BP commits $2.9bn to Shah Deniz Phase 3, to expand solar and gas projects in Azerbaijan

Why Is BP Investing in a New Phase of Shah Deniz and Renewables in Azerbaijan?

BP plc (LSE: BP) has announced a sweeping expansion of its energy footprint in Azerbaijan with the approval of the $2.9 billion Shah Deniz Compression project, a 240MW solar initiative in Jabrayil, and new exploration access agreements across the Caspian Sea. The investments, formalized during Baku Energy Week 2025, underscore the British oil and gas major’s dual mandate—scale upstream production while embedding low-carbon infrastructure across core geographies.

The moves strengthen BP’s long-standing strategic partnership with Azerbaijan and state oil company SOCAR, with whom it has collaborated for over three decades. They also align with broader industry trends, where oil majors are rebalancing portfolios by securing low-risk gas assets and investing in decarbonization technologies across emerging markets.

As global energy security and transition priorities converge, the Shah Deniz expansion and Sangachal electrification scheme position Azerbaijan—and BP—as critical enablers in Europe’s evolving gas supply chain and green energy blueprint.

What Will the Shah Deniz Compression Project Deliver by 2030?

The Shah Deniz Compression project, now entering its third development phase, is set to unlock additional 50 billion cubic metres of gas and 25 million barrels of condensate from the massive Shah Deniz gas field in the Caspian Sea. BP operates Shah Deniz with a 29.999% stake, alongside partners including LUKOIL (19.99%), TPAO (19.00%), SGC (16.02%), NICO (10.00%), and MVM (5.00%).

Construction is expected to begin in late 2025, with first gas delivery from the Shah Deniz A platform in 2029, and from Shah Deniz B by 2030. The project includes building an unmanned compression platform, enabling recovery from lower-pressure zones and significantly extending the field’s life.

According to BP’s 2025 capital markets update, Shah Deniz Compression is one of the 8–10 major projects scheduled for start-up between 2028 and 2030, supporting the company’s ambition to grow global upstream production to 2.3–2.5 million barrels of oil equivalent per day (mmboed) by 2030. Management has also signaled that production capacity could increase further into the 2030s.

How Does the Sangachal Terminal Electrification Fit into BP’s Emissions Plan?

In tandem with expanding gas output, BP is pushing forward with its Sangachal Terminal Electrification (STEL) project, designed to reduce operational emissions at one of the region’s most critical export hubs. Currently powered by onsite gas turbines, the Sangachal terminal near Baku will be converted to run on renewable electricity sourced from the Shafag Solar project.

This electrification will free up natural gas currently used for internal power, redirecting it toward commercial export via the Southern Gas Corridor (SGC), which serves key European markets. The STEL project, developed by BP in partnership with SOCAR, TPAO, LUKOIL, and others, will be implemented in two phases, targeting completion in 2027 and 2028.

From a sustainability perspective, the project directly contributes to BP’s net-zero targets, reducing Scope 1 emissions from oil and gas operations while offering immediate gas monetization benefits.

What Is the Shafag Solar Project and Who’s Involved?

The 240MW Shafag Solar plant, located in Jabrayil, is being developed as a joint venture between BP (50.01%), SOCAR Green (39.99%), and the Azerbaijan Development Fund (10%). The plant will feed power into AzerEnerji’s grid, which will then supply the Sangachal terminal, completing the circular renewable integration.

Construction of Shafag Solar is slated to begin by end-2025 and reach commissioning by mid-2027. The solar asset forms part of BP’s wider renewables push across its global footprint, including wind and solar in the U.S., Europe, and India. It also supports Azerbaijan’s own decarbonization agenda, where renewables are expected to constitute 30% of national power capacity by 2030.

What Are the New Exploration and Development Agreements?

In a bid to reload its reserves and exploration pipeline, BP signed new agreements with SOCAR to access two blocks in the Caspian Sea: the Karabagh oil field and the Ashrafi-Dan Ulduzu-Aypara (ADUA) block. BP will become operator of both blocks with a 35% working interest, while SOCAR retains the remaining 65%.

Additionally, BP and SOCAR have brought Türkiye’s TPAO into the Shafag-Asiman production sharing agreement with a 30% stake, allowing joint development of a block where a 2021 well had already discovered gas condensate. The entry of TPAO is expected to accelerate evaluation, appraisal, and commercialization timelines.

These agreements align with BP’s target to raise its reserves replacement ratio to 100% by end-2027, a critical metric for sustaining future cash flows and shareholder returns.

How Did BP Stock React to These Announcements?

Following the June 3, 2025 announcement, BP’s stock (LSE: BP) closed up 0.8% in London trading on June 4, slightly outperforming the FTSE 100. The moderate rise reflects measured investor optimism around BP’s upstream growth profile and integrated low-carbon investments.

Analysts view the Shah Deniz Compression project as low-risk and strategically essential, particularly in the context of Europe’s effort to secure long-term gas contracts post-Russia. However, concerns persist over execution risks and regional geopolitics, prompting many brokerages to maintain “Hold” or “Market Perform” ratings.

ESG-focused funds have responded positively to the renewables–hydrocarbon synergy on display, with the Shafag-Sangachal linkage seen as a replicable template in other BP geographies.

Institutional Flow and Investor Sentiment

Recent institutional positioning shows net inflows into BP from European-based index and ESG-aligned funds, according to Morningstar and LSEG data. Conversely, U.S. fund flows have remained flat, pending updates on BP’s dividend stability and capital allocation efficiency.

Foreign Institutional Investors (FIIs), particularly those with holdings via iShares Global Energy ETF and Vanguard FTSE Developed Markets ETF, continue to retain exposure. Domestic Institutional Investors (DIIs) in the U.K. remain cautiously optimistic, with long-horizon players preferring BP’s steady cash flow profile and visible production assets.

Retail interest has remained low, with options volume data indicating minimal short-term speculative positioning around the Azerbaijan story.

What’s Next for BP’s Upstream and Energy Transition Strategy?

BP’s deepening of its Azerbaijan engagement reflects a broader shift toward geographically balanced, gas-weighted upstream growth integrated with emissions reduction initiatives. CEO Bernard Looney has emphasized that all projects remain within BP’s disciplined capex framework, expected to stay around $16 billion annually through 2030.

With gas demand projected to remain robust across Asia and Europe, and renewable integration increasingly becoming a license to operate, the Azerbaijan model may be emulated in other emerging markets where BP holds infrastructure or exploration rights.

Analysts anticipate further project announcements in North Africa and Southeast Asia, with a similar dual focus on resilient hydrocarbons and green energy transition infrastructure.

If delivered successfully, the Shah Deniz–Sangachal–Shafag trilogy could bolster BP’s reputation as a legacy hydrocarbon operator capable of evolving into a climate-conscious energy systems player—one that can manage long-cycle investments while meeting near-term decarbonization milestones.