The deal has been negotiated with Sonatrach, the Algerian oil and gas company, and the gas produced will be exported to Spain and Portugal through a pipeline nearing completion across the Straits of Gibraltar.
Although the BP-Sonatrach gas is not intended for the Northern European market and will not arrive in Spain until 2002 at the earliest, the project underlines the scale of the continuing surge of new gas supplies into Europe as a whole, which has caused prices to fall.
This general market weakness has brought big difficulties for companies such as British Gas that are locked into high-price supply contracts.
The initial phase of exploration and appraisal will cost $100m and be entirely funded by BP, which is confident that it will be able to exploit the large reserves already known to exist in the area.
The company will fund two-thirds of the eventual $3.5bn bill for exploiting the gas, including a 520km pipeline costing $1bn across the desert to join the new line to Spain.
It is understood to have agreed to take about 30 per cent of the net profits of the development after payment of royalties and taxes, assuming the deal goes ahead.
BP is believed to have investigated the potential security threat from the Islamic fundamentalist unrest in Algeria but this has not deterred the company from backing the project.
Oil specialists point out that 98 per cent of violent incidents have been in the far north of the country and the remote location of the gasfields, on flat rocky terrain with 20 miles visibility, should make a high level of security feasible.
BP is thought to have drawn on the experience of oil exploration security regimes in Colombia and Vietnam, where the company also has big operations. It has prepared plans for safeguarding its employees, who will number about half the 50-strong team in the exploration and appraisal phase.
The gas fields are in a region about the size of England called In Salah, after the one small populated area it contains. The BP-Sonatrach licence area of 25,000 square kilometres covers about 20 per cent of In Salah, which is in the depths of the Sahara, one of the hottest places on earth, where temperatures regularly reach 45 degrees.
The area has been known to contain large amounts of gas since the 1950s, with seven gas fields already located. But it is remote and the geology is tricky, so Algeria concentrated on exploiting a huge gas field further north at Hassi R'Mel, one of the biggest in the world, which was discovered in the 1970s. Gas from that area is exported by pipeline to Italy.
The growth of markets for Algerian gas in Spain, Portugal and Italy led Sonatrach to look to In Salah for new supplies. Algeria has the world's eighth-largest gas reserves and 90 per cent of its exports are oil and gas. Oil specialists believe BP's new technology for producing three-dimensional seismic images of underground rock formations is particularly attractive to Sonatrach because it will allow the developers to overcome some of the technical difficulties of tapping the In Salah fields.
BP's agreement is expected to allow withdrawal if there is not sufficient gas to merit exploitation. First gas would not be delivered until 2002 or 2003, and will be sold in Europe by a joint marketing company in which BP and Sonatrach will have 50 per cent each.