Denali ditches pipeline; BP-ConocoPhillips venture doesn't secure support

Posted: Wednesday, May 18, 2011

JUNEAU -- One of two companies planning to build major natural gas pipelines in Alaska has dropped its bid, saying Tuesday that it didn't secure the support necessary to justify going forward with its project.

The announcement from Denali-The Alaska Gas Pipeline raised questions about the prospects for building a long-hoped-for line in Alaska. For years, Alaskans have dreamed of a gas line as a way to help shore up revenues as oil production declines, create jobs and provide a more reliable source of energy. But Denali cited changes in the market -- lower gas prices, the rise of North American shale -- as making it tough to get the commitments they needed to move forward.

Denali venture had been competing with a plan to build a line TransCanada Corp., which says it is continuing efforts to move its project forward. TransCanada has progressed with state financial support, something Denali never received. A company official, Scott Jepsen, doesn't believe it would have made a difference in the Denali decision.

Like TransCanada, Denali has been working since last year to secure shipping agreements necessary to advance its project. But Jepsen said it wasn't successful in doing so and Denali was cutting its losses.

To keep going, Denali would have needed firm transportation agreements in excess of $100 billion and transportation commitments of at least 20 years for a line that wouldn't be in service until at least 2020, said Jepsen, Denali's vice president of business services.

"It came time to make the business decision to discontinue" the project, he told The Associated Press.

Denali reported spending over $165 million in pursuing the project. In a statement, Denali President Bud Fackrell said the company could not spend the billions of dollars necessary to advance the project without binding agreements with shippers.

Denali, a joint venture of BP and ConocoPhillips, had estimated its project would have cost $35 billion. Both Denali and TransCanada had proposed plans to be in service by about 2020 and deliver about 4.5 billion cubic feet of gas per day from Alaska's North Slope to North American markets by larger lines to Canada.

While Jepsen couldn't comment on specific concerns raised by shippers in negotiations, citing confidentiality, he said today's market conditions aren't a secret.

He declined to speculate on whether he believes a major line will move forward in Alaska. Given that Denali has always been cast as a market-driven project, he said he doesn't believe its project would have fared any better had it received state financial support.

Under the 2007 Alaska Gasline Inducement Act, championed by then-Gov. Sarah Palin, TransCanada won an exclusive license to pursue a project, meaning it got the pledge of up to $500 million in state aid but also had to meet certain benchmarks. (TransCanada is working with Exxon Mobil Corp. to advance its project.)

On Tuesday, TransCanada's Tony Palmer said Denali's decision had no effect on TransCanada's activities. He said his company was making progress and has resolved nearly all the issues it has with customers. He said some of the others -- including resolution on disputed leases and long-term certainty on royalty and tax issues -- are out of its control and need to be dealt with by the state and the gas companies.

Lawmakers are antsy to see results from TransCanada. There was talk during the legislative session about possibly seeking to cut ties with the company if agreements weren't reached sometime this year. On Tuesday, at least two House Republicans renewed that debate: Speaker Mike Chenault, who said Denali's announcement was a "clear signal" that state needs to focus on a gas to serve Alaska's needs, and Rep. Mike Hawker, who said there's no reason to believe the circumstances facing Denali are any different than those facing TransCanada.

Hawker said it's time the state stop "wasting more time, money and effort" on the major line under the inducement act.

Larry Persily, the federal coordinator for Alaska natural gas transportation projects, said the gas line is too important to Alaska's economy to give up on it. He said U.S. natural gas markets are well-supplied in the near-term but that could change as utilities turn to natural gas.

"Our economy is wrapped up in oil and gas, and it's not looking real good on oil production," he said. Whether by "2020, 2025, it doesn't matter. We need (a major gas line)," he added.

He said officials should be doing everything possible -- including having the state, TransCanada and gas producers -- sit down together to see what, exactly, it will take to get a project moving.

Alaska Gov. Sean Parnell said there was a "silver lining" to Denali's announcement: it allows ConocoPhillips and BP to partner in another gas line project.

"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," he said.

Representatives of BP and ConocoPhillips in Alaska said their companies are looking for ways to bring Alaska gas to market.

BP Alaska spokesman Steve Rinehart declined to say whether the company had bid on either pipeline project. But he said there had been "active negotiations" with both.

ConocoPhillips had submitted an initial bid on the Denali project. Spokeswoman Natalie Lowman declined to say whether it was involved in talks on the TransCanada project.

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