Southern Pacific Resource Corp. Completes Arrangements To Transport And Market Bitumen Via CN To The U.S. Gulf Coast

abarrelfullabarrelfull wrote on 28 Jun 2012 05:52
Tags: canada cn n-america rail southern-pacific

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Southern Pacific Resource Corp. (“Southern Pacific” or the “Company”) (TSX: STP) announced today completion of a long-term arrangement to transport its bitumen to the U.S. Gulf Coast via the rail network of CN (TSX: CNR) (NYSE: CNI). Under this arrangement, Southern Pacific expects to significantly increase its plant gate bitumen netback using rail transportation that reduces diluent costs, and offers access to Brent-based pricing as opposed to selling its bitumen into a pipeline that offers access to West Texas Intermediate (WTI) based pricing.

This agreement is expected to allow Southern Pacific to generate attractive returns from Phase 1 of its STP-McKay Thermal Project, the only new steam assisted gravity drainage (“SAGD”) oil sands project anticipated to start up in 2012. STP-McKay is located about 45 km (28 miles) northwest of Fort McMurray, Alta. Phase 1 is designed to recover 12,000 bbl/d of bitumen.

The completed rail marketing solution includes agreements with CN, Rick’s Trucking, Altex Energy Ltd., Genesis Energy, L.P. (NYSE: GEL), CIT Group Inc. and Tauber Co. Under this arrangement, Southern Pacific’s bitumen volumes will be trucked approximately 60 km (38 miles) from the STP-McKay plant gate to Lynton, Alta., a CN rail terminal located immediately south of Fort McMurray. From Lynton, volumes will be transferred into rail cars and shipped approximately 4,500 km (2,800 miles) over CN’s network and a short-line rail partner to a terminal in Natchez, Miss. The bitumen will then be transferred to barges that will deliver the product as feedstock to refineries on the Gulf Coast.

CN expects to commence shipment of Southern Pacific’s bitumen from Fort McMurray to Natchez, located on the Mississippi River 135 km (85 miles) north of Baton Rouge, La., starting in the fourth quarter of 2012, with volumes ramping up to more than 12,000 carloads per year as production increases.

Rick’s Trucking will transport the bitumen from the STP-McKay plant gate to the CN Lynton terminal. Altex will operate the Lynton terminal and will install new loading facilities with dedicated capacity for the exclusive use of Southern Pacific. Altex will also manage the day-to-day rail car logistics. Genesis, owner of the terminal in Natchez, will upgrade the terminal to provide Southern Pacific with dedicated capacity. Genesis can also provide barge service from Natchez to the various refineries in the Gulf Coast. Tauber will provide the marketing services for the product into the Gulf Coast refineries and assist with the transition as Southern Pacific assumes this role directly. Southern Pacific has leased approximately 500 rail cars from CIT, which should accommodate most of the STP-McKay Phase 1 volumes.

There are a number of significant benefits to this rail-based solution for Southern Pacific. Diluent cost savings are a key driver for this arrangement. Diluent savings are achieved on two fronts. The amount of process diluent required at the plant site will be significantly lower than what is required to meet pipeline specifications. By transporting bitumen via CN, Southern Pacific will only require process diluent to blend with its bitumen, thus lowering the total diluent requirements by approximately 33 per cent. Secondly, Southern Pacific has the opportunity to backhaul lower priced diluent from the Gulf Coast utilizing its empty return rail cars.

Another important driver for securing this marketing arrangement is the security of access to the world’s largest market for heavy crude. Given recent regulatory delays around additional pipeline capacity to accommodate growing bitumen volumes from Alberta, the Company has now secured direct and immediate access into the Gulf Coast market. Because of these access issues, the Gulf Coast market for heavy crude currently trades at a premium to WTI, whereas Alberta-based blended bitumen and diluent (“dilbit”) products arriving by pipeline into the Cushing, Okla., region of the U.S. are experiencing significant pricing discounts due to capacity constraints. The rail and terminal arrangements described above have an average term of five years, with options for extension and expansion related to Southern Pacific’s STP-McKay Phase 1 Expansion and Phase 2 plans. Expansion opportunities being discussed include the construction of a pipeline system to the CN Lynton terminal or building a rail spur to the STP-McKay plant site. Either option would remove the trucking component and further reduce diluent costs. While the Gulf Coast is the initial target market, the details within the arrangement provide Southern Pacific with the flexibility to deliver its bitumen to other North American markets or to export terminals along the west coast.

“This arrangement is significant to Southern Pacific because it demonstrates that alternatives to conventional pipelines are available to market bitumen from the Athabasca oil sands,” said Southern Pacific’s CEO, Byron Lutes.

“This has implications not only for Southern Pacific shareholders through higher netbacks, but also for Albertans through increased royalties and demonstrating another safe and viable alternative for transporting bitumen.”

James Cairns, CN vice-president, Petroleum and Chemicals, said the agreement with Southern Pacific represents an important milestone in CN’s growing business of shipping crude oil by rail. In 2012, CN expects to move a total of approximately 25,000 carloads of crude oil, up significantly from approximately 5,000 last year. “CN offers producers of bitumen and heavy and light crude oil flexible, scalable and cost-efficient transportation options to help them enhance plant gate crude pricing netbacks and significantly extend their market reach and

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