for some key Shah Deniz consortium members including BP, Socar and Total, to take up to a combined 50% of the project should it be picked. TAP's current shareholder structure includes Axpo of Switzerland (42.5%), Norway's Statoil (42.5%), and Germany's E.ON Ruhrgas (15%).

This followed a similar agreement on January 10 with the partners building the rival Nabucco West to take up to a 50% stake in that pipeline (BP said January 31 it would take a 14% stake), which is a vastly scaled-back EU project that was initially intended to take gas all the way from the Shah Deniz field to Austria. The shorter version of 1,300 km will pick up from TANAP at the Turkish-Bulgarian border and run to the gas hub at Baumgarten near Vienna, via Romania and Hungary. At present, the six equal shareholders in Nabucco West are Austria's OMV, Hungary's Mol, Romania's Transgaz, Bulgarian Energy Holding, Turkey's Botas and Germany's RWE.

With BP in advanced talks to take a stake in the Azeri-Turkish TANAP project, that would give the British firm equity stakes in all four of the pipeline projects associated with Shah Deniz 2 - the South Caucasus Pipeline Expansion, TANAP, Nabucco West and TAP.

On the face of it, TAP looks a better bet, say analysts, since it offers a shorter route with fewer transit countries and fewer partners to complicate matters, though Cook told delegates at the Vienna European gas Conference on January 31 that, "there are a number of factors other than length which will dictate which pipeline."

One major factor will be political support. "We genuinely do not know which pipeline will have the more compelling offer... what we need to see on TAP is a similar level of political support through an inter-governmental agreement that we have seen on the Nabucco pipeline."

Tomasz Daborowski, an energy expert at the Centre for Eastern Studies, a Warsaw think-tank, says he does not share the widespread opinion that Nabucco is dead, given the project's still solid political backing, desire by Azerbaijan to diversify its export routes as much as possible, plus new gas discoveries that could potentially supply the pipeline; for example, last year OMV, one of the Nabucco shareholders, and Exxon Mobil discovered huge gas reserves in offshore fields in the Black Sea.

As such, some experts believe that both pipelines could end up getting built - a view given some weight by comments from BP and Socar over the past few weeks.

Socar's deputy vice-president, Vitaly Beylarbayov, was quoted by newswires as saying at the end of January that Nabucco West and TAP "are definitely not mutually exclusive". While Cook told that conference BP had received buyer interest totalling 20bn cm/y for each of the two proposed routes and, asked whether both pipelines will be built, replied: "We would not rule it out in the long term."

Analysts at IHS Energy says these comments suggest Socar and BP are signalling that both Nabucco West and TAP will be built, with the long-awaited announcement in June likely to reveal which will come first.

Andrew Neff, senior energy analyst at IHS Energy, says the fact that TANAP is open to having two exit routes, to Bulgaria and to Greece, seems to suggest that both Nabucco West and TAP could be built in the end. "There is a growing expectation now that Nabucco West versus TAP is not an 'either-or' proposition so much as a 'which comes first?' decision - with the June decision on which route will be built first and will carry Shah Deniz 2 gas, while the 'loser' option could yet be built one to two years behind, carrying additional Azeri gas supplies from Umid, Absheron, and future output from Shafag-Asiman, deepwater ACG," says Neff.

But the June decision is still crucial, since obviously it would better to be chosen as the first option. "The second option/loser has a bit more problem to overcome with regard to getting to a [final investment decision] in the context of what happens with South Stream's progress on construction," he says.