BP, ConocoPhillips team up on North Slope gas pipeline

Two of the world's largest oil companies announced plans Tuesday to jointly develop a multibillion-dollar natural gas pipeline to move North Slope natural gas to U.S. markets through Canada.

Britain's BP PLC and ConocoPhillips, based in Houston, said they plan to spend $600 million US in the first phase of the project over the next three years.

The plan, dubbed Denali The Alaska Gas Pipeline, is to deliver natural gas via a 3,200-kilometre pipeline from the energy rich North Slope in Alaska to a pipeline hub in Alberta, which has links to numerous other markets.

If necessary, the project would also involve building an additional 2,400-kilometre pipeline to U.S. markets.

The pipeline would eventually move about four billion cubic feet of natural gas a day to markets, about six to eight per cent of daily U.S. consumption, the companies said.

There is already a proposal to build a Canadian natural gas pipeline from the Far North through the Mackenzie River Valley to southern markets, but that plan has faced hurdles because of rising costs and regulatory delays.

No timeline was announced for construction, but the first phase involves project field work this summer and securing long-term commitments from energy producers to send gas down the pipeline.

Much of that commitment is likely to come from BP, ConocoPhillips and Exxon Mobil Corp. (NYSE:XOM). The three companies hold leases to nearly 35 trillion cubic feet of North Slope gas.

While energy analysts have estimated there are about 35 trillion cubic feet of proved natural gas reserves in the North Slope, they believe that figure will rise.

Earlier this year, Alaska Gov. Sarah Palin rejected a pipeline proposal by ConocoPhillips alone, opting to stick with a plan by TransCanada Alaska Company LLC/Foothills Pipelines, a proposal headed by Calgary-based TransCanada Corp. (TSX:TRP), Canada's biggest shipper of natural gas.

The TransCanada plan for a pipeline remains under review by state regulators.

ConocoPhillips submitted its earlier stand-alone plan to the Alaska government in November, but it was outside the bid requirements of the state's Alaska Gasline Inducement Act, also known as AGIA.

The plan was billed as an alternative to AGIA, a law which called for bidders to guarantee progress toward construction of a pipeline. TransCanada's plan complies under the law's guidelines.

Failed approach prompts new course

ConocoPhillips, the North Slope's largest oil producer, wanted to negotiate a long-term financial package covering taxes and royalties on natural gas production; this approach failed under the previous state administration and prompted Palin to chart a new course under the state law.

In January, she turned down the ConocoPhillips proposal, saying such a deal could deprive the state of its regulatory powers.

The company decided to move forward on its own, saying it did not want to lose a potential summer season of field work.

BP and ConocoPhillips say they have assigned staff on the project, which they say will be the largest private construction project ever in North America.

The companies did not estimate the cost of building a full pipeline but such a project would likely cost tens of billions of dollars.

"This project is vital for North American energy consumers and for the future of the Alaska oil and gas industry," Tony Hayward, chief executive of BP Group, said in a release. "It will allow us to keep our North Slope fields in production for another 50 years."

Jim Mulva, ConocoPhillips chair and chief executive, said "our goal of bringing Alaska's North Slope gas to market is becoming a reality.

"Our companies have a long history of successfully developing projects on Alaska's North Slope, in Canada, and around the world," Mulva said. "The time is right to start moving this project forward."

Currently, the Denali project consists of a gas treatment plant on Alaska's North Slope and a large-diameter pipeline across Alaska, through the Yukon Territory and British Columbia to Alberta.

If more capacity is needed, the project will also include a large-diameter pipeline from Alberta to the Lower 48 states.

BP and ConocoPhillips said they would seek other equity partners, including pipeline companies, who can add value to the project and help manage the financial risks involved.