SPP/CPM STOCKHOLDERS GIVEN PROMISING OUTLOOK AT ANNUAL MEETING

The 33rd annual general meeting of the stockholders of Southern Pacific Pet-roleum/Central Pacific Minerals (SPP/CPM), held in Brisbane, Australia, in April, heard an optimistic statement by chairman I. McFarlane. He noted that many people have inquired about the reasons for Suncor’s decision to withdraw from the Stuart Project and concentrate their efforts in Canada. He pointed to comments by R. George, the chief executive officer of Suncor:

"For Suncor it makes sense to focus on our core business in Canada. We think the (Stuart) Project has potential. Since our 1996 Agreement, Suncor has undertaken several major project expansions in Canada:

• It has trebled its oil sands resources by purchases.
• It has undertaken Project Millennium which is now nearly complete at $2.8 billion.
• It is planning Project Firebag at a cost of $0.6 billion.
• It has indicated the possibility to expand to over 400,000 barrels per day.

In summary, these opportunities represent 300,000 barrels per day of expansion in Canada compared to the opportunity of a net 50,000 barrels per day for Stuart Stages 1, 2 and 3."

McFarlane stated that only four plant employees were Suncor Secondees, allowing SPP/CPM to retain almost the entire current operating team of 70 who now have significant experience on the Stage 1 plant. Another 100 contractors are also supporting current efforts to enhance plant reliability.

SPP/CPM believes they have sufficient financial resources to handle full ownership of Stage 1. Due to the current exemption from excise taxes, the plant can achieve breakeven at around 35 percent of design capacity. The companies also have $55 million in cash.

The major address at the meeting was given by J. McFarland, managing director of the Stuart Project. A digest of his remarks follows.

"The past year has been challenging. Buying out Suncor and taking over as 100-percent owner and operator of the Stuart Project is a big step for us. I believe we are up to the challenge. Becoming operator provides an opportunity to more directly apply our knowledge and capability, to test new approaches and to create even greater shareholder value in the long term.

I believe we have turned the corner in terms of emissions performance and are making accelerating headway in building production volumes, plant reliability and operating experience.

Over the past year our top priority was to complete the Stuart Stage 1 plant commissioning. In terms of results, I am pleased to say that all parts of the plant have been commissioned. The naphtha hydrotreater was the last part of the plant to be commissioned in July 2000. Since that time, the plant has been in an emissions and production testing mode leading to a semi-continuous operating mode in April this year. Practical completion testing of the plant under the Bechtel contract is expected to be completed later this year.

Overcoming unexpected air emission issues including odors, dioxins and shale dust, has been a key focus over the past 18 months. These issues caused concerns to us, the community and regulators, and limited our plant run time to less than 25 days in 2000.

A major program of emissions assessment, health risk reviews and engineering design led to implementation of a number of facility and operational enhancements in November 2000. These were successful in achieving major reductions in plant emissions. The plant now meets all regulatory requirements. Improvements include:

• 95 percent removal of sulfur dioxide
• 60 percent reduction of odors
• 60 percent reduction in dioxins
• Significant reductions in shale dust emissions

While these are significant achievements, we need to continue to work with the community and the regulators to deal with lingering concerns, varying perceptions and high expectations in the neighboring community of Yarwun/Targinnie.

The end game in Stage 1 is to confirm the viability of the AOSTRA Taciuk Processor (ATP) technology to support a scale-up decision on Stage 2. To date, the ATP has been a bright light in the Stage 1 plant. It has performed well in terms of operability and reliability. Over 60,000 barrels of oil have been produced to date. Naphtha and medium-shale oil products have consistently met tough specifications on sulfur, nitrogen and dust levels.

Given the longer-than-anticipated timeline on Stage 1 commissioning, we reduced the engineering effort on Stage 2 in 2000. Our efforts have focused on preserving the significant regulatory progress achieved to date since the filing of our Environmental Impact Statement (EIS) and Mining Lease application in September 1999.

We have long recognized the need to develop this new oil shale industry on a sustainable basis and have demonstrated our commitment with actions. We have committed to achieve a net Greenhouse Gas (GHG) emissions intensity in a commercial-sized oil shale project that is equal to or less than the intensity associated with production of conventional oil products.

This led us to implement a $3.5-million research and development plantation trial to sequester carbon dioxide. Some 160 hectares of plantations using native eucalyptus species were established in early 1999. Growth rates and carbon dioxide uptake have generally exceeded expectations. Some species have had spectacular growth rates of 12 meters in 2 years.

During the year a new computer model was developed of carbon dioxide emission sources in a commercial-sized plant. This was used to model carbon dioxide reduction opportunities in terms of quantity and costs. This work has confirmed, on a preliminary basis, that our emissions reduction goal is feasible and affordable.

A key goal for the year 2001, is to confirm the viability of the ATP technology in all its dimensions. By mid-year, that means delivering on a number of goals we set for ourselves.

Firstly, we want to double run length and oil production compared to our experience to date. That means a 10-day continuous run on shale and 35,000 barrels of new oil production.

Secondly, we want to make our first shipments of both Medium Shale Oil (MSO) and naphtha. Volumes are being inventoried to achieve attractive shipment sizes and good progress is being made with buyers in terms of product specification requirements.

Thirdly, we will be taking some new approaches with the neighboring community to seek solutions to issues that range from health concerns, to property values and lifestyle. A new working group has been formed consisting of three representatives from SPP, six people from the community and a representative from the Department of State Development. An independent facilitator is also working with this group, funded by State Development.

