Southern Pacific Resource revises McKay cost estimate

If everything goes according to plan, Southern Pacific Resource (STP-T) will finish construction of its McKay thermal project in Alberta in the second quarter of next year with the first steam to follow and production targeted to get underway in the third quarter.  A six- to twelve-month ramp-up period will then be required to get the plant to full capacity.

The McKay project, 45 km northwest of Fort McMurray, is designed to process 12,000 barrels per day (bbl/d) of bitumen and generate 33,600 bbl/d of steam.

In a project update released Aug. 31, Southern Pacific also reported that construction costs will be below original estimates. The original budget estimate had been $450 million but now Southern Pacific says it will be closer to $415 -$440 million.

Management attributes the lower costs primarily to a “successful civil construction program” that is nearing completion and says its new estimate includes about $15 million of unbudgeted scope additions. The company believes the additions will “enhance the reliability and reduce operating costs of the facility.”

“These enhancements include additional diluted bitumen (dilbit) storage, a concentrator to increase produced water recycle, the purchase (versus renting) of rig mats for future SAGD drilling, a second free water knockout system, additional truck loading capacity and increasing the cogeneration efficiency,” the company says.

Southern Pacific has completed its steam-assisted gravity drainage (SAGD) drill program at McKay with a total of 12 SAGD well pairs that are expected to fill the plant design capacity. Altogether Southern Pacific has completed 23.1 km of horizontal drilling through the bitumen-bearing McMurray formation.

The company says that all twelve of the SAGD well pairs “encountered high-quality reservoir throughput and, most notably, the absence of lean zones and shale barriers in any of the well bores.”

The McKay project received regulatory approval in October 2010 and is expected to produce over a lifespan of more than twenty years. Expansion plans are underway for 24,000 bbl/d of new capacity, bringing the total design capacity up to 36,000 bbl/d.

On other fronts, Southern Pacific started steaming wellbores at its Red Earth project in the Peace River oilsands in June and in July reported that “strong performance” at its Senlac thermal project in Saskatchewan, coupled with “strong oil prices”, drove up the company’s fiscal fourth quarter production and revenue.

Total production averaged 4,915 barrels of oil equivalent per day (boe/d) for the three months ended June 30, up from 3,663 boe/d in the previous quarter. Those numbers generated petroleum and natural gas revenues before royalties to $30.7 million, up from the previous quarter’s $18.8 million.

At presstime Southern Pacific was trading at $1.41 per share within a 52-week range of 98¢ and $1.95. The company has about 339.3 million shares outstanding.