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

102 Denbury Resources Inc. 2009 Annual Reportincluded a long-term transportation service agreement for the Free State Pipeline and a 20-year financing lease forthe NEJD Pipeline system. These two transactions are accounted for as financing leases and are discussed in detail inNote 3, “Related Party Transactions-Genesis”.At December 31, 2009, long-term commitments for these items require the following future minimum rental payments:PipelineFinancing Capital OperatingIn thousands Leases Leases Leases2010 $ 31,759 $ 1,974 $ 27,5662011 33,205 1,974 26,6212012 33,438 1,272 23,2482013 33,518 700 20,5442014 33,513 673 17,145Thereafter 393,623 721 47,037Total minimum lease payments 559,056 7,314 $ 162,161Less: Amount representing interest (308,436) (1,366)Present value of minimum lease payments $ 250,620 $ 5,948Long-term contracts require us to deliver CO 2 to our industrial CO 2 customers at various contracted prices, plus wehave a CO 2 delivery obligation to Genesis related to three CO 2 volumetric production payments (“VPPs”) (see Note 3).Based upon the maximum amounts deliverable as stated in the industrial contracts and the volumetric productionpayments, we estimate that we may be obligated to deliver up to 433 Bcf of CO 2 to these customers over the next 18years; however, since the group as a whole has historically purchased less CO 2 than the maximum allowed in theircontracts, based on the current level of deliveries, we project that the amount of CO 2 that we will ultimately be requiredto deliver would likely be reduced to 165 Bcf. The maximum volume required in any given year is approximately 136MMcf/d. Given the size of our proven CO 2 reserves at December 31, 2009 (approximately 6.3 Tcf before deductingapproximately 127.1 Bcf for the three VPPs), our current production capabilities and our projected levels of CO 2 usagefor our own tertiary flooding program, we believe that we can meet these contractual delivery obligations.We currently have long-term commitments to purchase manufactured CO 2 from eight proposed gasification plants: fourare in the Gulf Coast region and four are in the Midwest region (Illinois, Indiana and Kentucky area) of the United States.The Midwest plants are not only conditioned on those specific plants being constructed, but also upon Denburycontracting additional volumes of CO 2 for purchase in the general area of the proposed plants that would provide anacceptable economic return on the CO 2 pipeline that we would need to construct to transport these volumes to ourexisting CO 2 pipeline system. If all of these plants are built, these CO 2 sources are currently anticipated to provide us withaggregate CO 2 volumes of around 1.2 Bcf/d to 1.9 Bcf/d. Due to the current economic conditions, the earliest we wouldexpect any plant to be completed and provide CO 2 would be 2014, and there is some doubt as to whether they will beconstructed at all. The base price of CO 2 per Mcf from these CO 2 sources varies by plant and location, but is generallyhigher than our most recent all-in cost of CO 2 from our natural sources (Jackson Dome) using current oil prices. Prices forCO 2 delivered from these projects are expected to be competitive with the cost of our natural CO 2 after adjusting for ourestimates of future prices for our share of potential carbon emissions reduction credits. If all eight plants are built, theaggregate purchase obligation for this CO 2 would be around $280 million per year, assuming a $70 per barrel oil price,before any potential savings from our share of carbon emissions reduction credits. All of the contracts have priceadjustments that fluctuate based on the price of oil. Construction has not yet commenced on any of these plants, andtheir construction is contingent on the satisfactory resolution of various issues, including financing. While it is likely that notevery plant currently under contract will be constructed, there are several other plants under consideration that couldprovide CO 2 to us that would either supplement or replace the CO 2 volumes from the eight proposed plants for which wecurrently have CO 2 purchase contracts. We are having ongoing discussions with several of these other potential sources.We have invested a total of $13.8 million in preferred stock of one of the proposed plants. All of our investment may laterbe redeemed, with a return, or converted to equity after construction financing for the project has been obtained. We haverecorded our investment in this debt security at cost and classified it as held-to-maturity, since we have the intent andability to hold it until it is redeemed. The investment is included in “Other assets” in our Consolidated Balance Sheets.Form 10-K Part IINotes to Consolidated Financial Statements