A second key milestone is to achieve an average quarterly throughput rate of at least 35 percent of plant capacity in the fourth quarter of this year (Figure 1). At this production rate, cash operating costs would be covered by revenues and we would be at operating net cash flow break-even (excluding capital).

Figure 1

To achieve these Stage 1 milestones, we will be focused on improving plant reliability, particularly equipment peripheral to the ATP, to achieve a more sustained level of production. This will be important in confirming key parameters such as oil yield performance. These are the cornerstones for determining ATP viability and readiness for scale-up in Stage 2.

With respect to Stage 2 of the project, we want to position ourselves to make a decision to ramp-up development work by the end of this year. In addition to confirming the ATP technology, we will need to prepare a Supplementary EIS Submission. This supplement will address the questions raised in the public review process and will be filed by the fourth quarter. A second Supplementary Submission may be required in 2002 to incorporate all the lessons learned on Stage 1, in particular, management of emissions.

We will also need to initiate research and development testing on Stage 1 in the fourth quarter to confirm Stage 2 design parameters prior to moving into detailed design on the Stage 2 ATP.

While our prime focus is clearly on Stuart, we plant to initiate pre-feasibility work on the Condor deposit. The objective here is to develop a basis on which to engage in meaningful discussions with potential partners.

And finally, efforts will continue to attract new partners to accelerate development of our huge oil shale resource base. We are in the process of kicking off an independent engineering review to be completed over the next couple of months. Solid performance on Stuart Stage 1 and this engineering review will be important in seeking new partners.

To achieve operating net cash flow breakeven by the fourth quarter, our objective is to ramp-up average production from about 10 percent of plant capacity in the second quarter to about 35 percent of plant capacity in the fourth quarter. This fourth quarter target represents an average production rate of 1,600 barrels per day or total production of 145,000 barrels in the quarter. Under this ramp-up scenario, cumulative production grows to 290,000 barrels by year-end.

Stage 1 operating net cash flow, excluding capital expenditures, was negative $4.9 million in the first quarter reflecting our 50 percent share of operating costs, with no sales revenue offset.

In the second quarter we expect cash flow to be about negative $9.3 million. This reflects 100-percent funding of costs, partially offset with initial revenues from sales. In the third quarter, this cash flow deficit reduces to $5.8 million and is breakeven by the fourth quarter.

We are currently reassessing the appropriate level of capital expenditures in 2001 to improve reliability and to ensure low-emissions performance at higher daily production rates. Capital expenditures could be about $6 to $10 million in 2001, of which about $1.1 million (SPP/CPM 50 percent share) had been spent to the end of the first quarter.

From a corporate perspective, we believe we have the financial resources to manage 100 percent ownership of Stuart and can carry through on achieving the objectives for Stage 1 (Figure 2).

Figure 2

Our spending rate will average about $5 to $6 million per month over the rest of 2001. This includes operating costs of about $3.3 million per month for Stage 1.

Offsetting these expenses will be growing revenues from Stage 1 and ongoing portfolio earnings. By the fourth quarter, we expect Stage 1 revenues to average about $3.3 million per month which covers Stage 1 operating expense.

The net effect of these costs and revenues is to draw down our cash reserves from about $55 million currently (after the Suncor deal) to about $17 to $25 million by the end of this year. Projecting this outlook forward to year-end 2002, we expect our cash reserves to grow somewhat to about $20 to $35 million.

The delays in Stage 1 have resulted in corresponding delays in progressing Stage 2. We now estimate first oil in 2005, a delay of about 18 months since our projection at this time last year.

Although the regulatory process is well advanced, two additional supplementary submissions to the EIS will likely be required. As a result, we expect regulatory approvals to be delayed to the third or fourth quarter next year. If the regulatory process is proceeding well, we could initiate additional engineering early next year with emphasis on ATP detailed engineering which is on the critical path.

The earliest anticipated financial close would be at year-end 2002, permitting start of construction in early 2003. The construction phase is estimated at 24 to 30 months, followed by a commissioning-phase leading to first oil in late 2005.

In summary, achieving this schedule requires confirmation of ATP viability in 2001, new investment funds and a fast-track engineering and construction schedule beginning early next year.

Over the longer term, we are targeting to achieve productive capacity of over 200,000 barrels per day by 2012 (Figure 3). This includes a fully developed three-stage Stuart project with a capacity of 85,000 barrels per day by 2009. We continue to believe it is realistic to achieve start-up of one other commercial-scale project in Condor or Rundle by the end of the decade.

Figure 3

A number of critical steps will be required to achieve this target, including success at Stuart Stage 1, regulatory approvals, new partner arrangements and financing. Investment requirements to achieve a 200,000-barrel per day rate could exceed A$8 billion.

One may well ask where will these kinds of funds come from? The worldwide oil and gas industry is generating unprecedented cash flows and earnings. Exxon alone generated almost US$18 billion (A$35 billion) in profits last year. The number of oil industry players is shrinking and they are getting bigger. It will be a major challenge for these companies to effectively deploy these profits and to achieve growth commensurate with their size. With success at Stuart we offer the scale and potential profitability that will no doubt be attractive to the majors and aspiring independents.

A similar trend is under way in the mining industry and it is only a matter of time before the mining industry recognizes the potential of oil mining and the synergies it offers with their current capabilities.

I am therefore very optimistic about the future. Our success revolves on Stuart, and if the experience of the past few weeks as the new owner and operator is anything to go by, I believe our prospects are very good indeed."