Denali exits; TransCanada alone on Alaska pipeline

CALGARY/ANCHORAGE Tue May 17, 2011 6:55pm EDT

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CALGARY/ANCHORAGE (Reuters) - BP Plc (BP.L) and ConocoPhillips (COP.N) dropped efforts on Tuesday to build a $35 billion gas pipeline from Alaska, blaming chronically low prices as well as a technological revolution that has opened up huge supplies of natural gas much closer to big U.S. markets.

The move to scrap the Denali pipeline proposal after three years and $165 million in development costs leaves longtime hopeful TransCanada Corp (TRP.TO) as the only proponent of a gas pipeline from Alaska to the Lower 48 States, a project that has faced years of delays and market uncertainty.

In the meantime, energy companies have developed drilling and hydraulic rock fracturing technology that allows them to tap massive shale gas reserves in Pennsylvania, New York state, Texas, Louisiana and the U.S. and Canadian Rockies.

"Since Denali began its efforts in 2008, the North American gas market has changed significantly, primarily as a result of the development of shale gas resources," Denali President Bud Fackrell said in a statement. "This has created a very difficult environment in which to secure financial commitments from potential customers."

Both Denali and TransCanada held "open seasons" last year to gain shipping commitments from the three major gas producers on Alaska's North Slope, where about 35 trillion cubic feet of reserves currently have no market outlet.

With BP and ConocoPhillips backing Denali and the other major producer, Exxon Mobil Corp (XOM.N), aligned with TransCanada, neither pipeline proposal gained sufficient backing. The two projects had planned different routes to the big U.S. markets.

TransCanada, whose hopes of a pipeline to U.S. markets from Alaska date back to the 1970s, has the backing of the state government under a process that was started by former Governor Sarah Palin. But producers have been hesitant to commit to either project due to a glut of supplies and the lack of fiscal deal with the state.

An executive at Calgary-based TransCanada declined to say if the scrapping of Denali may have paved the way for BP and ConocoPhillips to support its $40 billion project.

"We've said clearly for a long time that we very much want to attract all major producers in Alaska to be our customers, that's always been our goal, and certainly we've also indicated our standing offer for major customers -- if they wish to be our equity partner, we'd love to have them," Vice-President Tony Palmer told Reuters.

The pipeline would ship up to 4.5 billion cubic feet of gas a day 1,717 miles through Alaska and northern Canada to the Alberta border, where it could be routed to numerous Canadian and U.S. markets on TransCanada's network. The current in-service target is around 2020.

But it is still anything but a done deal.

The shale gas revolution has created a flood of new supplies across the continent, pushing prices below break-even levels in some cases and prompting a new push to export gas to Asia. This has all squeezed the economics of an Alaska pipeline and the competing Mackenzie Gas Project in Canada's Northwest Territories.

"Over the last several years, North America has been blessed with the development of unconventional gas. The result though, is people thought we would have decades of natural gas and now people are talking about a century or more of natural gas," ConocoPhillips Chief Executive James Mulva said last week. "So the gas pipeline from Alaska, from my way of thinking, is more challenged than in the past."

Before TransCanada can finalize its process for signing up shippers, the gas producers must iron out a pair of thorny issues with the state, Palmer said.

They include a legal fight over the Exxon Mobil-operated Point Thomson field, which holds about a quarter of known North Slope natural gas reserves. The Alaska Department of Natural Resources has revoked leases for alleged failure to diligently develop them. The matter remains unresolved in state court.

Another obstacle is uncertainty over a setting up state tax system on the gas production.

Alaska Governor Sean Parnell said it was always accepted that just one pipeline would eventually get built.

"While we dislike seeing the demise of any gas pipeline project before a gas line is under way, the silver lining here is that Denali's announcement frees ConocoPhillips and BP to independently become partners in another Alaska gas line project," Parnell said.

The Denali partners said they still aim to find a commercially feasible way to get their gas to market with the state's oil supplies -- its financial lifeblood -- declining.

However, a Denali official said they had no plans to join the TransCanada project.

(Additional reporting by Anna Driver; Editing by Alden Bentley and Peter Galloway)

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