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Denbury Resources Acquires Option To Hastings Field, Plans CO2 Enhanced Oil Recovery

[Daily News] Denbury Resources Inc. has announced it has entered into an agreement with a subsidiary of Venoco, Inc. which gives the company the option to purchase its interest in Hastings Field, a strategically significant potential tertiary flood candidate located near Houston, Texas, between Nov. 1, 2008 and Nov. 1, 2009.
The agreement provides for the parties to agree upon a purchase price at the time of the exercise of the option, which may be paid in cash or through a volumetric production payment; failing agreement as to price, the price will be determined by a pre-designated independent petroleum engineering firm using specified criteria for calculation of the discounted present value of proved reserves at that time.

The agreement requires an upfront payment of $37.5 million (all figures US) to be paid at closing of the option agreement, with additional payments totaling $12.5 million over the next two years.

The company may extend the option beyond November 2009 for up to seven additional years at an incremental cost of $30 million per year. None of the option payment amounts are to be credited against the purchase price if the option is exercised by Denbury.

Closing is expected within the next thirty days, subject to title and environmental due diligence and approval by Venoco's lenders. Hastings Field is currently producing approximately 2,400 barrels per day.

The option is to purchase Venoco's interest in Hastings Field, less a 2% override and a 25% reversionary interest following payout, as defined. Venoco has a working interest of approximately 89% in the West Hastings Unit and near 100% in East Hastings Field.

The company initially has estimated, based on preliminary engineering data, that the West Hastings Unit (the most likely initial area to be developed as a tertiary flood) has an estimated net reserve potential from CO2 tertiary floods of 50 to 90 million barrels of oil equivalent depending on the ultimate recovery factor, net of the projected reversionary interest, based on a $60 oil price.

The company will need to build a pipeline to transport CO2 to this field, estimated at approximately 280 miles, from the southern end of its existing CO2 pipeline which terminates near Donaldsonville, Louisiana. Based on very preliminary estimates, this pipeline is expected to cost between $225 million and $250 million.

Initially, the company would anticipate transporting CO2 from its natural source at Jackson Dome, but would ultimately plan to use manufactured (anthropogenic) sources of CO2 for this tertiary operation. The company is initiating studies related to construction of this line, with a goal of having it installed and operational within the next few years.

Based on preliminary company estimates, it will cost between $400 million and $600 million (net) to develop the West Hastings Unit as a tertiary flood, excluding the cost of the CO2 pipeline.

If the option is exercised, under the agreement Denbury is committed to make aggregate net capital expenditures in the field of approximately $175 million over the subsequent five year period to develop the field for tertiary operations, with an obligation to commence CO2 injections in the field within three years following the option exercise.

The company has committed to take all of the CO2 (a by-product of the plant) produced by a planned petroleum coke gasification project in Louisiana, scheduled to commence operations in 2010, and is engaged in ongoing discussions with other potential sources of manufactured CO2. This plant, if completed, is expected to produce between 190 and 225 million cubic feet per day of CO2.

The purchase price of this CO2 will vary, depending on oil price and the level of compression provided by the seller, anticipated at this time to cost around one and one-half times as much as the company's most recent all-in costs for its natural sources, using roughly equivalent pressures and current oil prices. The company plans to connect this manufactured source of CO2 to the company's natural source of CO2, which will allow the company to allocate production as required between the two sources.

Gareth Roberts, CEO of Denbury, commented on the transaction, saying: "This agreement provides for a significant strategic addition to Denbury, giving us an anchor field to justify the cost of building a CO2 pipeline to the Texas Gulf Coast region. This will significantly expand our area of operations and growth opportunities.

"With the recent agreement to purchase an anthropogenic source of CO2, we have added the potential for an additional one tcf of CO2, assuming the plant project is built as planned, so we should have plenty of CO2 to expand our operations both at Hastings and elsewhere. Our tertiary operations continue to provide Denbury a unique opportunity for growth for years into the foreseeable future."

Denbury Resources Inc. is a growing independent oil and gas company. The company is the largest oil and natural gas operator in Mississippi, owns the largest reserves of CO2 used for tertiary oil recovery east of the Mississippi River, and holds key operating acreage in the onshore Louisiana and Texas Barnett Shale areas. The company increases the value of acquired properties in its core areas through a combination of exploitation drilling and proven engineering extraction practices.

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Daily Oil Bulletin | JuneWarren-Nickle's Energy Group

Daily Oil Bulletin | JuneWarren-Nickle's Energy Group