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

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22 Denbury Resources Inc. 2009 Annual ReportFederal, State or Indian LeasesOur operations on federal, state or Indian oil and gas leases are subject to numerous restrictions, includingnondiscrimination statutes. Such operations must be conducted pursuant to certain on-site security regulations andother permits and authorizations issued by the Bureau of Land Management, Minerals Management Service (“MMS”)and other agencies.Environmental RegulationsPublic interest in the protection of the environment has increased dramatically in recent years. Our oil and natural gasproduction and saltwater disposal operations, and our processing, handling and disposal of hazardous materials suchas hydrocarbons and naturally occurring radioactive materials are subject to stringent regulation. We could incursignificant costs, including cleanup costs resulting from a release of hazardous material, third-party claims for propertydamage and personal injuries, fines and sanctions, as a result of any violations or liabilities under environmental orother laws. Changes in or more stringent enforcement of environmental laws could also result in additional operatingcosts and capital expenditures.Various federal, state and local laws regulating the discharge of materials into the environment, or otherwise relatingto the protection of the environment, directly impact oil and gas exploration, development and production operations,and consequently may impact the Company’s operations and costs. These regulations include, among others,(i) regulations by the EPA and various state agencies regarding approved methods of disposal for certain hazardousand nonhazardous wastes; (ii) the Comprehensive Environmental Response, Compensation, and Liability Act, FederalResource Conservation and Recovery Act and analogous state laws that regulate the removal or remediation of previouslydisposed wastes (including wastes disposed of or released by prior owners or operators), property contamination(including groundwater contamination), and remedial plugging operations to prevent future contamination; (iii) the Clean AirAct and comparable state and local requirements, which may result in the gradual imposition of certain pollution controlrequirements with respect to air emissions from the operations of the Company or could result in the imposition ofeconomic penalties on the production of fossil fuels that, when used, ultimately release CO 2 ; (iv) the Oil Pollution Actof 1990, which contains numerous requirements relating to the prevention of and response to oil spills into waters of theUnited States; (v) the Resource Conservation and Recovery Act, which is the principal federal statute governing thetreatment, storage and disposal of hazardous wastes; and (vi) state regulations and statutes governing the handling,treatment, storage and disposal of naturally occurring radioactive material (“NORM”).Management believes that we are in substantial compliance with applicable environmental laws and regulations.Management does not currently anticipate that future compliance will have a materially adverse effect on ourconsolidated financial position, results of operations or cash flows.Estimated Net Quantities of Proved Oil and Natural Gas Reservesand Present Value of Estimated Future Net RevenuesInternal Controls Over Reserve EstimatesWe engage an independent petroleum engineering consulting firm to prepare our reserve estimates and rely on theirexpertise to ensure that our reserve estimates are prepared in compliance with SEC guidelines and with generallyaccepted petroleum engineering principles. The person responsible for the preparation of the reserve report is aSenior Vice President at this consulting firm; he is a Registered Professional Engineer in the State of Texas; he receiveda Bachelor of Science degree in Petroleum Engineering at Texas A&M University in 1974; and he has in excess ofthirty-five years of experience in oil and gas reservoir studies and evaluations. Denbury’s Vice President – BusinessDevelopment is primarily responsible for overseeing the independent petroleum engineering firm during the process.Our Vice President – Business Development has a Bachelor of Science degree in Petroleum Engineering and over20 years of industry experience working with petroleum reserve estimates. The Company’s internal reserveengineering team consists of qualified petroleum engineers who both provide data to the independent petroleumengineer and prepare interim reserve estimates. The internal reserve team reports directly to our Vice President –Business Development. In addition, the Company’s Board of Directors’ Reserves Committee, on behalf of the Boardof Directors, oversees the qualifications, independence, performance and hiring of the Company’s independentForm 10-K Part I
Denbury Resources Inc. 2009 Annual Report 23petroleum engineering firm and reviews the final report and subsequent reporting of the Company’s oil and natural gasreserves. The Chairman of the Reserves Committee is a Chartered Engineer of Great Britain and received his Bachelorof Science degree in Chemical Engineering from the University of London in 1963.Reserves EstimatesDeGolyer and MacNaughton, independent petroleum engineers located in Dallas, Texas, prepared estimates of ournet proved oil and natural gas reserves as of December 31, 2009, 2008 and 2007. See the summary of DeGolyerand MacNaughton’s report as of December 31, 2009 included as an exhibit to this Form 10-K. Estimates of reserves asof year-end 2009 were prepared using an average price equal to the unweighted arithmetic average of hydrocarbonprices on the first day of each month within the 12-month period ended December 31, 2009, in accordance withrevised guidelines of the SEC, first applicable to reserves estimates prepared as of year-end 2009. Estimates ofreserves as of year-end 2007 and 2008 were prepared using constant prices and costs in accordance with previousguidelines of the SEC, based on hydrocarbon prices received on a field-by-field basis as of December 31st of eachyear. Reserve estimates do not include any value for probable or possible reserves that may exist, nor do they includeany value for undeveloped acreage. The reserve estimates represent our net revenue interest in our properties. During2009, we provided oil and gas reserve estimates for 2008 to the United States Energy Information Agency, which wassubstantially the same as the reserve estimates included in our Form 10-K for the year ended December 31, 2008.Our proved nonproducing reserves primarily relate to reserves that are to be recovered from productive zones thatare currently behind pipe. Since a majority of our properties are in areas with multiple pay zones, these propertiestypically have both proved producing and proved nonproducing reserves.Proved undeveloped reserves associated with our CO 2 tertiary operations and our Heidelberg waterfloods accountfor virtually all of our proved undeveloped oil reserves. We consider these reserves to be lower risk than other provedundeveloped reserves that require drilling at locations offsetting existing production because all of these provedundeveloped reserves are associated with secondary recovery or tertiary recovery operations in fields and reservoirsthat historically produced substantial volumes of oil under primary production. The main reason these reserves areclassified as undeveloped is because they require significant additional capital associated with drilling/re-entering wells oradditional facilities in order to produce the reserves and/or are waiting for a production response to the water or CO 2injections. Virtually all of our proved undeveloped natural gas reserves are located in our Selma Chalk play at Heidelbergand Sharon Fields at December 31, 2009. Our current plans include drilling five additional wells in the Selma Chalk playduring 2010, one at Heidelberg and four at Sharon. Our proved undeveloped reserves decreased from December 31,2008 to December 31, 2009 primarily due to the sale of our Barnett Shale natural gas assets during 2009.Form 10-K Part I
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