The pipeline, backed by the United States, is a key project aimed at reducing Western dependence on Middle East oil.

It also bypasses the shipping bottlenecks at the Turkish straits where in winter crude shipments can be held up for weeks.

Nursultan Nazarbayev, the Kazakh president, said "we've now secured a third alternative way of selling our oil" after signing an agreement alongside visiting Azeri counterpart Ilham Aliyev.

But shipments of Kazakh oil are likely to stay limited until its $29 billion Kashagan oilfield starts pumping oil in 2008, an industry source said.

BP, the main partner in the consortium running the pipeline, expects its capacity to reach a million barrels per day (bpd) by 2008, mainly on Azeri shipments. It is expected to account for 8% of the global crude trade.

Kazakhstan is a big Caspian oil producer but faces the challenge of securing reliable transportation routes to key markets.

Alternatives
  
Its Soviet past and landlocked geography have made it reliant on Russia for export routes and has prompted the government to look for alternatives.

Nazarbayev: We've secured a
third way of selling our oil

Kazakhstan exports much of its oil by tanker via Russia's export outlet of Novorossiisk on the Black Sea.

Last year Kazakhstan opened a pipeline to China, with initial shipment volumes of about 10 million tonnes.

Kazakhstan now plans to send its oil to Baku in Azerbaijan by tankers across the Caspian from the Kashagan oilfield, developed by a group of foreign majors led by Italy's ENI.

A source in Kazakhstan's oil industry said Kazakhstan's shipments will remain limited before Kashagan comes on stream.

"It's possible that Kazakhstan would ship three million tonnes via Azerbaijan before the end of the year. It's technically possible," the source said.

Kazakhstan plans to produce 62-63 million tonnes of oil this year (1.3 million barrels per day) and raise output to 64-65 million tonnes in 2007.