E&P independent Denbury Resources has managed to vastly broaden its enhanced oil recovery, EOR, program in the Rockies and Texas through separate billion dollar deals with ConocoPhillips and ExxonMobil. But the transactions also greatly strengthen the Bakken portfolios of these two big companies.
One deal allows Conoco to focus more investment dollars in the region, while the other significantly expands Exxon’s acreage position and production in the unconventional oil play.
Denbury is the largest combined oil and natural gas operator in both Mississippi and Montana, and owns the largest reserves of CO2 used for tertiary oil recovery east of the Mississippi River.
Under terms of the latest deal, announced Jan. 15, Denbury agreed to pay Conoco $1.05 billion in cash to acquire producing property interests in the Cedar Creek Anticline, CCA, of eastern Montana and northwestern North Dakota. The assets include additional interests in Denbury’s existing operated fields in CCA, along with operating interests in other CCA fields.
Denbury focused on CO2“Strategically, we are now purely focused on what we do best, CO2 enhanced oil recovery, which we believe offers one of the lowest risk, and most compelling rates of return in the oil and gas industry today,” said Phil Rykhoek, Denbury’s president and chief executive officer.
Conoco’s position in the Cedar Creek Anticline comprises about 86,000 net acres. Net production in 2012 averaged about 13,000 barrels of oil equivalent per day through November.
However, the Denbury acquisition does not include any of Conoco’s assets in the Bakken formation, where the company owns 626,000 net acres, consisting of 207,000 net lease acres and 419,000 net mineral acres. Conoco has big plans for the Bakken.
“The transaction will allow us to focus our investments in North Dakota and Montana on our significant Bakken unconventional position,” explained Don Wallette, Conoco’s executive vice president of commercial, business development and corporate planning.
Conoco to ramp up drillingIn late November, Conoco told analysts in Houston that the company aimed to ramp up drilling to eight rigs in 2013 from five rigs in 2012 in the Bakken after recent expansions of oil-shipping capacity in the region.
“We will see the benefits of that increased activity in our production in 2013,” according to a company executive.
ConocoPhillips has since released plans to spend a total of $15.8 billion in 2013. Of that, more $4 billion will be spent across the company’s U.S. assets in the Bakken, Barnett, Eagle Ford, Niobrara and Permian Basin areas. Targets in all of those areas are identified as liquids-rich.
If 2012 is a good indication of what to expect in 2013, Conoco will likely spend 15-to 20 percent of the $4 billion allocated for the United States in the Bakken. In 2012, the company spent about $600 million developing the play.
Conoco believes its 600,000-plus acres in the Bakken will yield 1,300 gross proved and probable drilling locations, 400 million barrels of resources from just 40 percent of its acreage, and production of almost 40,000 boe per day in 2016.
Since last year, Conoco has acquired more than 700,000 acres of leaseholds in unconventional oil and natural gas formations, primarily in liquids rich areas. The company now has 21 million acres of onshore properties in the Lower 48 states and Canada.
In a complicated two-phase deal valued at about $2 billion, Denbury ended up selling all of its Bakken area properties to Exxon and its subsidiary XTO Energy for $1.3 billion in cash. Additionally, Denbury received Exxon interests in various fields in Texas and Wyoming with EOR potential, along with some CO2 reserves.
The deal gave Exxon and XTO an additional 196,000 acres in the Williston Basin.
96 million boe in reservesProved reserves attributed to Denbury’s Bakken assets were about 96 million boe as of Dec. 31, 2011, and were 84 percent oil and natural gas liquids and 26 percent proved developed producing.
Average production from the Denbury properties in the first half of 2012 was about 15,400 boe per day, of which 88 percent was oil and natural gas liquids. XTO averaged 19,944 barrels per day in October, while Denbury averaged 12,156 barrels per day.
Exxon has said it plans to increase capital spending by $7 billion to $8 billion a year, with a significant portion of the increase earmarked for unconventional plays in the United States, including the Bakken.
Denbury said that it intended to use the cash proceeds from Exxon to pursue the purchase of additional oil fields in the Gulf Coast or Rocky Mountain regions that were candidates for CO2 flooding. Conoco’s Cedar Creek Anticline obviously was on the company’s radar screen.
Denbury redeploys Exxon cash“Denbury plans to fund the purchase out of the approximately $1.3 billion of cash received from the Bakken sale and asset exchange with ExxonMobil completed in December,” the company announced.
Highlights of the Denbury-Conoco deal include:
The Cedar Creek Anticline is a major geological feature that extends for about 126 miles in a northwest-southeast direction and ranges from two to six miles in width. It’s made up of a series of producing oil units, each of which could be considered a field by itself.
Commercial quantities of oil were first discovered in the South Pine Unit of CCA in the early 1950s. The original oil in place at all CCA fields, including those not owned by Denbury, is estimated at over 3 billion barrels of oil.
CCA produces from numerous reservoirs, although the primary reservoir is the Red River formation, which is a series of carbonate reservoirs that have produced significant amounts of oil. The gross producing interval at CCA is about 2,000 feet thick, and ranges in depth from approximately 7,000 feet to 9,000 feet.
Reservoir characteristics similarThe reservoir characteristics of CCA are similar in many respects to oil fields successfully flooded with CO2 in the Permian Basin of West Texas and Weyburn field in the Canadian Williston Basin.
CCA is about 110 miles north of Denbury’s Bell Creek field, which the company plans to start flooding with CO2 in the first half of 2013, and the current terminus of the recently completed Greencore Pipeline which will initially transport CO2 from Denbury’s source in central Wyoming. Denbury currently plans to extend the pipeline both north and southwest in order to deliver the CO2 necessary to flood its CCA fields.
Denbury said it is currently designing a CO2 development plan for its CCA assets, and will incorporate the newly acquired properties into these plans. The company estimates that a CO2 flood of the properties could recover between 60 million and 80 million barrels of oil. As a result, Denbury estimates a CO2 flood of its CCA assets, including the assets to be acquired, could recover between 260 million to 280 million barrels of oil.
“This transaction, combined with the recently completed ExxonMobil transaction, results in the trade of our Bakken assets for three assets with significant oil production, proved reserves, cash flow and CO2 EOR potential, along with additional CO2 reserves and a little bit of cash, all in a tax efficient manner,” Denbury’s Rykhoek said.