Turkish Prime Minister Recep Tayyip Erdoğan and Azerbaijani President Ilham Aliyev signed the deal at an İstanbul ceremony to launch a project, set to be completed in six years, to pipe 16 billion cubic metres of gas a year from Azerbaijan's Shah Deniz II field.
"Today's signing is the most important step in completing the legal framework for this project," Erdoğan said in a speech at a signing ceremony. "This project won't just deepen ties between our countries, it will create an organic tie between Azerbaijan and Europe via Turkey."
Erdoğan said that the project is key for Europe to diversify energy supply routes. The Trans Anadolu pipeline deal is expected to help reduce the European Union's reliance on Russian deliveries in particular.
Turkey has a 20 percent stake in TANAP, while Azerbaijan's state oil company SOCAR holds 80 percent. In March, a Turkish Energy Ministry official said Turkey may raise its 20 percent stake in the project.
Construction is expected to start at the end of 2013 or in early 2014, and the project's first phase is seen ready in 2018.
Representatives from the State Oil Company of Azerbaijan Republic (SOCAR), the Turkish state-owned pipeline and gas company BOTAŞ and the Turkish Petroleum Corporation (TPAO) were also present during the ceremony. Held at the Turkish Prime Ministry, the signing ceremony was also attended by Azerbaijani Industry and Energy Minister Natig Aliyev and Turkish Energy and Natural Resources Minister Taner Yıldız.
Under the project, some 10 bcm of gas is planned to be shipped to Europe, while Turkey will get the remaining 6 bcm. The project is designed to be expandable to 30 bcm and ultimately 60 bcm.
Erdoğan said the link will initially carry fuel from Shah Deniz II, then from other Azeri sources.
"Additionally, gas from the other side of the Caspian could be directed to the TANAP pipe, transiting via Azerbaijan," Erdoğan said.
Analysts have said TANAP could undermine efforts to bring online the 7.9 billion euro Nabucco pipeline project, which aims to ship 31 bcm a year of Caspian and Middle Eastern gas to Europe.
Turkish officials have said Turkey will continue to be a part of Nabucco.
Austrian energy group OMV is counting on a shorter version of the Nabucco pipeline to win the business of carrying gas to Europe from Azerbaijan, Chief Executive Gerhard Roiss told Reuters earlier this month. Turkey and Azerbaijan signed an inter-governmental agreement on Tuesday on the $7 billion Trans-Anatolian natural gas pipeline project (TANAP), planned to carry Azeri natural gas across Turkey to Europe.
Azerbaijan and Turkey signed a memorandum of understanding in December of last year to establish a consortium that will build a gas pipeline to transport gas from the Shah Deniz gas field to Europe via Turkish territory. Currently, BOTAŞ holds a 20 percent stake in TANAP while SOCAR holds the remaining 80 percent share. The initial capacity of the pipeline is expected to be 16 billion cubic meters annually. About 6 billion cubic meters of that will be allocated to Turkey, while the rest will be transported to Europe. Preferring to diversify routes for gas exports to Europe via Turkey, Azerbaijan currently exports gas to Turkey via the South Caucasus gas pipeline.