BP, Conoco drop bid to build Alaska natural gas pipeline

Sean Cockerham | Tribune Media Services

BP and Conoco Phillips are abandoning their joint venture to build a $35 billion natural gas pipeline from Alaska to the Lower 48, known as the Denali project. The decision is renewing the debate over whether an Alaska gas line is just a pipe dream.

Bud Fackrell, who led the Denali project for the two companies, said Tuesday that there wasn't enough customer interest to make it work.

"Denali is ending its efforts because of a lack of customer support ... we cannot spend the billions of dollars necessary to advance the project unless we have binding agreements with shippers. Although we have been in discussions with potential shippers for nearly a year and half, we have been unable to secure the financial commitments necessary to advance the project," he said.

He said Denali spent more than $165 million on the effort.

Natural gas prices have plummeted since BP and Conoco announced the Denali project in 2008. There was little surprise that it pulled the plug.

"It was a matter of when, not if," said Fadel Gheit, an analyst at Oppenheimer Co. in New York.

There's a separate effort led by the Canadian pipeline firm TransCanada that continues its pursuit of an Alaska gas pipeline to the Lower 48. The TransCanada effort is supported with state money, unlike the rival Denali gas pipeline proposal. An executive with TransCanada expressed optimism Tuesday and said the end of Denali does not impact his project.

Alaska gas pipelines have been proposed repeatedly in the decades since North Slope gas was discovered, only to fade away because of low gas prices or other factors. But BP and Conoco insisted the Denali project was different when they announced it with great fanfare in 2008. "I would just say watch," BP Alaska President Doug Suttles said at the time. "Watch."

Denali President Fackrell said Tuesday that the North American natural gas landscape has changed greatly since 2008, primarily as a result of the development of shale gas resources outside Alaska. He said that has made it extremely difficult to secure the financial commitments from potential customers that are needed to finance the estimated $35 billion Alaska project.

Denali needed to get commitments from natural gas producers on the North Slope, which include Exxon Mobil and different arms of the companies BP and Conoco than those that were involved in the Denali project. The shippers pay transportation fees to move their gas through a pipeline and ultimately pay the costs of construction and provide the profit.

The remaining Denali employees from Conoco and BP will return to their companies. There are no plans for its Midtown office.

GAS LINE SKEPTICISM

Alaska House Speaker Mike Chenault said he wasn't surprised about Denali and expects the same result from the TransCanada project.

"I think TransCanada has run into the same problems that Denali did trying to commercialize the project, and I don't think it bodes any better for TransCanada," the Nikiski Republican said. "TransCanada is under a different contract, where the state's paying 90 percent of their bill right now. So they can afford to stay in the game longer, as long as somebody else is paying the bill."

Chenault introduced a bill in the Legislature this spring that was seen as a first step toward dumping the TransCanada project. The bill didn't pass, but the debate will continue when the Legislature returns to Juneau in January.

TransCanada and its project partner Exxon Mobil are entitled to a state reimbursement of up to $500 million in pre-construction costs. Those are terms of the 2007 Alaska Gasline Inducement Act (AGIA) pushed by then-Gov. Sarah Palin.

BP and Conoco didn't seek the AGIA license and said it came with too many "must-have" demands from the state about its operations.

They announced their competing Denali project just as the state was about to give the license to TransCanada. Anchorage Democratic Rep. Les Gara said he thinks the Denali project was never an honest attempt to build a natural gas pipeline.

"Many of us believe the Denali pipeline was never real in the first place; we always viewed it as a Trojan horse to get people to back away from the TransCanada deal," Gara said.

Former Gov. Frank Murkowski weighed in Tuesday with an emailed statement sent from "Aboard the First Lady, en route to Wrangell."

Murkowski has a 53-foot Southern Cross-style yacht named the First Lady.

The former governor's statement from sea said it was a foregone conclusion that the Denali project was doomed as natural gas prices dropped. He said the Legislature should have agreed to his proposed gas line deal in 2006, before the economics went bad.

Legislators said that Murkowski's deal gave away too much to the oil and gas companies. So did Palin, who made it a central theme when she defeated him in the 2006 Republican primary for governor and then pushed through her AGIA bill.

"Unfortunately, the actions of the Palin administration in its gas line efforts displayed a measure of ineptness which will likely result in grave consequences to the economy of our state," Murkowski said in his emailed statement Tuesday afternoon.

Gov. Sean Parnell was Palin's lieutenant governor and is a supporter of AGIA. Parnell didn't agree to an interview request Tuesday. But his press office released a prepared statement urging Conoco and BP to now join up with TransCanada. "While we dislike seeing the demise of any gas pipeline project before a gasline is underway, the silver lining here is that Denali's announcement frees ConocoPhillips and BP to independently become partners in another Alaska gasline project," Parnell said in the statement. "While the competition that drove progress on this important project has been welcome, it has always been universally understood that only one project would be built."

CAN TRANSCANADA SUCCEED

TransCanada has long said it would like such companies to join as equity partners in its project, but there's been no sign that was about to happen.

TransCanada Vice President Tony Palmer said Tuesday that the end of Denali doesn't affect his work, which is moving ahead.

TransCanada missed a self-imposed deadline to have signed agreements with gas shippers by the end of 2010. But Palmer said his company is working to complete the deals, called precedent agreements. The talks are private, so it's impossible for the public to know for certain what's going on, and Republican legislators are skeptical. But Palmer characterized it as positive.

"We have made good progress on resolving pipeline shipper issues with our customers and have resolved most of the items," Palmer said.

He said the shippers also want certainty over how much the state will tax natural gas and what's going to happen with the state-Exxon dispute over the Point Thomson field on the North Slope. Those are things that are out of TransCanada's hands, he said.

Larry Persily, the federal coordinator for the Alaska natural gas pipeline effort, said he thinks hope remains for TransCanada. Persily said the demand in the Lower 48 markets could rise as utilities increasingly turn to cleaner burning gas.

"There could be a place in the market for North Slope gas in the 2020s and beyond, and the gas line is too important to Alaska's economy not to keep trying," he said

Alaska Sens. Lisa Murkowski and Mark Begich said they were disappointed by the end of the Denali project but agreed with Persily that it's not over.

"We've always known a gas line can only succeed if there is a market for the gas, and prices are low while supplies are plentiful in the lower 48 markets right now," Begich said in a written statement. "But this is also about planning for the long-term and the growing U.S. demand for gas, especially from utilities, could make the Alaska pipeline economically possible down the road."

Philip Budzik, an analyst with the federal Energy Information Administration, said he wasn't surprised BP and Conoco dropped the Denali project.

"They're looking at the same thing that we are regarding lower than previously expected natural gas prices," Budzik said. "Before the advent of large-scale shale gas production, we were projecting much higher future natural gas prices and an Alaska gas pipeline coming into operation."

But the most recent report from the Energy Information Administration now predicts an Alaska gas pipeline won't make economic sense to build for at least the next 20 years.

Budzik said, though, that the end of the Denali project doesn't necessarily mean the TransCanada effort is also doomed to failure. TransCanada has two advantages over Denali in building a natural gas pipeline from Alaska through Canada to reach the Lower 48 markets, he said.

One is the fact that TransCanada gets the $500 million in reimbursement from the state, he said. TransCanada also has a long history in building pipelines in Canada and has a useful familiarity with that country's regulatory process, Budzik said.


By SEAN COCKERHAM
scockerham@adn.com