May 12, 2012

Steam Assisted Gravity Drainage Bitumen Production

Southern Pacific is pleased to announce expansion plans for its steam assisted gravity drainage ("SAGD") STP-McKay Thermal Project. Upon completion of the expansion, 

STP-McKay Phase 1 will have a bitumen processing design capacity of 18,000 bbl/d. The expansion is anticipated to significantly reduce future overall capital costs in the entire project and accelerate the Company's production growth forecast. Southern Pacific's internal technical team have identified a unique opportunity to expand the existing STP-McKay Phase 1 central process facilities ("Phase 1 Expansion") by as much as 50% (6,000 bbl/d of bitumen based on a steam-oil ratio ("SOR") of 2.8) at an estimated cost of approximately $25,000 per barrel of designed capacity, or $150 million, including additional well pairs. The expansion plans have been in the engineering design phase for three months and based on analysis over that period, the Company has elected to proceed with expanding STP-McKay Phase 1 prior to the construction of STP-McKay Phase 2. 

The expansion takes advantage of excess capacity that was incorporated into the original design and construction of Phase 1. Phase 1 currently has additional water treatment capacity that can be accessed with minimal capital investment, allowing the facility to treat approximately 50,400 bbl/d of water. Additional steam generation will be required to convert an incremental 16,400 bbl/d (50,400 bbl/d total) of treated water to steam.

 An additional cogeneration turbine will be required to supplement the power demand of the expanded facilities. The remainder of the facility expansion will be limited to piping modifications and small equipment additions. The entire expansion will fit comfortably within the existing Phase 1 Central Process Facility ("CPF") site, making this expansion both cost effective and environmentally responsible.
Approval for the Phase 1 Expansion will be incorporated into the STP-McKay Phase 2 approval process. An application for Phase 2 was submitted in November, 2011. Phase 2 is a separate facility, located approximately 5 km east of Phase 1 and on the east side of the McKay River. Southern Pacific plans to provide an update to the application which will include the plans for the 6,000 bbl/d Phase 1 Expansion. Concurrently, the Phase 2 project design capacity will be reduced from the proposed 24,000 bbl/d to 18,000 bbl/d, resulting in the total STP-McKay project area retaining the same overall capacity of 36,000 bbl/d of bitumen. 

There are a number of advantages to this approach. Phase 2 will be designed using a very similar design to Phase 1.. This is anticipated to reduce the total capital cost for Phase 2, which was originally designed with two integrated 12,000 bbl/d facility streams. The overall layout of Phase 2 will likely be smaller, further reducing cost and environmental footprint. From a reserves perspective, having additional capacity in Phase 1 will better balance the capacity and reserve distribution between the west and east sides of the McKay River, which will minimize the requirement for future river crossings. 

Southern Pacific does not expect this revision to significantly delay the application approval process as the changes are minimal from an environmental or regulatory perspective; virtually every modification can be viewed as an improvement to the overall scheme. Southern Pacific has already consulted with the Alberta regulators on the modification, and the appropriate steps are being taken to accommodate the new Phase 1 Expansion plans within the original Phase 2 application. Additionally, the Phase 1 Expansion can be expedited quickly upon approval, with a current estimate of only nine months to construct. This will provide the Company with accelerated cash flow from the 6,000 bbl/d expansion, prior to Phase 2 start up. Assuming regulatory approval occurs in the fourth quarter of 2013, expansion volumes could be realized from Phase 1 before the end of 2014. 

The Phase 1 Expansion is significant to STP; it enhances the ability of the Company to grow internally. Expected cash flow using current pricing from STP-Senlac and STP-McKay Phase 1, coupled with STP's existing debt facilities could fully provide funding necessary for the Phase 1 Expansion. Further along those lines, the Company would expect lower costs of capital funding for the Phase 2 project with the expanded cash flows from the Phase 1 Expansion and lower Phase 2 capital costs. 

STP-McKay Phase 1 Construction Update
Construction of STP-McKay Phase 1 continues to advance very well. All of theCPF equipment packages and modules have been delivered to site. The permanent operating team is now fully staffed with 45 Southern Pacific employees; they are deployed on the project site and preparing for start up and operations. Commissioning of the CPF is expected to commence in mid-May and will begin with the cogen plant, which will supply permanent power. From there, a sequential start-up of various CPF process systems will occur, and first steam is anticipated to be delivered to the SAGD well pairs towards the end of June, 2012. After first steam, the wellbores will be circulated and warmed with steam for a period of three to four months after which bitumen production will commence. It is expected to take approximately 12 months for production to ramp up to capacity after steam circulation has been completed. 

The project's total projected capital cost estimate remains at $440 million, as compared to the original budget of $450 million. As of March 31st, 2012 approximately $400 million of capital has been incurred or committed on the project. As most of the equipment and modules have been included in the incurred amount, the remaining capital estimate is not expected to vary significantly through to the conclusion of the construction and start up. It should also be noted that the cost estimate includes $15 million of additional scope changes to the original design that were added to further increase the reliability of the overall process and these additions will also be utilized within the Phase 1 Expansion. 

Arrangements for the transportation and marketing of the bitumenproduction out of the STP-McKay Thermal Project are currently being finalized. The Company will release more details upon completion of these arrangements. 

Soruce - Marketwire 

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