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Vol. 16, No. 21 Week of May 22, 2011
Providing coverage of Alaska and northern Canada's oil and gas industry

Denali project folds

BP, Conoco discontinue North Slope-to-market natural gas pipeline project

Kristen Nelson

Petroleum News

Denali, one of two projects which have held open seasons to attract customers to North-Slope-to-market natural gas pipelines, said May 17 that it had failed to get customer support for the project.

A statement from Denali - The Alaska Gas Pipeline, said it was discontinuing the project because its open season efforts had not resulted in customer commitments necessary to continue work.

Denali said it would withdraw its Federal Energy Regulatory Commission pre-file application and would close out its operations over the next few months.

In a letter to FERC, also dated May 17, Denali said it “has not received the customer support needed to continue advancing the project and has ended its open season process.” Denali told FERC it was withdrawing its pre-filing request and ending its contract with the University of Chicago Argonne LLC. Denali had contracted with Argonne to assist FERC staff in developing an environmental impact statement for the project.

Market-driven

“Denali is ending its efforts because of a lack of customer support,” Denali President Bud Fackrell said in a 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 a half, we have been unable to secure the financial commitments necessary to advance the project.”

Denali said the project has an estimated capital cost, in 2009 dollars, of $35 billion.

The company said that to date it has spent more than $165 million on the project.

Since Denali began its efforts in 2008, the company said, the North American gas market has changed significantly, primarily as a result of the development of shale gas resources.

Denali is owned by subsidiaries of BP and ConocoPhillips.

Chenault: expected news

The reaction of House Speaker Mike Chenault, R-Nikiski, was a prelude to what will certainly be a discussion continued when the Legislature reconvenes in January.

Chenault said, in a May 17 statement: “This news was not unexpected, but is disappointing just the same.”

Chenault has been promoting state withdrawal from the Alaska Gasline Inducement Act license with TransCanada and, with Rep. Mike Hawker, R-Anchorage, sponsored House Bill 142, which called on the administration to reevaluate the economics of the AGIA project, and if warranted to abandon the project.

“The competition from shale gas in the Lower 48 pushed Alaska’s prospects over the edge,” Chenault said. “It’s time we stop wasting more time, money and effort on AGIA.

“The world changed while Alaska waited,” he said, “and now it is probably too late for an AGIA line.”

Chenault is a proponent of an in-state gas pipeline to bring natural gas from the North Slope to Interior and Southcentral Alaska.

An Alaska Housing Finance Corp. subsidiary, the Alaska Gasline Development Corp., has a report due to the Legislature July 1 on the economics of an in-state line. Chenault added $200 million to this year’s capital budget toward that project, which would have to be approved by the Legislature before the money could be spent.

All needed at table

The administration had a different view.

Alaska Gov. Sean Parnell said while the state dislikes seeing the demise of any project before a natural gas pipeline project is under way, “the silver lining here is that Denali’s announcement frees ConocoPhillips and BP to independently become partners in another Alaska gasline project.”

He said competition has been important in driving progress on the project, but “it has always been universally understood that only one project would be built.”

He said the State of Alaska recognizes that it will take alignment among all stakeholders — producer-shippers, a pipeline entity and the state and federal governments — to advance a project of this magnitude.

The TransCanada-ExxonMobil project is licensed under AGIA, which requires the state’s licensee to continue through a FERC certificate, irrespective of shipper commitments.

“I hope that the partners in Denali — BP and ConocoPhillips — will someday find themselves at the table with ExxonMobil, TransCanada and the state to see if everyone can get together on this project that is so important to the state’s economy and the nation’s long-term energy supply,” Federal Coordinator Larry Persily said in a May 17 statement.

Persily said that while U.S. natural gas markets are well supplied in the near-term, “that could change as the nation’s utilities increasingly turn to cleaner-burning natural gas as the fuel of choice.” He said there could be a place in the market for North Slope natural gas “in the 2020s and beyond, and the gas line is too important to Alaska’s economy not to keep trying.”

Delegation pledges support

Alaska’s congressional delegation pledged continued support, with Congressman Don Young commending ConocoPhillips and BP “for taking the initiative to invest their resources in this project and for their interest in developing a gas pipeline.”

He said he “can understand that these companies must make decisions based on economics and what can be profitable for them,” and said he believes Alaska’s gas can be developed and will do everything he can at the federal level to help Alaska make a gas pipeline a reality.

Sen. Lisa Murkowski said while it was disappointing that BP and ConocoPhillips were shutting down Denali, “there remains a lot of interest in getting Alaska’s natural gas off the North Slope to Alaska households and bigger markets Outside.” She noted that “it will be the market that determines how we monetize our gas resources,” but said she doesn’t think the Denali shutdown signals an end of efforts.

“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,” said Sen. Mark Begich. He said the Alaska gas line project is “about planning for long-term and the growing U.S. demand for gas, especially from utilities, could make the Alaska pipeline economically possible down the road.”



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