|Denbury Sharpens Enhanced Oil Recovery Focus |
Copyright © 2009 Energy Intelligence Group, Inc.
Friday, December 4, 2009
Dallas-based Denbury Resources is expanding further into the carbon dioxide-based enhanced oil recovery (EOR) business and disposing of its largest remaining natural gas assets.
Denbury said on Thursday it will pay $430.7 million in cash and stock to privately held Wapiti Energy for a 95% stake in the old Conroe oil field north of Houston.
The cash will come from the proceeds of a $210 million sale of Denbury's remaining Barnett Shale gas assets in North Texas to Talon Oil & Gas, another private company that purchased 60% of the Barnett properties earlier this year (OD May14,p7).
The two transactions will get Denbury almost completely out of the natural gas business, even after factoring in the recently announced $4.5 billion purchase of Encore Acquisition (OD Nov.3,p1).
Denbury is currently in the process of acquiring Fort Worth-based Encore which focuses on enhanced oil recovery and unconventional oil, such as the Bakken Shale play of North Dakota. Encore does have a few small natural gas holdings.
Denbury is representative of an emerging trend, especially among independent producers, but also some majors, to focus more on North American oil which currently offers much higher margins.
Current Nymex futures prices have oil and natural gas at a 17:1 price ratio, compared to the historical ratio of 10:1. The multiple had been as high as 30:1 earlier this year.
"We believe that taken together, these two transactions further enhance our core strategy, assets and focus," said Denbury Chief Executive Phil Rykhoek.
"We are acquiring an asset with an estimated 125 million barrels of upside potential in exchange for an asset that we believe has far less potential," he added.
Rykhoek described the Conroe field as the "single largest potential tertiary flood on our list of desired Gulf Coast properties."
Denbury has been expanding from its original base in Mississippi into the Upper Texas Gulf Coast through the acquisition of an assortment of old oil fields. It is currently constructing the Green Pipeline to transport naturally occurring occurring carbon dioxide from an underground source to the region.
The company also is looking at opportunities to capture carbon dioxide from industrial emissions for use in enhanced oil recovery projects in the Gulf Coast area.
Developing the Conroe field as an enhanced recovery project will not be cheap, however. Denbury said it will invest $750 million to $1 billion to recover an additional 125 million bbl of oil from the field, including construction of an 80-mile connection to the Green Pipeline.
In addition, Denbury believes it can recover another 20 million barrels of oil equivalent of conventional reserves from the property.
The Conroe field, located about five miles northwest of the town of Conroe and 40 miles north of Houston, was discovered in 1931 by wildcatter George W. Strake.
As was often the case, development of a find of this magnitude was beyond Strake's means, so he brought in the Humble Oil & Refining Co. -- one of Exxon Mobil's predecessor companies -- as his partner.
Other drillers had interests in the field, and it became a test case for the Texas Railroad Commission as the agency sought to implement newly passed production regulations in the 1930s. Eventually the field was unitized under a single operator, initially Humble, which later became part of Exxon.
According to Texas Railroad Commission figures, the Conroe field has already yielded more than 750 million bbl of oil over a lifetime of nearly eight decades.
Barbara Shook, Houston