Rail preferred over pipe

Southern Pacific Resource to ship bitumen production by rail, ramping up to 12,000 carloads a year on Canadian National Railway

Gary Park

For Petroleum News

Southern Pacific Resource, an Alberta oil sands startup, views rail transport of its bitumen production as more profitable than shipping by pipeline.

It has negotiated a long-term deal with Canadian National Railway to carry crude from its STP-McKay thermal project to the U.S. Gulf Coast, ramping up over time to 12,000 carloads a year, or about 720,000 barrels.

Southern Pacific said it believes the strategy will significantly increase its plant gate bitumen netback by reducing the diluent needed to move bitumen by pipeline by 33 percent and offering access to Brent-based pricing.

The company will also be able to bring back lower-priced diluents from the Gulf Coast in 25 percent of the rail cars that would otherwise be empty.

“The arrangement … demonstrates that alternatives to conventional pipelines are available to market bitumen from the Athabasca oil sands,” said Southern Pacific Chief Executive Officer Byron Lutes in a news release.

He said that ultimately everything from the STP-McKay operation will be rail-connected.

By securing direct and immediate access to the world’s largest market for heavy crude, Southern Pacific said it will be able to bypass the capacity constraints at Cushing, Okla., where Alberta-sourced blended bitumen experiences significant pricing discounts.

Southern Pacific’s completed rail marketing solution involves agreements with CN, Rick’s Trucking, Altex Energy, Genesis Energy, CIT Group and Tauber Co.

In the same release James Cairns, CN vice president, petroleum and chemicals, said his company expects to move about 25,000 carloads (or about 1.5 million barrels) of crude oil this year, up from about 5,000 in 2011.

Southern Pacific’s bitumen will be trucked about 38 miles from the STP-McKay plant gate to a CN terminal, then railed about 2,800 miles to a Mississippi terminal at Natchez, 85 miles north of Baton Rouge, and finally barged as feedstock to Gulf Coast refineries.

The initial C$450 million phase of STP-McKay is designed to produce about 12,000 barrels per day of bitumen, gradually building up after coming onstream in the fourth quarter.

The company is also working on expansion plans costing C$400 million for 24,000 bpd of new capacity, with a production life of 20 years. An application was filed with regulators last November.