Denbury Resources: How to Profit From Carbon Dioxide (and Not How You'd Think)

Denbury Resources (DNR) is an oddity in the domestic energy exploration business -- it makes its money by injecting carbon dioxide into depleted petroleum fields to recover lost production. The Plano-based oil company just acquired Encore Acquisition, nearly doubling its inventory of recoverable petroleum reserves.

Denbury is dishing out $4.5 billion to acquire oil producer Encore -- paying 35 percent more than the price of Encore's stock price just prior to the deal announcement last November.

Chief executive Officer Phil Rykhoek defended the premium price, telling analysts on the fourth-quarter 2009 earnings call that the purchase would more than double the potential of its enhanced oil recovery (EOR) assets. The anticipated EOR production from Encore properties in the Rocky Mountains (Montana and Wyoming) fits nicely into Denbury's overall EOR program, said Ryhoek, and will provide production growth in 2015 and beyond, about the time when the company's Gulf Coast tertiary fields are expected to hit production peaks. Denbury is an industry leader in carbon dioxide (CO₂) tertiary operations, which involves injecting sequestered carbon dioxide into mature oil wells to decrease reservoir viscosity, increase flow rate, and cost-effectively help pump out difficult-to-reach oil. The company has successfully recovered, on average, 17 percent of original oil deposit reserves using this enhanced technology. Prior to the merger, the company estimated it could recover more than 260 million barrels of oil from CO₂ -tertiary flooding methods of held leases.

The company is looking to shift more of its annual production to tertiary CO₂ oil production, as its CO₂ -tertiary oil reservoirs have historically generated higher rate of returns than those of its traditional oil properties: current estimated break-even of tertiary fields, before overhead and interest costs (which historically range from $15 to $25 per barrel of oil), is estimated in the mid-thirties per barrel. Management believes that with scale and completion of CO₂ pipeline projects, its tertiary finding and development costs could drop from a recent $12.68 per barrel to less than $10 (over the recovery life of the field).

In the fourth-quarter 2009, production from the energy producer's tertiary recovery operations averaged 26,307 barrels of oil per day, or 58.4 percent of total daily production (of which 83 percent was oil), according to Denbury's 2009 annual report.

Proved reserves associated with CO₂ tertiary operations account for approximately 65 percent of current proved reserves, or 134.5 million barrels of oil as of year-end 2009. Based on estimated fourth-quarter production levels and proved reserves, Denbury's tertiary oil reserves had a 14.0 R/P ratio (reserve life in years based on current production levels).

The Encore acquisition will add an additional 43,000 barrels equivalent per day to production and approximately 260 million barrels of recoverable oil from CO₂ operations to reserves.

"Sentimental irony is a dog that bays at the moon while pissing on graves." ~ Austrian satirist Karl Kraus (1874-1936)

Carbon caps, greenhouse gases, climate change - irony of ironies is that the biggest logistical problem facing Denbury Resources is securing large, nearby sources of (inexpensive) CO₂ reserves needed for injection-recovery projects.

Carbon Dioxide EOR Photo Source: Lawrence Livermore National Laboratory