Russian gas giant OAO Gazprom (GAZP.RS) clinched a deal Monday to buy natural gas from ex-Soviet Azerbaijan, as Moscow seeks to extend its grip on potential European energy supplies in the resource-rich Caspian Sea.
The agreement was signed by Gazprom chief executive Alexei Miller and Azerbaijani national energy company chief Rovnag Abdullayev in the presence of Russian President Dmitry Medvedev and his Azerbaijani counterpart Ilham Aliyev.
"I think that we will be able to take this work further, in view of greater opportunities and greater volumes, which will be increased," Medvedev told journalists in Baku.
Miller said Gazprom's purchases would start at 500 million cubic meters of gas annually as of Jan. 1, 2010, with the agreement allowing for supply levels to increase later.
"The price will be commercially attractive for Azerbaijan because we are neighboring countries so there are no transit states between us," Miller said, without providing further details.
"We can therefore begin to buy the gas quickly. There is already a gas pipeline between us," he said.
The deal could cast doubts on the viability of the European Union's ambitious Nabucco pipeline project, aimed at bypassing Russia to deliver Caspian Sea gas to western Europe.
Rich in oil and gas and strategically located between Russia and Iran, Azerbaijan has been courted by both Russia and the West since gaining its independence with the 1991 collapse of the Soviet Union.
Backed by Western governments, companies such as BP PLC (BP.LN) have pumped hundreds of millions of dollars into the country's energy sector, building a corridor of oil and gas pipelines from Azerbaijan through Georgia and Turkey to Europe.
Azerbaijan is seen as a crucial potential provider for Nabucco, a 3,300-kilometer (2,050-mile) pipeline between Turkey and Austria scheduled to be completed by 2013.
The pipeline is aimed at reducing European reliance on Russian gas supplied through Ukraine - a route that has seen repeated interruptions.
Anxious to secure energy sources for its own export pipelines, Russia this year stepped up efforts to buy gas from Azerbaijan.
In March the two countries signed a preliminary deal on natural gas sales from 2010 and a month later Medvedev hosted Aliyev in Moscow to push the deal forward.
Russia is also backing a rival pipeline to Nabucco, South Stream, being built by Gazprom and Italy's Eni SpA (E). That project entails building a gas pipeline under the Black Sea from Russia to Bulgaria and then branches to Austria and Italy.
Azerbaijan last year produced 22.8 billion cubic meters of natural gas, according to government figures, and the country expects to nearly double gas production to 40 billion cubic meters by 2015-2020.