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BP, Conoco give up plans for natural gas pipeline

Patti Epler

BP and ConocoPhillips are ending their bid to build a multibillion-dollar pipeline from the North Slope to Canada, saying the market for Alaska natural gas just isn't there.

The companies -- which have been behind the project known as Denali - The Alaska Gas Pipeline -- said Tuesday in a repared statement posted on its website that its open season efforts have not resulted in the customer commitments necessary to continue work on its North Slope gas pipeline project. Denali will withdraw its Federal Energy Regulatory Commission pre-file application and, over the next few months, close out its operations, the company said.

"Denali is ending its efforts because of a lack of customer support," said Bud Fackrell, Denali President, in the statement. "Denali is a market-driven company. As such, 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."

That leaves TransCanada and Exxon Mobil Corp. without competition to pursue a large-diameter gas line, a project that Alaska and the industry have struggled to put in place for more than 30 years. The two companies have an exclusive license agreement with the state under the Alaska Gasline Inducement Act (AGIA), passed in 2007 to encourage construction of a natural gas pipeline.

AGIA includes a provision requiring the state to reimburse TransCanada and its partner Exxon up to $500 million their costs for pre-construction and design work. So far, the state has paid the companies about $125 million and the Legislature just authorized another $60 million in the fiscal year 2012 budget.

But lawmakers are losing their enthusiasm for the state subsidy, in large part because of continuing reports that the market for Alaska gas is still decades away at the soonest -- the reason BP and ConocoPhillips say they are giving up on what had been estimated to be a $35 billion project.

A bill backed by Republican House leaders, who appear to be moving toward a small in-state gas line instead, would allow the state to abandon its deal with TransCanada. The measure was tabled this year but likely will be considered next year.

Both TransCanada and the Denali project held open seasons last year, a bidding process designed to gauge interest from potential gas customers like big utilities. Both projects announced successful open seasons but have refused to reveal details of the bids, saying that information is proprietary.

Pipedream

The gas line has long been touted as the next boom for Alaska. In recent years, though, shale gas in the Lower 48 and other new gas markets have changed the economics of the pipeline, which would be one of the biggest construction projects in U.S. history.

Denali President Bud Fackrell said in October that the proposed Denali pipeline received bids "for significant capacity" from potential shippers but that the bids included conditions outside of Denali's control.

Considerations for moving forward hinged on a number of factors, Fackrell said at the time, including gas markets, growth in North American shale gas supplies, the "Alaska fiscal framework" and the status of Point Thomson leases, which are tied up in a legal dispute with the state.

The Denali project initially had expected to announce firm deals with gas shippers by March 31 but missed the self-imposed deadline and officials said then they didn’t know if there would be enough support to move forward.

BP and ConocoPhillips have spent at least $165 million on the Denali project, company officials have said. But their Midtown office has been basically empty in recent months as the project stalled.

Denali was announced in spring 2008, at the same time then-Gov. Sarah Palin was pushing for a state-backed pipeline project under AGIA. BP and Conoco officials at the time said they expected to spend $600 million on Denali. Skeptics wondered, however, if Denali was more of a well-funded PR campaign to undermine AGIA than an actual effort to pursue the gas pipeline. At the time, Doug Suttles, then president of BP's Alaska operation, told reporters his company was committed to Denali. "Watch, just watch," he said.

Three years later and TransCanada, the company receiving state subsidies under AGIA, has also missed its target to have agreements signed, initially projected by the end of 2010.

TransCanada officials have said they are negotiating but that some of the terms shippers want -- such as firm tax rates -- need to be resolved by the Alaska Legislature and Parnell administration. TransCanada has put the cost of a gas line at as much as $41 billion and anticipated it to be finished by 2020.

The Denali project consists of a gas treatment plant on the North Slope, transmission lines from the Prudhoe Bay and Point Thomson fields to the plant, and a pipeline from the Slope to Alberta, Canada.

Contact Patti Epler at patti(at)alaskadispatch.com.