Southern Pacific’s McKay: On time and under budget

While project costs are soaring for many companies in the natural resources sector, Southern Pacific Resource (STP-T) maintains that costs for its McKay thermal project in Alberta will move in the opposite direction.  

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. 

Southern Pacific’s president and CEO chalks up the success to a -combination of timing, building the facility at fabrication plants and trucking the pieces to site, and keeping the number of workers at the project, 45 km northwest of Fort McMurray, to a minimum. 

Byron Lutes says that Southern Pacific didn’t have to compete for services it needed because the project was the only one of its kind being built in Alberta during 2011 that was targeted to come on stream in 2012. The company also benefited by building the facility in pieces and modules at fabrication shops in Calgary, Edmonton, Saskatoon and as far away as Texas and Oklahoma. The various modules were then loaded onto the back of trucks and dropped off on pilings at the site. This technique kept the number of workers on-site, where costs are higher, to a maximum of 300.

“It’s basically like a big Lego kit,” Lutes explains in a telephone interview from Calgary. “It’s not a new approach, but this is probably one of the most modular projects ever put up in the oilsands.”

While the smaller size of the McKay project helped the company take advantage of building modularly, Lutes believes the technique could become a broader trend in the industry as companies operating in northern Alberta are forced to develop outlier and typically smaller reserves.   

Earlier this month Southern Pacific announced expanding the bitumen processing design capacity in phase one of the project from 12,000 barrels per day (bbl/d) to 18,000 bbl/d, in a change the company anticipates will trim future capital costs and accelerate growth.

The phase-one expansion has been in the engineering design phase for three months and will expand the existing McKay central processing facilities by as much as 50% — 6,000 bbl/d of bitumen, based on a steam to oil ratio of 2.8 — at an estimated cost of $25,000 per barrel of designed capacity, or $150 million, Southern Pacific says.

Southern Pacific expects to be steaming the first SAGD well pairs towards the end of June. After first steam, the wellbores will be circulated and warmed with steam for three to four months, after which bitumen production will start. After steam circulation, the company expects it will take another 12 months for production to ramp up to capacity.

The expansion plan takes advantage of excess capacity that was incorporated in the original design and first-phase building, the company says, including extra water-treatment capacity that can be accessed with minimal capital investment, and that “will fit comfortably” within the phase-one central process facility, making the expansion “both cost effective and environmentally responsible.”

During phase one’s expansion, phase two will be reduced from 24,000 bbl/d to 18,000 bbl/d. Overall capacity of phase one and phase two will remain as planned, at 36,000 bbl/d of bitumen.

Phase two will be designed similar to phase one, which the company maintains will reduce the capital cost for phase two. (Phase two had originally been designed with two integrated 12,000 bbl/d facility streams.) Phase two’s layout will likely be smaller, which could further lower the cost and environmental footprint, Southern Pacific says. And in terms of reserves, additional capacity in phase one “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.”

Phase two of the project involves a separate facility 5 km east of phase one, off the McKay River.

Phase-one expansion will be incorporated into the phase-two approval process. An application for phase two was submitted to the Alberta Energy Resources Conservation Board and Alberta Environment for phase two on Nov. 10, 2011.

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 prices helped maintain cash flow, the company says, despite the second quarter being a lower production cycle for the STP-Senlac project.

At presstime Southern Pacific traded at $1.63 per share within a 52-week range of 87¢–$1.92 per share. The company has 341 million shares outstanding.