Moscow (Platts)--27Nov2012/609 am EST/1109 GMT

BP is in "discussions" with the UK and the Russian governments and Russia's gas giant Gazprom over joining the project to build an extension of the Nord Stream gas pipeline to the UK, a spokesman for BP's Russian office said Tuesday.

BP has contacted Nord Stream to "understand better the technical aspects of the project," he added.

"We are holding consultations although nothing concrete has been decided yet, the discussions are at a very early stage," the spokesman said.

BP believes that a Nord Stream extension to the UK could significantly enhance energy security for the UK by providing an alternative source of supply of natural gas, he said.

The company currently does not have any estimate of the potential investment it may make into such a project, the spokesman said.

In early October, at the official launch of the second Nord Stream line, Gazprom CEO Alexei Miller said one of the future lines of the pipeline may run to the UK.

"One of the lines may be used for supplies of Russian gas to Great Britain. We see that our British partners are interested in the project," the Gazprom statement quoted Miller as saying.

The following day, Chris Barton, head of energy supply security at the UK's Department of Energy and Climate Change, said Russia is "vital" to the UK's energy security. "In the UK, gas production is falling quite fast, and our import dependence in rising," Barton told the Gastech conference in London.

"We welcome new sources of gas, including potentially from Russia," Barton said.

Analysts, however, are doubtful about the viability of constructing a Nord Stream offshoot to the UK.

"We are cautious on the project, given the high capital expenditures associated with it and overall weak demand for gas in Europe in general and the UK in particular," Russia's VTB Capital said in its daily note on Tuesday.

It estimated the total cost of the UK extension at $16 billion-20 billion.

Moreover, while Gazprom's supply to Europe is predominantly based on long-term contracts, the UK market is mainly based on spot prices, it said.

"This means that Gazprom's sales to the UK -- as opposed to oil-linked gas contracts -- do not see the substantial premiums that they do to other markets," VTB Capital said.

In 2011, Gazprom sold around 13 billion cubic meters of gas to UK customers, and the figure is unlikely to increase in the future, according to the analysts.

In July, AAR, BP's Russian partner in the TNK-BP joint venture, reportedly blocked BP's attempt to join Nord Stream, Russian daily Kommersant said at the time.

AAR cited the exclusivity clause, under which BP can only operate in Russia through the TNK-BP joint venture, the report said.

AAR CEO Stan Polovets suggested then that BP "acts in accordance with its obligations within the framework of the shareholders' agreement," implying that BP should suggest that TNK-BP's board of directors consider taking part in the project.

BP did not agree with the proposal and then canceled plans to hold talks on Nord Stream.

Since then, however, both BP and AAR have reached agreements to sell their shares in TNK-BP to Russia's state-owned Rosneft.

In mid-November, BP and AAR reached an agreement to resolve all mutual outstanding disputes.

BP said at the time that the deal also included a waiver, effective immediately, of a provision in the original TNK-BP shareholder agreement which restricted each of the partners from pursuing new opportunities inside Russia.

As a result, both BP and AAR are now free to pursue new partnerships in Russia, as well as in Ukraine, effective immediately, BP said at the time.

--Dina Khrennikova, dina_khrennikova@platts.com --Edited by Elston Soares, elston_soares@platts.com