Southern Pacific Resource Corp.

Southern Pacific Resource Corp.

June 27, 2012 16:35 ET

Southern Pacific Resource Corp. Completes Arrangements to Transport and Market Bitumen via CN to the U.S. Gulf Coast

CALGARY, ALBERTA--(Marketwire - June 27, 2012) - 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 access."

About Southern Pacific

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. Southern Pacific trades on the TSX under the symbol "STP." For more information on Southern Pacific, visit the company's website at

About CN

CN - Canadian National Railway Company and its operating railway subsidiaries - spans Canada and mid-America, from the Atlantic and Pacific oceans to the Gulf of Mexico, serving the ports of Vancouver, Prince Rupert, B.C., Montreal, Halifax, New Orleans, and Mobile, Ala., and the key metropolitan areas of Toronto, Buffalo, Chicago, Detroit, Duluth, Minn./Superior, Wis., Green Bay, Wis., Minneapolis/St. Paul, Memphis, and Jackson, Miss., with connections to all points in North America. For more information on CN, visit the company's website at

CN Forward-Looking Statements

Certain information included in this news release constitutes "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995 and under Canadian securities laws. CN cautions that, by their nature, these forward-looking statements involve risks, uncertainties and assumptions. CN cautions that its assumptions may not materialize and that current economic conditions render such assumptions, although reasonable at the time they were made, subject to greater uncertainty. Such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors, which may cause the actual results or performance of CN or the rail industry to be materially different from the outlook or any future results or performance implied by such statements. Important factors that could affect the above forward-looking statements include, but are not limited to, the effects of general economic and business conditions, industry competition, inflation, currency and interest rate fluctuations, changes in fuel prices, legislative and/or regulatory developments, compliance with environmental laws and regulations, actions by regulators, various events which could disrupt operations, including natural events such as severe weather, droughts, floods and earthquakes, labor negotiations and disruptions, environmental claims, uncertainties of investigations, proceedings or other types of claims and litigation, risks and liabilities arising from derailments, and other risks detailed from time to time in reports filed by CN with securities regulators in Canada and the United States. Reference should be made to "Management's Discussion and Analysis" in CN's annual and interim reports, Annual Information Form and Form 40-F filed with Canadian and U.S. securities regulators, available on CN's website, for a summary of major risks. CN assumes no obligation to update or revise forward-looking statements to reflect future events, changes in circumstances, or changes in beliefs, unless required by applicable Canadian securities laws. In the event CN does update any forward-looking statement, no inference should be made that CN will make additional updates with respect to that statement, related matters, or any other forward-looking statement.

Southern Pacific Advisory

This news release contains certain "forward-looking information" within the meaning of such statements under applicable securities law including estimates as to: future production, operations, operating costs, commodity prices, administrative costs, commodity price risk management activity, acquisitions and dispositions, capital spending, access to credit facilities, income and oil taxes, regulatory changes, and other components of cash flow and earnings anticipated discovery of commercial volumes of bitumen, the timeline for the achievement of anticipated exploration, anticipated results from the current drilling program and, subject to regulatory approval and commercial factors, the commencement or approval of any SAGD project. Specific risk factors related to STP-McKay Phase 1 Expansion and STP-McKay Phase 2 include, but are not limited to, the timeline for completion of the DBM, approval of the application, the expected increase in the P+P reserves and net present value, development plans and the anticipated geological characteristics. Risk factors related to STP-McKay Phase 1 include the expected date of first steam.

Forward-looking information is frequently characterized by words such as "plan", "expect", "project", "intend", "believe", "anticipate", "estimate", "may", "will", "potential", "proposed" and other similar words, or statements that certain events or conditions "may" or "will" occur. These statements are only predictions. Forward-looking information is based on the opinions and estimates of management at the date the statements are made, and are subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those projected in the forward-looking statements. These factors include, but are not limited to the inherent risks involved in the exploration and development of conventional oil and gas properties and of oil sands properties, difficulties or delays in start-up operations, the uncertainties involved in interpreting drilling results and other geological data, fluctuating oil prices, the possibility of unanticipated costs and expenses, uncertainties relating to the availability and costs of financing needed in the future and other factors including unforeseen delays. As an oil sands enterprise in the development stage, with some conventional production Southern Pacific faces risks including those associated with exploration, development, start-up, approvals and the continuing ability to access sufficient capital from external sources if required. Actual timelines associated may vary from those anticipated in this news release and such variations may be material. Industry related risks could include, but are not limited to, operational risks in exploration, development and production, delays or changes in plans, risks associated to the uncertainty of reserve estimates, health and safety risks and the uncertainty of estimates and projections of production, costs and expenses. For a description of the risks and uncertainties facing Southern Pacific and its business and affairs, readers should refer to Southern Pacific's most recent Annual Information Form. Southern Pacific undertakes no obligation to update forward-looking statements if circumstances or management's estimates or opinions should change, unless required by law.

The reader is cautioned not to place undue reliance on this forward-looking information.

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