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The Nabucco pipeline, conceived to bring natural gas to Europe via Turkey from around the Caspian Sea, may clinch a supply contract with Turkmenistan in April, a partner in the negotiations said.

It would be the first gas contract for the Nabucco project and the first output from east of the Caspian to cross the inland sea. That’s politically contentious because Russia, Kazakhstan, Turkmenistan, Iran and Azerbaijan have yet to agree on water boundaries for the oil- and gas-rich Caspian.

Russia now provides about a quarter of Europe’s gas. Nabucco may secure a contract to purchase 10 billion cubic meters of gas a year from Turkmenistan, the only Central Asian country with enough reserves to supply Europe for years, according to the Nabucco partner, who declined to be identified because the negotiations are private.

“It’s a potentially significant step,” Julian Lee, an analyst at the Centre for Global Energy Studies, said in a phone interview today. “I think there are some very big caveats,” he said, citing the need to ship Turkmen gas to the pipeline in Azerbaijan before it moves on to Europe.

European gas production is falling and the continent is increasingly reliant on imports. Output from the U.K. North Sea declined 14 percent last year, according to figures yesterday from the Department of Energy and Climate Change.

The Turkmen gas is likely to come from a various offshore gas deposits in the Caspian Sea. Europe is looking to bring in new supplies of gas via a so-called southern corridor that isn’t controlled by Russia.

Earmarked for Europe

Turkmen President Gurbanguly Berdymukhammedov said in April 2008 that the country would produce 10 billion cubic meters of gas a year for the EU starting in 2009, according to European Commission spokeswoman Christiane Hohmann.

Berdymukhammedov made the offer at an April 9 meeting with EU External Relations Commissioner Benita Ferrero-Waldner in the Turkmen capital of Ashgabat. Bayramgeldy Nedirov, Turkmenistan’s acting energy minister, couldn’t immediately be reached by Bloomberg.

The 7.9 billion-euro ($11-billion) Nabucco Project is led by Austria’s OMV AG and is designed to transport as much as 31 billion cubic meters of gas a year though Turkey. Construction is due to begin in 2011. Partners are Budapest-based Mol Nyrt, Germany’s RWE AG, Bulgaria’s Bulgargaz EAD, Romania’s Transgaz SA and Ankara-based Botas.

Shah-Deniz

Gas from Turkmen-owned offshore fields in the west of the country may be connected to existing pipelines in Azerbaijan’s easterly waters, according to the Nabucco partner. The second phase of the Shah Deniz development from BP Plc, which isn’t a Nabucco parter, must be active before exports from Turkmenistan can start, the person said. Gas from the Shah-Deniz field, located off the shore of Azerbaijan, has been earmarked for export to Europe through Nabucco.

While the subsea transport pipes are yet to be built, Azeri and Turkmen government officials have indicated there won’t be obstacles to constructing a link, the person said.

There may be enough gas off Turkmenistan’s shore to fill the 10-billion-cubic-meter link into BP’s South Caucasus Pipeline that runs through Azerbaijan and Georgia and into Turkey. Turkmenistan will be responsible for providing all the gas to meet the contract, according to the person.

Building a 60-kilometer (37-mile) tie into Azerbaijan’s subsea pipelines will take about 18 months. The first gas from Turkmenistan would be delivered in time for the start of the Nabucco link around 2015.

Insufficient Capacity

Turkmenistan is prepared to sell gas to anyone at its border, the Centre for Global Energy Studies’s Lee said. Buyers would likely seek to tie offshore fields back to BP’s Azeri- Chirag-Gunashli pipelines, he said.

“Is there enough capacity to carry an additional 10 billion cubic meter of gas? Probably not,” he said.

The South Caucasus Pipeline would need to be expanded to carry gas from Turkmenistan, Lee said. Declining gas demand in Europe since the recession makes it more likely that an expansion will be postponed, he said.

London-based Gaffney Cline & Associates Ltd. produced a “best estimate” of reserves at the South Yolotan-Osman field in Turkmenistan in 2008 of 6 trillion cubic meters, ranking it among the world’s largest in the first independent audit of Turkmenistan’s reserves.

In June 2009, BP Plc tripled the country’s gas reserves in its annual Statistical Review of World Energy, taking it to fourth place in the world after Russia, Iran and Qatar. Land- locked Turkmenistan has 7.94 trillion cubic meters of proven gas reserves, according to the data.

“I would certainly welcome small-scale developments if at all possible,” U.K. Energy Minister Phil Hunt said Feb. 23 in an interview in London about the possibility of exporting gas from smaller Turkmen fields to Europe.

“The challenges of the development of the southern corridor can be overcome if governments and international companies work together,” he said. Hunt is visiting Azerbaijan, Kazakhstan and Turkmenistan next week.

By Ben  Farey – Bloomberg