Denali will still be a national park in Alaska, but it’s not going to be “The Alaska Gas Pipeline.” BP plc and ConocoPhillips, partners in the project to pipe Alaska North Slope Gas to Canada and Lower 48 markets, threw in the towel last week after producers refused to commit to shipping gas on the pipeline.
“Denali is ending its efforts because of a lack of customer support,” said Denali President Bud Fackrell. “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.”
Last October Denali said it had garnered “significant bids” during an open season (see NGI, Oct. 11, 2010), but no firm agreements were signed.
Work to date has been substantial. Denali said it had conducted extensive stakeholder consultations, set up multiple data rooms with detailed information, submitted comprehensive public filings, and provided access to Denali’s experts to help potential customers evaluate the project. Denali said it has spent more than $165 million and invested more than 760,000 man-hours in the project.
The project had an overall estimated capital cost of $35 billion in 2009 dollars. Denali said it will withdraw its Federal Energy Regulatory Commission pre-file application and, over the next few months, close out operations.
“The competing project, a partnership between TransCanada and ExxonMobil, is continuing its effort to design and permit a natural gas pipeline from Alaska,” said Larry Persily, the federal coordinator of efforts to develop a North Slope pipeline. “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.”
TransCanada Vice President Tony Palmer told NGI the Denali announcement has no effect on his company’s project. “They’re an independent project and make their own decisions as to how they proceed or not. We continue to advance our project, have done so independently for years and intend to continue to do so.
“We’ve had a standing offer on the table for any major customer that commits their gas to our project. If [the Denali partners] wish to become an equity partner, we’d be very pleased to have them. That continues to be a standing offer. We’d love to have them.”
TransCanada missed the deadline it had set for itself to have signed precedent agreements with shippers by the end of last year. Still, Alaska Gov. Sean Parnell remained hopeful last week.
“…[T]he silver lining here is that Denali’s announcement frees ConocoPhillips and BP to independently become partners in another Alaska gasline project,” Parnell said. “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.”
Also expressing optimism last week was U.S. Sen. Lisa Murkowski (R-AK). “Ultimately, it will be the market that determines how we monetize our gas resources,” Murkowski said. “I do not believe, though, that this signals an end to those efforts. The good news is that there are still several proposals for both an out-of-state line and an in-state line that could deliver real benefits to Alaskans.”
The TransCanada project has benefited from a $500 million subsidy from the state, afforded by its license under the Alaska Gasline Inducement Act (AGIA) of former Gov. Sarah Palin’s administration. Under AGIA, Alaska taxpayers have paid the lion’s share of what has been spent so far on the project. The AGIA subsidy and the shifting gas market earlier this year moved some Alaska lawmakers to push for the scrapping of the TransCanada agreement (see NGI, April 11).
Andrew Halcro — a former gubernatorial candidate, vocal critic of former Gov. Sarah Palin and AGIA, and a prolific blogger — was quick to chime in following Denali’s announcement.
“Denali pulled the plug on their three-year effort because as a private-sector organization they realized that continuing to push forward with a futile effort would mean continuing to throw good money after bad, a practice highly frowned upon by shareholders,” Halcro wrote. “TransCanada would have folded their tent a long time ago if they were responsible for taking the risk themselves. But when it’s other people’s money, the definition of logical approach is much different then when you’re spending your own cash.”
U.S. Sen. Mark Begich (D-AK) noted how gas prices in the Lower 48 have plummeted since the latest efforts for a North Slope gasline began. “But this is also about planning for the long-term and the growing U.S. demand for gas…There’s no doubt Alaska needs a gasline for 2020 and beyond to attract the investment dollars that will be necessary to produce more oil.”
In a recent report, the U.S. Energy Information Administration said a North Slope gasline to serve Lower 48 markets won’t make sense economically for at least 20 years.
While the federal government has had a 14-member team assigned to the Alaska pipeline effort, Persily recently conceded that “it doesn’t necessarily have to pencil out for the federal government to support it” (see NGI, April 25).
Persily commended the Denali partners for spending $165 million of their own money on the project over the past three years.
“Though 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,” Persily said. “There could be a place in the market for North Slope gas in the 2020s and beyond, and the gasline is too important to Alaska’s economy not to keep trying.”
Denali noted that the Lower 48 gas market has changed “significantly” since it began its efforts in 2008, particularly due to the development of shale gas supplies in numerous basins. “This has created a very difficult environment in which to secure financial commitments from potential customers,” Denali said.
“Although we are disappointed that Denali was not able to secure customer support, we are proud of our achievements,” said Fackrell. “In particular, I want to thank the hundreds of Alaskan and Canadian companies and individuals who have worked on the project as well as the regulatory agencies, government officials, and the many Native Alaskan and Canadian Aboriginal groups who have supported our work effort over the last three years. Denali’s work has advanced the project further than at any point in the past and has provided potential shippers an opportunity to evaluate the competitiveness of North Slope natural gas in the North American marketplace.”
The TransCanada project is planning to submit its application to the Federal Energy Regulatory Commission in October 2010, Persily said. “The venture [recently] submitted the first of its draft resource reports to the commission, with all 11 reports expected in December,” Persily said. “The project team will soon begin another field season in Alaska and Canada.”
Palmer said TransCanada and ExxonMobil “continue to work to have a commercial breakthrough on our side with our potential customers. We’ve resolved most pipeline shipper issues.” He added that issues around the development of the Point Thomson field (see NGI, Nov. 1, 2010) as well as taxation of gas production need to be resolved.
“The state of Alaska recognizes that alignment among all stakeholders — producer/shippers, a pipeline entity, and the state and federal governments — will be necessary to advance a project of this magnitude,” Parnell’s office said.
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