Denbury Resources (NYSE:DNR) is counting on the company's enhanced oil recovery (EOR) operations to generate double-digit annual production growth for the company, through 2020. This production growth will come from operations in the Gulf Coast and Rocky Mountains regions. (To know more about oil market investment, read: A Guide To Investing In Oil Markets.)
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Denbury Resources core strategy involves injecting carbon dioxide into oil reservoirs that have already produced, using primary and secondary recovery operations. The goal is to stimulate additional production and recover more of the original oil in place.
Denbury Resources has established a capital budget of $1.35 billion for 2012, with $860 million directed towards the company's EOR operations. These funds will be used for the development of the properties, pipelines to transport the oil and to secure a supply of carbon dioxide. (To know more about capital budgeting, read: Which Is A Better Measure For Capital Budgeting, IRR or NPV?)
Denbury Resources reported average production of 29,062 barrels of oil equivalent (BOE) per day in 2010, from its EOR properties, and estimates that 2011 production will average 31,000 BOE per day. The company projects that production from EOR operations will grow at a compound annual rate between 13 and 15%, from 2010 to 2020. Long term growth estimates would increase production to a range from 100,000 to 120,000 BOE per day, by the end of the decade.
Although some investors are worried that lower prices for crude oil might impact the company's EOR operations, Denbury Resources believes that these areas would still be economic to develop. The company cites a recent report that carbon dioxide EOR operations, in general, need a WTI crude oil price of $47.50 to generate an after tax rate of return of 10%.
Denbury Resources initiated its first EOR operation in the Gulf Coast region and still has the bulk of its reserves and production from this area. The company reported proved reserves of 156 million BOE, as of the end of 2010. The company has started up five phases in the Gulf Coast area and is currently producing oil from twelve fields. These five phases will require a total capital investment of $231 million in 2012 as the company continues development here.
Denbury Resources also has four other operational phases in various planning stages and expects to start up EOR production from the Hastings and Oyster Bayou fields in 2012. The company plans to start carbon dioxide injection at the Conroe field in 2015 and does not have a date set for the Citronelle field, as the timing of this phase is dependent on securing a reliable carbon dioxide supply. (For additional reading, check out: Oil And Gas Industry Primer.)
In the Rocky Mountains, Denbury Resources has three separate EOR project areas and expects the Bell Creek and Grieve fields to start up production in 2013 and 2014. The Cedar Creek Anticline accounts for the vast majority of the company's reserves in the Rocky Mountains and is being prepared for carbon dioxide injection in 2017.
Denbury Resources has secured a supply of carbon dioxide from the Riley Ridge Unit and estimates that this field has 2.4 Tcf of reserves available.
Plains Exploration and Production (NYSE:PXP) is also involved with EOR activity and has a number of fields in California that produce, using steam flood operations.
Occidental Petroleum (NYSE:OXY) is one of the largest EOR operators in the United States, with a substantial production base in the Permian Basin and other regions. The company estimates that 60% of its Permian Basin production is from fields that use carbon dioxide flooding.
Rex Energy (Nasdaq:REXX) has an EOR operation in the Illinois Basin and is injecting Alkali Surfactant Polymer into old wells, to help stimulate production.
The Bottom Line
Enhanced oil recovery is not the sexiest business in the energy patch and usually takes a distant second place to the more glamorous shale plays that have come to dominate development in the United States. Despite this lack of enthusiasm, Denbury Resources is making the correct decision to continue to allocate substantial resources here, as part of its long term growth strategy.
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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.
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