Southern Pacific’s McKay: On time and under budget

While project costs are escalating for many companies in the oil sands, Southern Pacific Resources (STP-T) maintains that costs for its McKay thermal project in Alberta will move in the opposite direction.

In February, Southern Pacific told shareholders that total project costs for McKay—a steam assisted gravity drainage (SAGD) project—are estimated at $440 million, down from the $450 million forecast in the project’s original budget.

The revised final project cost includes the addition of $15 million of scope changes that are expected to enhance the reliability of the plant and reduce operating costs, the company said. These include the addition of a storage tank with the capacity to hold 40,000 barrels (bbl) of diluted bitumen that will serve as a buffer to ensure production operations are maintained in the event of a “downstream upset” the company explains on its website. The $6.5 million price-tag is expected to be offset with cost savings from the initial stages of the project.

Southern Pacific also confirmed that it continues to expect to be steaming the first SAGD well pairs towards the end of the second quarter of calendar 2012, with oil production starting three to four months after first steam. STP production should exceed 10,000 bbl/d of liquids production in 2013.

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 under Phase I.  

Under Phase II, McKay is expected to add 24,000 bbl/d of bitumen capacity, bringing total capacity to 36,000 bbl/d. First oil for STP-McKay Phase 2 is forecast for 2015.

The company submitted an application to the Alberta Energy Resources Conservation Board and Alberta Environment for Phase II on Nov. 10 2011 and anticipates regulatory approval within 18 to 24 months of filing, based on the 15-month timeframe it took to approve Phase I.

Construction of Phase II will be staggered in two integrated 12,000 bbl/d pieces, which provides maximum flexibility operationally and financially, the company explained in a corporate presentation on its website.

In January, Byron Lutes, the company’s President and Chief Executive, said in a prepared statement that he was excited to be one of the only SAGD projects that is expected to start production this year.

In February the company reported financial and operating results for the quarter ended Dec. 31 2011 at its Senlac thermal project in Saskatchewan. Funds from operations reached $11.2 million for the quarter, down from $12.3 million in the second quarter of 2010. Strong oil prices, low heavy oil differentials and weak natural gas pricing helped maintain cash flow, the company said, despite the second quarter being a lower production cycle for the STP-Senlac project.

At presstime in Toronto, Southern Pacific was trading at $1.57 per share within a 52-week range of 87¢-$1.92 per share. The company has about 341 million shares outstanding.