Southern Pacific: Drilling supports STP-McKay heavy oil project expansion in Canada

Source: Southern Pacific Resource Corp.

Southern Pacific Resource Corp. (TSX:STP) is pleased to report that the drilling results from this past winter's McKay exploration program have confirmed sufficient bitumen resources to support Southern Pacific's planned Phase 2 expansion, which is expected to add an incremental 24,000 barrels per day (bbl/d) of bitumen processing capacity to the 12,000 bbl/d STP-McKay Thermal Project currently under construction. 

Resource Update 

From December 2010 to March 2011 Southern Pacific drilled a total of 38 coreholes, focused primarily on the eastern side of its existing STP-McKay project area. This brings the total corehole count to 88 inside the existing 10.5 square mile project area, which provides more than adequate delineation of the resource to understand its characteristics. The Company is pleased to report that the recent drilling confirmed the high quality of the bitumen resource identified from previous drilling programs, particularly on the east side of the project area, where the project area was less delineated. The significant feature of the STP-McKay McMurray oil sands is that they are largely continuous, both laterally and vertically, and are free of lean zones or shale barriers. The east side of the project area has now been delineated to a density that is suitable for developing well pad locations and trajectories and will exceed minimum requirements for an expansion application. 

GLJ Petroleum Consultants Ltd., Southern Pacific's independent reserves evaluators, are currently updating the Company's reserves and resource estimates at McKay. Results will be available after the fiscal year end (June 30, 2011). 

Expansion Plans 

Based on the drilling results at McKay, Southern Pacific has decided to proceed with expansion plans designed to add 24,000 bbl/d of bitumen processing capacity to the project, bringing the total design capacity to 36,000 bbl/d. 

Southern Pacific estimates a total producing project life of over 20 years, based on the discovered bitumen to date, which the Company believes will provide an optimal project life to maximize the project value. The STP-McKay Thermal Project - Phase 2 will be located on the east side of the McKay River, about 4.5 km from Phase 1 (currently under construction). Phase 2 will be subdivided into two 12,000 bbl/d integrated stages. Southern Pacific believes this staged approach will allow the Company to make modifications to the final stage based on performance and operation of the earlier stages. As well, it will allow growth to be done efficiently and effectively both from an operational and financial perspective. 

Southern Pacific has been in the process of conducting baseline environmental work for the Phase 2 expansion since last summer. With the final size determined, the next steps in preparing the application are now underway, including air emission modelling and preparation of a front end engineering and design ("FEED") study. The Company expects to submit an environmental impact assessment application for the entire 24,000 bbl/d expansion around the end of the third quarter of calendar 2011. With that timeline, and allowing an 18 month approval process, construction of Phase 2A could commence in the second quarter of 2013, a little more than two years after Phase 1. The timing of Phase 2B will be decided at a later date, but could be reasonably expected to commence within one to two years of the commencement of Phase 2A. 

Wabiskaw Pilot Project 

The existing STP-McKay project area includes another formation containing significant quantities of bitumen in place that will not be recovered using typical steam assisted gravity drainage ("SAGD") techniques. The Wabiskaw zone is above the McMurray formation, separated by about 10 metres of shale and shale-y sand. The zone contains high quality bitumen in a clean sand that averages six to eight metres thick, which is too thin for typical SAGD. The Company has recognized the existence of this zone as an incremental potential resource since the original coreholes were drilled within this project in 2009. Southern Pacific has now completed a significant amount of technical work on the Wabiskaw and believes bitumen is recoverable through thermal recovery taking advantage of conductive heat generated from SAGD chambers below in the McMurray formation, and cyclic steam stimulation ("CSS") in single leg horizontal wellbores drilled into the Wabiskaw.

The Company views this opportunity as a means to extract additional bitumen with minimal additional capital or energy input. Southern Pacific expects to drill a horizontal observation well into the Wabiskaw zone in the fourth quarter of calendar 2011 to evaluate the concept from one of the first two well pads constructed in STP-McKay Phase 1. Provisions have already been made to accommodate additional Wabiskaw wellbores on the first two well pads that have already been constructed. 

Southern Pacific Resource Corp. is engaged in the exploration, development and production of in-situ thermal heavy oil and bitumen production in the Athabasca oil sands of Alberta and in Senlac, Saskatchewan.

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