By OGJ editors
HOUSTON, Nov. 22 -- Denbury Resources Inc. has signed an agreement with a Venoco Inc. subsidiary for an option to purchase Veneco's interest in Hastings field, a potential tertiary flood property near Houston.
The agreement requires an upfront payment of $37.5 million to be paid at closing of the option agreement, with additional payments totaling $12.5 million over the next 2 years.
If approved, the option period will run from Nov. 1, 2008, through Nov. 1, 2009. Denbury may extend the option beyond the primary term for as many as 7 additional years at an incremental cost of $30 million/year. None of the option payment amounts are to be credited against the purchase price, which is to be agreed upon at the time the option is exercised and may be paid in cash or through a volumetric production payment.
If the parties fail to agree to a price, a price will be determined by a predesignated independent petroleum engineering firm using specified criteria for calculation of the discounted present value of proved reserves at that time.
The purchase deal would include Venoco's interest in Hastings field, less a 2% override and a 25% reversionary interest following payout, as defined.
Hastings field currently produces about 2,400 b/d. Venoco owns about 89% interest in the West Hastings Unit and nearly 100% in East Hastings field. Based on preliminary engineering data, the West Hastings Unit (the most likely initial area to be developed as a tertiary flood) has an estimated net reserves potential from CO2 tertiary floods of 50-90 MMboe depending on the ultimate recovery factor, net of the projected reversionary interest, based on a $60/bbl oil price, Denbury said.
Initially, Denbury had expected to transport CO2 from its natural source at Jackson Dome, but ultimately plans to use manufactured (anthropogenic) sources of CO2 for this tertiary operation. It is initiating studies for construction of a 280-mile pipeline to transport CO2 to Hastings from the southern end of its existing CO2 pipeline which terminates near Donaldsonville, La. The pipeline, with a target for installation and operation within the next few years, is expected to cost $225-250 million.
Preliminary estimates indicate that it will cost $400-600 million (net) to develop the West Hastings Unit as a tertiary flood, excluding the cost of the CO2 pipeline.
If the option is exercised, Denbury will be committed to make aggregate net capital expenditures of about $175 million over the subsequent 5-year period to develop the field for tertiary operations, and to begin CO2 injections in the field within 3 years after exercising the option.
Meanwhile, Denbury has committed to buy all the CO2 produced as a byproduct by a planned petroleum coke gasification project in Louisiana, scheduled to start up in 2010, and is engaged in ongoing discussions with other potential sources of manufactured CO2. The plant, if completed, is expected to produce 190-225 MMcfd of CO2. The purchase price of the CO2 will vary, depending on oil price and the level of compression provided by the seller.
Denbury plans to connect this manufactured source of CO2 to its natural source of CO2, which will allow the company to allocate production as required between the two sources.
