Gareth Roberts, president and chief executive of Denbury Resources Inc., wants the investment community to focus on the company as a long-term project rather than a three-month lease.

W?ith many U.S. consumers demanding more domestic oil supplies in lieu of foreign resources, companies such as Denbury Resources Inc. are in a strong position to provide the needed production, says president and chief executive Gareth Roberts.


Denbury specializes in enhanced oil recovery (EOR) using CO2 to boost output from old fields. Its operations are largely in Mississippi, where it is the largest oil and gas producer, and it is the No. 1 holder of CO2 reserves for EOR operations east of the Mississippi River. It also has EOR and traditional production from the Barnett shale in North Texas, and in Louisiana, Alabama and Southeast Texas.


Fresh from canceling a major $600-million EOR field acquisition in Texas, Roberts spoke with Oil and Gas Investor about current capital markets, Denbury’s CO2-injection projects and partnerships with alternative-energy producers, and the potential benefits of U.S. carbon-emission credits to an EOR-focused producer.


Roberts has honors and master’s degrees from St. Edmund Hall at Oxford University and was elected to an honorary fellowship at the university as well. His E&P background includes experience with Texaco Inc., Murphy Oil Corp. and Coho Resources Inc., with a focus on the Gulf Coast region.


He formed the former Denbury operating subsidiary Denbury Management Inc. in 1990, and was named president and CEO in 1992. His expertise is in the acquisition and development of old fields that have low productivity, by using enhanced-oil-recovery technology to produce the oil left behind.


Growing demand for energy has forced the U.S. to increase its oil imports, placing more U.S. money into the coffers of foreign nations. Roberts says Denbury’s innovations will not only increase production from mature U.S. fields, but also boost recoverable reserves.


Investor You planned to bring CO2 to Conroe Field to add to your EOR portfolio. Why did you cancel the deal?
Roberts It was a lot of money and, given the current credit crunch, we decided to give up our deposit instead of just closing the transaction, which is unusual and I don’t think we’ve ever done anything like that, but these are unusual times. We do want to acquire properties like Conroe Field and would like to acquire it in the future, but we felt it was more prudent to wait.
Looking longer term, we think oil and gas companies will be one of the better investments, among the broad markets, because there is always going to be a demand for oil and gas.


Investor How are current capital markets affecting Denbury’s growth plans?
Roberts The current market has made it very difficult to obtain additional capital, although I’m proud to say that we recently more than doubled our bank credit line in spite of the current conditions. However, because of the lack of liquidity in the market, we have already reduced our 2009 capital budget, we have entered into an oil collar for approximately 75% of our projected production in 2009, and, as we discussed, we cancelled the $600-million purchase of Conroe Field.
Because of the long lead time between our capital spending and oil production, we don’t think any of this will materially affect our production in the short term, but obviously, if we continue to reduce spending, it will affect our production growth over time.
Bottom line, we are being forced to live within our cash flow.


Investor How does Denbury use CO2 in its business?
Roberts We are using it to extract additional amounts of oil from depleted reservoirs, oil that could not be produced with any other method. The volumes are relatively significant. At Conroe Field, we estimated that we could extract another 130 million barrels of oil that could not have been produced any other way. This is a field that had produced more than 740 million barrels and has another 18 million barrels of primary oil (produced without CO2) left to go.
It is hard to find 130 million barrels of oil almost anywhere in the world today. That would be a good discovery in Angola, never mind here in the domestic U.S., a few miles from Houston.
The reason enhanced oil recovery using CO2 is not done more often is because there aren’t many sources of pure, natural CO2. We use natural CO2 from an old volcano at Jackson Dome, in Jackson, Mississippi. We produce it in much the same manner as natural gas is produced, and we ship it via pipeline to various oil fields. To get the CO2 to our Texas fields, we’re building a $750-million pipeline from where our pipeline currently ends near Baton Rouge, Louisiana, to the Houston area.


Investor What are your plans for 2009?
Roberts Next year will be a very important year for us because we will finish building this pipeline. We call it the Green Line. After we build it, we will have the ability to grow and expand with relatively modest investment for the next few years.


Investor How feasible is CO2 take-away from other sources of CO2, such as an alternative-energy plant?
Roberts There are a number of proposals we’re considering. One partnership we’ve announced is with a coal-to-liquids plant in Natchez, Mississippi. That’s only a few miles from one of our current CO2 floods, Cranfield, which has a CO2 pipeline connection, so we’re in a great position to take CO2 from this plant.
All of these plants use gasifiers. They’re basically burning carbon with pure oxygen so the product is pure CO2. This makes it relatively easy to capture CO2 and use it for enhanced oil recovery. All that’s needed is to compress the CO2 up to about 2,000 psi, into a dense phase (a liquid), that allows transport of large volumes. However, one should note that the compression is relatively expensive.


Investor You are looking at similar collaborations for CO2?
Roberts We’re also in discussions with other alternative-energy plants in Mississippi that would produce either coal-to-liquids from lignite or synthetic natural gas from lignite. There are also many proposed plants along the Gulf Coast stretching all the way to Texas City, near our Green Line.

Investor How would CO2-capture legislation help Denbury and the oil industry—or would it?
Roberts In the recently signed bailout bill, Congress put in some tax incentives for gasification, and also a tax credit for sequestration of CO2 in an enhanced oil-recovery project. That’s going to help us continue with this business plan.
Congress is actively discussing what is called a cap-and-trade carbon bill. What it’s trying to do is create emission-level policy to encourage companies to reduce their emissions and allow them to trade emissions credits. So, if it’s more expensive for one type of company to reduce its emissions, it can buy credits from another type of plant that’s finding it cheaper to achieve. This is an arrangement used in Europe and it would be very beneficial for us, because it would allow Denbury to capture CO2 and then trade these credits.
Denbury can be a major generator of these credits because the enhanced-oil-recovery sites should be certified as sequestration sites. We use the CO2 to get oil out of the ground and we cycle it around. It’s a closed system. At the end of the day, the CO2 ends up in the ground, not up in the atmosphere.


Investor Tell us about your MLP.
Roberts Genesis Energy LP is a crude-oil gatherer, but it distributes CO2 and owns some pipelines, and it has a refinery-services group that removes the produced sulfur. It’s pretty small, but it’s doing well.

Investor What will be Denbury’s profile in one year? Five years?
Roberts We’ll continue to focus on CO2 EOR. CO2-assisted oil volumes should be more than half of our company’s oil production by next year. In five years’ time, we expect that oil production from EOR will grow to 60,000 barrels per day. And, we don’t have to spend an awful lot of money to get that.
We want the investment community to focus on a company that’s a long-term project as opposed to a three-month trade.

Investor What does the investment community overlook or misunderstand about Denbury’s potential?
Roberts A lot of shareholders do understand our potential, which is really great. We have the ability to ultimately extract something like a couple billion barrels of oil with this method in the Gulf Coast region. Of course, what the investment community currently overlooks is that we’re in a strong financial position. They’re selling all energy equities with every other equity in the market, so short-term thinking is overwhelming the strategy at the moment.

Investor Has there been a better time to be in the U.S. oil business?
Roberts It’s a very good business right now relative to other businesses. It may not look like it, since oil prices came down from $150, but they’re still higher than they were a year ago. They’re still much higher in terms of relative stock. For example, a year ago it would have taken two GE shares to buy a barrel of oil and today it would take four shares. So oil prices have actually doubled.
We believe that, fundamentally, it has to be a good business, because the U.S. cannot keep on importing energy from overseas producers and paying those massive costs.

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