Denbury-Encore merger to test carbon dioxide-oil synergies

The production-sequestration synergies of crude oil and carbon dioxide will receive a new test under a $4.5 billion acquisition by Denbury Resources Inc. of Encore Acquisition Co.

By OGJ editors
-- The production-sequestration synergies of crude oil and carbon dioxide will receive a new test under a $4.5 billion acquisition by Denbury Resources Inc. of Encore Acquisition Co.

Both companies have strategies geared to enhanced oil recovery via CO2 injection. On Nov. 1 they announced signing of a definitive merger agreement that will leave Denbury, of Plano, Tex., the surviving entity.

Both companies also are pursuing supplies of CO2 from industrial sources needing to reduce emissions of greenhouse gas through capture and sequestration in the subsurface.

The companies
Denbury has 212.4 million boe of reserves, 59% developed and 82% oil, in mature fields of Mississippi, Louisiana, Alabama, and Texas.

At Jackson Dome in Mississippi it has CO2 reserves estimated at 5.6 tcf proved, 3 tcf probable, and 2 tcf possible connected to mature oil fields by 750 miles of existing and planned pipelines. Denbury hopes to supplement Jackson Dome supply with CO2 from Gulf Coast emitters and planned projects to gasify solid carbon.

In this year’s second quarter it produced an average of 44,240 boe/d after adjustments for the acquisition late last year of Hastings oil field south of Houston and sale of properties this year in the Barnett shale gas play.

Among other projects, Denbury is laying a 320-mile, 24-in. pipeline to carry CO2 from Donaldsonville, La., near the termination of an existing line, to Hastings field.

Encore, Fort Worth, recently reported 186 million boe of reserves, 72% oil and 80% proved developed, in the Williston basin, Rocky Mountains, Midcontinent, and Permian basin. Its interests include 300,000 net acres in the Bakken shale oil play.

In this year’s first half Encore produced an average 41,652 boe/d.

Before the merger announcement, Encore said its CO2 plans centered on Bell Creek field in southeastern Montana. Now on waterflood, the field has an estimated 350 million bbl of oil originally in place with 221 million bbl remaining.

Encore said it expects the field to produce an additional 30.1 million bbl through miscible CO2 injection. It will deliver the gas through new 206-mile, 8-in. or 10-in. pipeline from the Lost Cabin gas plant operated by ConocoPhillips in central Wyoming.

Encore entered a deal in July to buy about 50 MMcfd of CO2 from the plant during an initial term of 15 years. In addition to laying the pipeline, it plans to install compression at the plant.

The Bell Creek project includes reactivation of 275 wells and drilling of as many as 75 wells to establish a five-spot injection pattern.

Encore estimated the production response from 100% utilization of the available CO2 at more than 6,500 b/d by 2015, with output remaining at that level for 10 years.

The Bell Creek project would bring CO2 to within 120 miles of the Cedar Creek anticline in eastern Montana, where Encore has 40% of its total reserves and estimates oil potentially recoverable via CO2 injection at 200 million bbl.

It has identified the U4 zone of the Upper Ordovician Red River formation in South Pine oil field as the first target of CO2 injection enabled by a northward extension of Log Cabin-Bell Creek pipeline.

Shell Oil, the original South Pine operator, conducted a pilot CO2 flood in the field in the 1980s after the pilot area stopped producing oil via waterflood. Encore estimates potential recovery through CO2 injection in the target zone at 19 million boe and in other South Pine strata at 42 million boe.

Larger projects
After the merger, the combined company will be able to pursue “significantly larger” CO2 projects in the Gulf Coast and Rockies, said Denbury Chief Executive Officer Phil Rykhoek.

“This combination will also further enhance Denbury’s position as the natural buyer and owner of mature oil properties in our core regions and the partner of choice for CO2 emitters looking to reduce their carbon footprint,” he said.

Rykhoek said the acquisition would provide for production growth in 2015 and beyond, “about the time when we anticipate nearing the production peak of our existing EOR field inventory.”

Although the companies have reported financial losses in recent quarters, mainly because of decreased prices of oil and gas, both were profitable last year, during the first half of which prices set record highs.

For 2008, Denbury reported net income of $388.4 million on revenue of $1.366 billion. Encore earned $438.8 million on $1.125 billion of revenue.

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