The pace of development of the $16.2 billion Mackenzie Valley pipeline, an energy megaproject that has been proposed and debated for decades, has been cut back.

The five-member consortium made the announcement Thursday, blaming low prices for natural gas and ongoing negotiations with the federal government on incentives to lower the costs of the project.

"This reduction will include closure of offices in Fort Simpson and Norman Wells and a reduction in the size of the office in Inuvik," Imperial Oil, the Calgary-based lead company in the consortium, said.

"The structure of the government support combined with private-sector natural-gas market economics have not resulted in the right commercial opportunity under current circumstances," Imperial spokesman Jon Harding said.

The 1,196-kilometre line would transport up to 1.2 billion cubic feet of natural gas from the Beaufort Sea to North American markets.

The other partners include an aboriginal group funded by Calgary-based TransCanada Corp, Exxon Mobil Corp., Royal Dutch Shell and ConocoPhillips.

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The 1,196-kilometre line would have transported natural gas from the Beaufort Sea to North American markets by connecting with the current pipeline system in Alberta. (CBC)

Conoco warned investors that the delay meant it was writing down the carrying value of its 75 per cent stake in the undeveloped Parsons Lake gas field and capitalized project development costs by approximately $525 million after-tax in the most recent quarter.

The announcement follows a decision less than a week ago by ExxonMobil, ConocoPhillips, BP and TransCanada, to work toward developing natural gas reserves on Alaska’s North Slope, which would be assessed as an alternative to a natural gas pipeline through Alberta.

The state of Alaska has offered up to $500 million in incentives to build a pipeline there. 

Development of the pipeline, first proposed in the 1970s, was put on hold for 10 years after an inquiry led by Mr. Justice Thomas Berger released in 1977 warned that any gas pipeline would be followed by an oil pipeline, and that the infrastructure supporting this "energy corridor" would be enormous.

Berger raised concerns about what impact roads, airports, maintenance bases, and new towns would have on the people, animals and land.

Momentum began building again in the early 2000s and, after a lengthy review, the National Energy Board gave its approval in December 2010.

The NEB has given the consortium until the end of 2013 to make its final decision on whether to proceed with the project.

The price of natural gas, already at a 10-year low, fell further Thursday after the U.S. government reported a surprisingly large increase in supply. Gas for May delivery closed down five cents at $2.09 per thousand cubic feet in New York.

The government said supplies expanded last week to a level that's 60.5 per cent higher than the five-year average.

With files from The Associated Press