Delhi Field
The Delhi Holt Bryant Unit in the Delhi Field in Louisiana is currently our most significant asset. 

• The Delhi Holt Bryant Unit is currently being redeveloped with an EOR project utilizing CO₂   technology by a subsidiary of Denbury Resources Inc. as Operator;
• As of May 5, 2009, the Operator reported that the 78 mile Delta Pipeline from Tinsley Field to the Delhi Field had been completed and tested; and
• As of August 4, 2009, the Operator publicly announced that CO₂ injection is expected to commence in the fourth quarter of calendar 2009, with initial oil production response expected by mid-calendar 2010.

We believe that the Delhi Holt Bryant Unit is a strong candidate for a CO₂-EOR project due to its favorable rock characteristics, large unproven reserves remaining in place, low cost of drilling due to a relatively shallow depth and relatively close location to naturally occurring CO₂ reserves approximately 100 miles east of the Delhi Field.  We base our
belief on (i) our internal analyses of CO₂ pilot tests successfully completed in the Delhi Holt Bryant Unit by a prior field operator, (ii) our analysis of favorable analogous comparisons to successful full scale projects in the same or similar geological formation, (iii) a competitive offering process, wherein we solicited multiple major participants with CO₂-EOR expertise, funding and operating abilities, leading to two confidential competitive offers made to us in writing, (iv) our qualitative assessment that the competitive offers were based on the CO₂-EOR potential of the Unit and not on the relatively minor associated proved reserves existing at that time, and (v) the buyer’s willingness to commit a portion of its proved CO₂ reserves and a $100 million minimum future investment in a CO₂ project in the Unit.

According to published reports and field records, the Delhi Field was discovered in the mid-1940’s and was extensively developed by various operators including the Sun Oil and Murphy Oil companies through the drilling and completion of approximately 450 wells, most within the first few years after discovery.  According to DeGolyer & MacNaughton (“D&M”), the independent reservoir engineering firm engaged by the Operator and by us to review the project, the Delhi Field has produced approximately 192 million barrels of crude oil and substantial amounts of natural gas to date. Much of the natural gas production was processed to remove natural gas liquids and re-injected for pressure maintenance. Beginning in the late 1950’s, the field was unitized to conduct a pressure maintenance project through the injection of water into the producing reservoir in down dip injection wells (unitization is the process of combining multiple leases into a single ownership entity in order to simplify operations and equitably distribute royalties when common operations are conducted over multiple leases). Drilling operations resulted in primarily 40-acre spacing across the unit’s 13,636 acres. A few wells were drilled below the targeted Tuscaloosa and Paluxy formations. The water injection pressure maintenance operations did not utilize a more traditional and effective five spot flood pattern water flood that generally results in a more complete reservoir sweep and oil recovery.

At the time we began our oil and natural gas operations in late September 2003, we purchased essentially all of the working interests and an 80% net revenue interest in the Delhi Field (from the surface to the top of the Massive Anhydride formation, but excepting the Mengel Unit), for approximately $2.8 million, including the assumption of a plugging and abandonment reclamation bond.  All but 43 wells in Richland, Franklin and Madison Parishes, Louisiana had been plugged and abandoned and production averaged approximately 18 BOPD with no natural gas being sold due to a lack of natural gas processing and transportation facilities.  The best producing well was immediately lost during a periodic sand wash work-over when water from a lower reservoir broke through along the casing exterior and into the producing reservoir.

In October of 2003, we applied an unproven lateral re-entry technology that resulted in no increase in production.  In December 2003, we initiated a conventional development program based on re-completion of wells to other reservoirs and restoring non-producing wells to producing status.  During 2004, we refurbished a gas injection line, converting it to a gas gathering and sales line, and placed a gas processing plant in the field to begin natural gas production in July of 2004.  During 2005, we began a five well development drilling program aimed at reaching mostly proved undeveloped reserves left in primary “attic” positions.  The culmination of these activities caused production to increase from 18 BOPD to a monthly average rate of 145 BOEPD during our peak production month in late 2005. 

Concurrent with these activities, we completed internal studies indicating that the reservoirs in the Delhi Holt Bryant Unit, the dominant oil producing reservoirs, had substantial remaining recoverable oil in place.  Based on positive CO₂ pilots conducted by Sun Oil in 1985, and favorable rock characteristics shown in multiple cores taken throughout the Delhi Field, we began discussions in late 2004 with potential industry partners skilled in CO₂-EOR recovery methods.

