Producer cites benefits of rail transport of bitumen

By OGJ editors

Southern Pacific Resources Corp., Calgary, has completed a long-term agreement to ship bitumen by rail to the US Gulf Coast in a system it says will improve production netbacks at its STP-McKay thermal oil sands project west of Fort McMurray, Alta.

The producer says the arrangement, with the Canadian railroad CN, will increase the value of bitumen at the production site by lowering shipping costs relative to pipeline transport.

Rail shipment requires about 33% less process diluent than what is necessary to meet pipeline specifications, Southern Pacific said. And return-trip rail cars can supply the project with low-cost Gulf Coast diluent.

The arrangement also provides pricing advantages, according to a press statement.

“The Gulf Coast market for heavy crude currently trades at a premium to WTI [West Texas Intermediate], whereas Alberta-based blended bitumen and diluent products arriving by pipeline into the Cushing, Okla., region of the US are experiencing significant pricing discounts due to capacity constraints,” the statement said.

The system

Under the arrangement with CN, bitumen will be trucked 38 miles from the STP-McKay site, 28 miles northwest of Fort McMurray, to a rail terminal at Lynton. From there, rail cars will carry the material 2,800 miles over CN’s network to Natchez, Miss., for transfer into barges that will carry it down the Mississippi River to Gulf Coast refineries.

Southern Pacific expects shipments to begin in the fourth quarter this year, eventually reaching 12,000 carloads/year.

The STP-McKay project, still under development, will use steam-assisted gravity drainage to produce 12,000 b/d in an initial stage, which Southern Pacific has indicated will be expanded to 18,000 b/d (OGJ Online, May 11, 2012). A second phase will push output to 24,000 b/d.

The Southern Pacific-CN arrangements have an average term of 5 years with options for extension. The companies are discussing elimination of the trucking link with construction of a pipeline or rail link between the project site and Lynton terminal.

Either option would reduce diluent needs, Southern Pacific said. The arrangement gives the producer flexibility to deliver bitumen elsewhere in North America, including export terminals on the West Coast.

A CN executive said the railroad expects to move about 25,000 carloads of crude oil this year, five times the number of last year.

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