BP, the petrochemical giant, is alleged to have been aware of safety design faults that could have jeopardised the funding.

The disclosure — revealed in leaked documents to The Sunday Times — will embarrass BP, which prides itself on its closeness to Tony Blair.

Allegations of suspected corruption, mismanagement and incompetence were all covered up as BP fought a propaganda war against environmental campaigners lobbying for public backing to be withdrawn.

At stake was one of the world’s most ambitious pipelines, which is intended to reduce the West’s dependence on oil from volatile regimes. BP leads the Baku-Tblisi-Ceyhan (BTC) consortium building the pipeline.

Environmental groups say the pipeline, which runs for 1,000 miles underground from the Azerbaijan capital Baku, through the Caucasus mountains to Ceyhan on Turkey’s Mediterranean coast, will cause an ecological catastrophe if it leaks. But the British government has given assurances that the pipeline had undergone “rigorous assessment” and is safe.

It is understood, however, that ministers were unaware of a report by a leading expert hired by BP who discovered “serious flaws” in the pipeline’s design, which would make it highly likely to leak.

Derek Mortimore, a world- renowned pipeline consultant, was called in by BP managers in Azerbaijan to assess a key material used to seal the pipe’s estimated 50,000 joints: its paint coating.

The paint plays a vital role in protecting the joints from corrosion. Unusually, however, for such a large project, BP had opted for an untried coating from SPC, a Canadian company. Mortimore, a consultant to BP for more than 30 years, was shocked at what he found.

“We are completely out on a limb,” his report to BP warned. “Clearly the use of (this paint) is going to lead to a serious problem. (In the event of cracks appearing) the cost for repairs could be astronomical. The potential for claims against (BP) is open-ended.

“I have witnessed many failures in specifications . . . but the situation on the pipeline is unique in my 41 years’ experience. There is no question in my own and many other people’s minds that the wrong system has been chosen through a seriously flawed selection programme.”

His fears were realised in November last year when construction was halted after cracks were discovered in the joint coating before burial. An estimated 15,000 joints have already been buried in Azerbaijan and Georgia. Work was suspended on the pipeline until last week.

The findings had potentially catastrophic implications for the project. Consultants estimate that it could cost £500m to dig up the pipeline and recoat the joints with a new material. This has not been done.

Rival suppliers have also claimed there were irregularities in the way BP awarded the £5m contract to supply the paint. Two other companies that competed for the coating contract have claimed the selection contest was rigged.

The tender was controlled by Trevor Osborne, BP’s materials consultant. The Sunday Times has learnt that Osborne’s own consulting firm, Deepwater Corrosion Services (DCS), was the UK representative of SPC at the time of the selection process. One of Osborne’s DCS directors has since joined the Canadian company. Osborne referred all questions to BP last week.

The oil giant carried out a confidential inquiry into procurement fraud allegations in November 2002, which apparently exonerated SPC and BP staff. The company refuses to publish its findings.

It appears, though, that such concerns failed to surface when BP was negotiating with the British government to secure a £56m export credit guarantee loan to underwrite the project. The credit guarantee was crucial — along with the backing of the World Bank and the European Bank for Reconstruction and Development — in persuading the commercial banks to lend £1.3 billion, the lion’s share of the project’s total cost.

Under the BP-led consortium’s agreement with those putting up the money, it was obliged to disclose any event that could have a “material adverse effect” on the pipeline.

But a spokeswoman for the Export Credits Guarantee Department (ECGD) last night confirmed BP had not informed it of any significant problems. In fact, the ECGD had only been informed of minor welding problems in June 2003, she said.

On December 17 last year Mike O’Brien, the trade minister, told MPs his decision to pledge £56m to the project had been made after a “rigorous assessment of the risks and a thorough review of the environmental, social and human rights impacts”.

Today’s revelations raise serious questions about how rigorous the government’s assessment of the project was. MPs on two Commons committees are now demanding to know whether ministers misled parliament and whether they, in turn, had been misled by BP.

The Conservative MP John Horam, a member of the house environmental audit committee, said the ECGD had failed to monitor the project properly and should consider withdrawing its loan.

“If this is a dangerous project because of the possibility of leakage, ECGD should exercise some leverage on the situation,” he said.

Yesterday, BP denied the company had acted improperly. It said the pipeline was being produced to the “highest” industry standards.

“The BTC consortium is confident that its construction techniques and testing regimes ensure that the pipeline will be laid safely and that it will operate safely,” a spokesman said.

“BTC is aware that certain allegations have been made and these allegations have been thoroughly investigated. Full discussions on this have been held with the financial institutions and other interested parties, where appropriate.”