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

88 Denbury Resources Inc. 2009 Annual ReportUnevaluated Oil and Natural Gas Properties Excluded From DepletionUnder full cost accounting, we may exclude certain unevaluated costs from the amortization base pendingdetermination of whether proved reserves can be assigned to such properties. We assign the purchase price of oil andnatural gas properties we acquire to proved and unevaluated properties based on the estimated fair values as definedin the FASC “Fair Value Measurements and Disclosures” topic. The costs classified as unevaluated are transferred tothe full cost amortization base as the properties are developed, tested and evaluated. A summary of the unevaluatedproperties excluded from oil and natural gas properties being amortized at December 31, 2009, and the year in whichthey were incurred follows:December 31, 2009Costs Incurred During:In thousands 2009 2008 2007 2006 and prior TotalProperty acquisition costs $ 95,477 $ 2,573 $ 31,042 $ 70,350 $ 199,442Exploration and development 68,530 21,898 2,645 — 93,073Capitalized interest 12,477 7,442 5,341 2,581 27,841Total $ 176,484 $ 31,913 $ 39,028 $ 72,931 $ 320,356Property acquisition costs for 2009 are primarily for CO 2 tertiary potential at Conroe Field. Property acquisition costsfor 2007 are primarily for CO 2 tertiary oil field candidates acquired in the Seabreeze Complex. Property acquisitioncosts for 2006 and prior are primarily for Delhi Field, South Cypress Creek Field, and Citronelle Field. We commencedCO 2 injection at Delhi Field in November 2009 and we plan to commence CO 2 injection at Seabreeze in mid-2010. SeeNote 2, “Acquisitions and Divestitures.” Exploration and development costs are primarily associated with our CO 2tertiary oil fields that are under development and did not have proved reserves at December 31, 2009. During 2009, weestablished proved reserves at Cranfield Field and as a result we transferred $82.4 million of costs incurred on thisproject into the amortization base. Costs are transferred into the amortization base on an ongoing basis as the projectsare evaluated and proved reserves established or impairment determined. We review the excluded properties forimpairment at least annually. We currently estimate that evaluation of most of these properties and the inclusion of theircosts in the amortization base is expected to be completed within five years. Until we are able to determine whetherthere are any proved reserves attributable to the above costs, we are not able to assess the future impact on theamortization rate of the full cost pool.Full Cost Ceiling TestIn 2008 the Company recognized a write-down of its oil and natural gas properties of $226 million under the full costceiling test at December 31, 2008. In accordance with the full cost ceiling rules at December 31, 2008, the ceiling limitwas calculated utilizing the unescalated period-end prices, which were a NYMEX WTI oil price per Bbl of $44.60 anda Henry Hub cash price per MMBtu of $5.71. We included the portion of net capitalized cost of CO 2 assets and CO 2pipelines that were required for our proved tertiary reserves in the net capitalized costs subject to this ceiling test. Thefair value of our oil derivative contracts at December 31, 2008 of $249.7 million, which contracts had a floor price of$75.00 per barrel on 30,000 barrels per day for calendar year 2009, was not included in the ceiling test as we did notdesignate these contracts as hedge instruments for accounting purposes.Because oil prices have recovered during 2009 from their year-end 2008 levels, we did not have a ceiling testwrite-down during 2009. However, if oil prices were to decrease significantly in subsequent periods, we may berequired to record additional write-downs under the full cost pool ceiling test in the future. The possibility and amountof any future write-down is difficult to predict, and will depend upon oil and natural gas prices, the incremental provedreserves that may be added each period, revisions to previous reserve estimates and future capital expenditures,and additional capital spent. The SEC adopted major revisions to its rules governing oil and gas company reportingrequirements which are effective for us beginning with this December 31, 2009, Form 10-K. Under these new rules,the full cost ceiling value is calculated using an average price based on the first day of every month during the period.Form 10-K Part IINotes to Consolidated Financial Statements