Derek Brower in London -

The discovery of a "potentially significant" new reserve of natural gas in the Caspian Sea will strengthen Azerbaijan's claims to become a major export of natural gas to Europe, say analysts. It could also boost the chances of the EU-backed Nabucco pipeline being built.

UK energy major BP found the gas, which is condensate or "wet gas," while drilling wells in its Shah Deniz oil- and gasfield, which lies in the Caspian Sea, some 70 kilometres southeast of Baku. The company would not confirm the size of the discovery, saying that more appraisal work of the find and a development programme to exploit it must be done first.

However, BP insiders indicated to bne that it could add a "fourth" phase to the development of Shah Deniz. The gasfield, Azerbaijan's largest, is already on stream, having begun production last December. Small volumes of the gas are already supplying the domestic market, as well as Georgia and Turkey. BP says plateau production from stage-1 of 8.6bn cubic metres a year (cm/y) will be reached "over the next few years."

Shareholders in Shah Deniz are: BP (the operator with 25.5%); StatoilHydro (25.5%); State Oil Company of Azerbaijan Republic, or Socar, (10%); Lukoil (10%); Nico (10%); Total (10%); and TPAO (9%).

Two additional phases have already been planned at Shah Deniz, which together should increase production to 20bn-24bn cm/y. That will help fill the eventual capacity of the South Caucasus Pipeline, which stretches from Shah Deniz to the Turkish border. BP, which operates the line, brought it on stream at the end of last year. Its initial capacity is 8bn cm/y, designed to handle stage-1 production from Shah Deniz. But that will grow to 16bn cm/y, allowing it to transit the incremental production from the second and third phases of the field.

The latest discovery could change all that.

Another phase

Local reports of the size of the discovery have said it's bigger than BP will yet admit; the company does say, however, the gas found could support a fourth phase "similar or larger than stage-1."

The new reservoir lies several hundred metres below the existing producing one. And the gas is also under high pressure. Ian Thom, an analyst at the Wood Mackenzie energy consultancy, says that means production from the deeper reservoir will remain some way off and require new equipment at the top of the well.

Even so, the prospect of expanding production of gas from Shah Deniz to more than 32bn cm/y - an attainable target if BP's conservative estimates are correct - will excite Azerbaijan. The country has been positioning itself as an upstream partner eager to supply consumers in Europe.

It will also excite policymakers in the EU, whose worries about the reliability of Russian gas exports have sent them to the Caspian and Central Asia in search of alternative supplies and "energy diversification."

The news from Shah Deniz is most encouraging for Austrian energy firm OMV and its partners in the Nabucco pipeline. That project, which envisages importing up to 31bn cm/y for gas through Turkey into Central Europe, has faced a number of hurdles. Construction of the pipeline has not yet begun, as doubts about the partners' ability to source gas to fill it have undermined its progress - and its ability to raise the €6bn that analysts say it will cost. Nabucco's progress could now depend on BP firming up the new discovery in Azerbaijan and agreeing to expand the South Caucasus Pipeline to handle the extra output.

Despite scepticism about its Nabucco plans, OMV recently released more details about how it will divide the pipeline's capacity - if it ever comes on stream. EU rules demand that third parties not involved in the construction or operation of energy infrastructure must be given access on equal terms to its capacity. In response, Gottfried Steiner, head of OMV's international gas division, says that 50% of Nabucco's capacity will be auctioned among shareholders, with the other half set aside for auction to other companies. He also said that 10% of the capacity would be guaranteed on short-term contracts.

OMV also says it plans to turn its Baumgarten gas hub into a "one-stop shop" for traders and a "stock market for natural gas". But analysts remain sceptical, saying that even if Nabucco eventually comes on stream, the likelihood is that Russia's Gazprom - which has agreed to take a 50% stake in Baumgarten - will be the hub's main supplier.

"Gas hubs are like hotels," says Jonathan Stern of Oxford's Institute for Energy Studies. "You need lots of people staying in them to make them work. If you are going to develop a gas trading centre in Europe, why would you build it in Baumgarten, and not in any number of existing hubs?"

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