June 29 (Bloomberg) -- President Dmitry Medvedev sealed a “milestone” deal to buy natural gas from Azerbaijan, as Russia seeks to thwart European efforts to diversify energy suppliers.

OAO Gazprom, Russia’s largest energy producer, agreed to buy 500 million cubic meters of Azeri gas next year, during a visit to Baku by Medvedev today.

Azerbaijan, a former Soviet republic that imported Russian gas until 2007, is ramping up production of the fuel as it develops its export potential. Russia, the European Union, Iran and even Israel are vying to lock in future supplies as the Caspian country plans to open the second phase of the Shah Deniz field as early as 2014.

Today’s agreement is a “milestone” for future cooperation, Medvedev said after meeting his counterpart Ilham Aliyev, who said the agreement “turns the page” in relations with Russia. When Gazprom threatened to more than double gas prices in December 2006, Aliyev halted imports and used fuel oil instead to supply power plants.

Gazprom will get priority treatment when the State Oil Co. of Azerbaijan determines the buyers for the offshore field, said Alexei Miller, chief executive officer of the Russian company. Azerbaijan’s gas production will rise 11 percent to 30 billion cubic meters next year, Aliyev said.

Azerbaijan is reviewing bids for future gas volumes from companies seeking to bring Caspian energy to Europe via pipelines that bypass Russia. The biggest project, Nabucco, depends on Shah Deniz gas if it is to start deliveries in 2014.

Gazprom is bidding to buy up all excess gas from Caspian producers to maintain its monopoly on exports from former Soviet republics to Europe.

To contact the reporters on this story: Lyubov Pronina in Baku at lpronina@bloomberg.net; Lucian Kim in Moscow at lkim3@bloomberg.net

Last Updated: June 29, 2009 10:45 EDT