Interactive 2009 Annual Report (PDF 7.56 MB) - Denbury Resources ...

76 Denbury Resources Inc. 2009 Annual Reportupon the relative energy content, which is six thousand cubic feet of natural gas to one barrel of crude oil. Thedepletion and depreciation rate per BOE associated with our oil and gas producing activities was $13.39 in 2009,$12.54 in 2008 and $11.60 in 2007.Asset Retirement Obligations. In general, our future asset retirement obligations relate to future costs associatedwith plugging and abandonment of our oil, natural gas and CO 2 wells, removal of equipment and facilities from leasedacreage, and returning such land to its original condition. The fair value of a liability for an asset retirement obligation isrecorded in the period in which it is incurred, discounted to its present value using our credit adjusted risk-free interestrate, and a corresponding amount capitalized by increasing the carrying amount of the related long-lived asset.The liability is accreted each period, and the capitalized cost is depreciated over the useful life of the related asset.Revisions to estimated retirement obligations will result in an adjustment to the related capitalized asset andcorresponding liability. If the liability is settled for an amount other than the recorded amount, the difference is recordedto the full cost pool, unless significant. See Note 4 for more information regarding our asset retirement obligations.Ceiling Test. The net capitalized costs of oil and natural gas properties are limited to the lower of unamortized cost orthe cost center ceiling. The cost center ceiling is defined as the sum of (i) the present value of estimated future netrevenues from proved reserves before future abandonment costs (discounted at 10%), based on unescalated periodendoil and natural gas prices during 2007, 2008 and for the first three quarters of 2009; and beginning in the fourthquarter of 2009, the average first-day-of-the-month oil and natural gas price for each month during the 12-monthperiod ended December 31, 2009; (ii) plus the cost of properties not being amortized; (iii) plus the lower of cost orestimated fair value of unproved properties included in the costs being amortized, if any; (iv) less related income taxeffects. We include that portion of net capitalized costs of CO 2 assets and CO 2 pipelines that are required for ourcurrent proved tertiary reserves in the net capitalized costs subject to the ceiling test. The cost center ceiling test isprepared quarterly.Joint Interest Operations. Substantially all of our oil and natural gas exploration and production activities areconducted jointly with others. These financial statements reflect only Denbury’s proportionate interest in such activities,and any amounts due from other partners are included in trade receivables.Proved Reserves. See Note 16, “Supplemental Oil and Natural Gas Disclosures (Unaudited)” for information on ourproved oil and natural gas reserves and the basis on which they are recorded.Tertiary Injection Costs. Our tertiary operations are conducted in reservoirs that have already produced significantamounts of oil over many years; however, in accordance with the rules for recording proved reserves, we cannotrecognize proved reserves associated with enhanced recovery techniques, such as CO 2 injection, until there is aproduction response to the injected CO 2 , or unless the field is analogous to an existing flood. Our costs associated withthe CO 2 we produce (or acquire) and inject are principally our costs of production, transportation and acquisition,and to pay royalties.We capitalize, as a development cost, injection costs in fields that are in their development stage, which means wehave not yet seen incremental oil production due to the CO 2 injections (i.e., a production response). These capitalizeddevelopment costs are included in our unevaluated property costs if there are not already proved tertiary reservesin that field. After we see a production response to the CO 2 injections (i.e., the production stage), injection costs areexpensed as incurred and any previously deferred unevaluated development costs will become subject to depletionupon recognition of proved tertiary reserves. During the years ended December 31, 2009 and 2008, we capitalized$8.0 million and $10.4 million, respectively, of tertiary injection costs associated with our tertiary projects that were inthe development phase.Property and Equipment – OtherOther property and equipment, which includes furniture and fixtures, vehicles, computer equipment and software, andcapitalized leases, is depreciated principally on a straight-line basis over estimated useful lives. Estimated useful lives aregenerally as follows: vehicles and furniture and fixtures — 5 to 10 years; and computer equipment and software — 3 to 5years. Leasehold improvements are amortized over the shorter of the estimated useful life or the remaining lease term.Form 10-K Part IINotes to Consolidated Financial Statements