BP has scrapped multibillion-pound plans to produce low-carbon hydrogen on Teesside after clashing with a rival project to build a vast data centre at the former Redcar steelworks site.

The oil giant was seeking permission from the government for its “H2Teesside” project, which would have processed natural gas to make clean-burning hydrogen and captured the resulting carbon emissions. BP wanted powers to compulsorily purchase land at the Teesworks site.

However, the owners of the site, where steelmaking ceased in 2015, have backed rival plans to develop what could be one of the world’s biggest artificial intelligence data centres on the land. These plans gained permission from Redcar and Cleveland council in August, and would use the same patch of land earmarked by BP.

• Google in talks to build giant Teesside datacentre

According to planning documents, the first phase of BP’s development would have cost £2.3 billion and a second phase £2.2 billion.

Lord (Ben) Houchen, the Tees Valley mayor, is championing the data centre plans. which he has claimed could be four times larger than the biggest data centre in America and could be at the heart of up to £100 billion of investment in AI on Teesside.

BP withdrew its application on Monday, citing “material changes in circumstances on the Teesworks site, including a planning application being granted locally for a data centre on the same piece of land”.

It said it maintained that “a solution which enabled co-existence of both [H2Teesside] and the proposed data centre on the Teesworks estate could have been identified”, but that “two proposals are incompatible on the same piece of land”.

BP said it was “mindful that central and local government will need to consider competing priorities in a very different way than was the case” when it submitted its application, in March 2024.

• BP plans to turn Teesside into first green hydrogen hub

While it believes “hydrogen could have an important role to play in the future energy market”, BP added that since it had submitted its application, “the hydrogen demand situation in Teesside has also deteriorated as some major industrial consumers have either scaled back operations or postponed decarbonisation plans”, significantly increasing the risk of developing the site.

The rival plans are said to have become the subject of a dispute within government, with the prime minister and Peter Kyle, the business secretary, backing the data centre and Ed Miliband, the energy secretary, backing BP’s plans. Miliband had delayed a decision on BP’s application until this week.

A BP spokeswoman said: “We continue to move forward with other projects on Teesside, including our investments in Net Zero Teesside and the Northern Endurance Partnership, and remain an active partner in the region.”

A spokeswoman for the energy department said: “This is a decision taken by BP. We continue to provide a route for hydrogen projects in Teesside, including Tees Green Hydrogen, which is moving towards a final investment decision, along with several other projects creating high-quality jobs for the region.”