During this time we also began to acquire royalty and overriding royalty interests that ultimately aggregated 7.4%.

With positive industry reception, and following extended negotiations with three candidates as prospective partners, we accelerated our redevelopment plan in June 2006 by selling a major portion of our Delhi Field interests, in the form of a Farmout, to Denbury Onshore LLC, a subsidiary of the Operator for all of our working interests in the Delhi Holt Bryant Unit and its proved reserves and 75% of our working interests in certain other depths of the Delhi Field (the “Delhi Farmout”).  Important aspects of this transaction include:

• We received approximately $50 million in cash (pre-tax) to redeploy to other projects and repay all of our then outstanding debt.
• We retained significant participating interests through a reversionary working interest of 25% (20% revenue interest net to us).  We expect the value of these interests (along with the separately acquired royalty and overriding royalty interests aggregating 7.4%) will substantially exceed the $50 million cash component of the Delhi Farmout, subject to future oil prices, operating expenses, anticipated EOR performance and project completion by the Operator.
• The Operator committed to install a CO₂-EOR project in the Holt Bryant Unit and expend a minimum additional $100 million on the project over the first 6-1/2 years, subject to penalty payments to us for shortfalls in such expenditures. All capital expenditures related to the project are borne by the Operator prior to payout.
• The Operator is the dominant CO₂-EOR operator on the Gulf Coast, currently operating a large number of CO₂-EOR projects and owns naturally occurring CO₂ reserves that we believe to be sufficient to meet the needs of the Delhi project and which have been dedicated to the Delhi project.
• Our reversionary working interest in the CO₂-EOR project is based on a defined $200 million threshold, subject only to expansion of the project through acquisitions, and our reversionary working interest occurs when cumulative project revenues less direct operating costs in the field reach the threshold.
• We further retained a 25% working interest (20% net revenue interest) in certain other depths outside of the Holt Bryant Unit within the Delhi Field, and believe that additional development potential may exist in the shallower depths.
•  We expect that our independent reservoir engineer will be able to consider and assign proved reserves following the earlier of (i) first EOR production response in Delhi, projected to occur by mid-year calendar 2010, or (ii) in our June 30, 2010 Form 10-K, assuming no delay in the implementation of SEC’s “Modernization” rules that are scheduled to become effective on January 1, 2010.

As of June 30, 2009, our independent reservoir engineer assigned 13.6 MMBO of probable reserves net to our interests at Delhi.  These reserves are based on first production beginning in the second half of 2010 and steadily increasing to peak production in 2017-2018, then gradually declining (see plot below). Additional projections include total purchases of CO2 of 664 bcf and recycle CO2 injection of 3324 bcf.  No allowance was included for severance tax abatement as subsequently approved by the State of Louisiana for the qualified EOR project.

CO₂ Recovery Potential at Delhi Field
The most logical method for recovering a large portion of this huge potential is through the injection of carbon dioxide in a miscible or immiscible gas flood. CO₂ flooding is a commonly applied enhanced oil recovery method, used wherever CO₂ is readily available in reservoirs similar to the Delhi Field. Naturally occurring reserves of CO₂ are present in the Jackson Dome Field in northwest Mississippi, near to and east of the Delhi Field.  CO₂ flooding generally, but not always, follows water flooding. The CO₂ aids oil recovery primarily by absorbing into the oil and reducing oil viscosity and surface tension to allow the oil to move more easily (improved mobility). The CO₂ also causes the oil to swell, thereby increasing localized pressure. When the CO₂ injection is continuous or combined with water injection to help move the oil, industry experience has shown that incremental recovery of an amount of oil of around 10% - 20% of the original oil in the reservoir can be attained, depending upon type of rock, original oil saturation, level of secondary recovery, amount of CO₂ injected, reservoir depth and other factors.

Based on DNR’s project plan, D&M is projecting EOR gross recovery of 15% of swept OOIP, or approximately 52 million gross barrels out of the swept OOIP of 348 MMBO, plus an additional 2 MMBO of remaining primary and secondary reserves. D&M further projects that our deemed payout will occur in 2014, based on a flat oil price of $66.60. These projections do not include any inclusion in the EOR project of three additional Tuscaloosa reservoirs within the Unit, which we fully expect to occur.  If included, these reservoirs would increase OOIP from 348 MMBO to approximately 398 MMBO, thus potentially increase projected reserves proportionately. Furthermore, DNR is achieving higher recovery rates in similar CO2 floods in the region and an increase in recovery from 15% to 17% is possible.