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By Dmitry Zhdannikov
DAVOS, Switzerland, Jan 25 (Reuters) - Azerbaijan has extended the production sharing agreement (PSA) behind the Shah Deniz gas project for an extra five years, a top official said on Friday, in a signal of improving relations with the operator, Britain's BP.
Azerbaijan's biggest gas field and one of the largest in the world began producing gas in 2006 and has a production capacity of 8 billion cubic metres a year from its first phase. Its second phase is expected to start production in 2018 and reach another 16 bcm in annual output.
"We have agreed to extend the Shah Deniz PSA from 2031 to 2036, and the Shah Deniz partners will now proceed with phase 2", Elshad Nassirov, vice president of the Azeri state oil company SOCAR, told Reuters in Davos.
Relations between Azerbaijan and BP soured last year over falling output at the BP-operated Azeri, Chirag and Guneshli (ACG) oilfields - output that is crucial to Azerbaijan's economy.
BP Chief Executive Bob Dudley visited Azerbaijan in December to try to repair relations after Azeri President Ilham Aliyev accused the company of making "false promises".
Nassirov said talks about an extension of the ACG production sharing agreement beyond 2024 were continuing.
The partners in the Shah Deniz gas project aim to ship Azeri gas by a new pipeline to Europe, reducing its dependence on Russia for energy supplies. BP said this week it was targeting 2018 as the phase 2 start date.
"There is (a) green light for the building of the pipeline for phase 2," Nassirov added in a reference to the pipeline stage as far as Turkey.
Beyond Turkey, Shah Deniz partners BP, Statoil, Total and SOCAR are set to choose by mid-2013 whether to transport via the Nabucco-West pipeline into Austria or the rival Trans-Adriatic pipeline (TAP) into Italy.
TAP's partners are EGL AG of Switzerland with 42.5 percent, Statoil with the same sized stake, and Germany's E.ON Ruhrgas EONGn.DE with 15 percent.
Nabucco's six equal partners are Austria's OMV AG, Germany's RWE AG, Hungary's MOL through its gas pipeline operator FGSZ, Turkey's Botas, BEH of Bulgaria and Romania's Transgaz.
The Shah Deniz group has options to take a 50 percent interest in each of the two projects.