Delhi Field
The Delhi Holt Bryant Unit in the Delhi Field in Louisiana is currently our most significant asset. 

• The Delhi Holt Bryant Unit is currently being redeveloped with an EOR project utilizing CO₂ technology by a subsidiary of Denbury Resources Inc. as Operator;
• As of November, 2009, the Operator reported that CO₂ injection had begun in Phase I of the Delhi Field EOR project;
• As of March 2010, the Operator publicly announced that first oil production had begun as a result of the Phase I CO₂ injection and EPM began receiving its 7.4% royalty   interest from the EOR production, net of operating costs.
• As of December 31, 2010, the Operator began first CO₂ injection in Phase II of the EOR project
• The Operator began installation of Phase III, out of a total of five phases, with Phases II-V all twice or more larger than Phase I in scope.

We believe that the Delhi Holt Bryant Unit is a strong candidate for a CO₂-EOR project due to its favorable rock characteristics, large unproven reserves remaining in place, low cost of drilling due to a relatively shallow depth and relatively close location to naturally occurring CO₂ reserves approximately 100 miles east of the Delhi Field.  We base our belief on (i) our internal analyses of CO₂ pilot tests successfully completed in the Delhi Holt Bryant Unit by a prior field operator, (ii) our analysis of favorable analogous comparisons to successful full scale projects in the same or similar geological formation, (iii) a competitive offering process, wherein we solicited multiple major participants with CO₂-EOR expertise, funding and operating abilities, leading to two confidential competitive offers made to us in writing, (iv) our qualitative assessment that the competitive offers were based on the CO₂-EOR potential of the Unit and not on the relatively minor associated proved reserves existing at that time, and (v) the buyer’s willingness to commit a portion of its proved CO₂ reserves and a $100 million minimum future investment in a CO₂ project in the Unit.

According to published reports and field records, the Delhi Field was discovered in the mid-1940’s and was extensively developed by various operators including the Sun Oil and Murphy Oil companies through the drilling and completion of approximately 450 wells, most within the first few years after discovery.  According to DeGolyer & MacNaughton (“D&M”), the independent reservoir engineering firm engaged by the Operator and by us to review the project, the Delhi Field has produced approximately 192 million barrels of crude oil and substantial amounts of natural gas to date. Much of the natural gas production was processed to remove natural gas liquids and re-injected for pressure maintenance. Beginning in the late 1950’s, the field was unitized to conduct a pressure maintenance project through the injection of water into the producing reservoir in down dip injection wells (unitization is the process of combining multiple leases into a single ownership entity in order to simplify operations and equitably distribute royalties when common operations are conducted over multiple leases). Drilling operations resulted in primarily 40-acre spacing across the unit’s 13,636 acres. A few wells were drilled below the targeted Tuscaloosa and Paluxy formations. The water injection pressure maintenance operations did not utilize a more traditional and effective five spot flood pattern water flood that generally results in a more complete reservoir sweep and oil recovery.

At the time we began our oil and natural gas operations in late September 2003, we purchased essentially all of the working interests and an 80% net revenue interest in the Delhi Field (from the surface to the top of the Massive Anhydride formation, but excepting the Mengel Unit), for approximately $2.8 million, including the assumption of a plugging and abandonment reclamation bond.  All but 43 Delhi Field wells in Richland, Franklin and Madison Parishes, Louisiana had been plugged and abandoned and production averaged approximately 18 BOPD with no natural gas being sold due to a lack of natural gas processing and transportation facilities.  The best producing well was immediately lost during a periodic sand wash work-over when water from a lower reservoir broke through along the casing exterior and into the producing reservoir.

In October of 2003, we applied an unproven lateral re-entry technology that resulted in no increase in production.  In December 2003, we initiated a conventional development program based on re-completion of wells to other reservoirs and restoring non-producing wells to producing status.  During 2004, we refurbished a gas injection line, converting it to a gas gathering and sales line, and placed a gas processing plant in the field to begin natural gas production in July of 2004.  During 2005, we began a five well development drilling program aimed at reaching mostly proved undeveloped reserves left in primary “attic” positions.  The culmination of these activities caused production to increase from 18 BOPD to a monthly average rate of 145 BOEPD during our peak production month in late 2005. 

Concurrent with these activities, we completed internal studies indicating that the reservoirs in the Delhi Holt Bryant Unit, the dominant oil producing reservoirs, had substantial remaining recoverable oil in place.  Based on positive CO₂ pilots conducted by Sun Oil in 1985, and favorable rock characteristics shown in multiple cores taken throughout the Delhi Field, we began discussions in late 2004 with potential industry partners skilled in CO₂-EOR recovery methods.

During this time we also began to acquire royalty and overriding royalty interests that ultimately aggregated 7.4%.  With positive industry reception, and following extended negotiations with three candidates as prospective partners, we accelerated our redevelopment plan in June 2006 by selling a major portion of our Delhi Field interests, in the form of a Farmout, to Denbury Onshore LLC, a subsidiary of the Operator for all of our working interests in the Delhi Holt Bryant Unit and its proved reserves and 75% of our working interests in certain other depths of the Delhi Field (the “Delhi Farmout”).  Important aspects of this transaction include:

• We received approximately $50 million in cash (pre-tax) to redeploy to other projects and repay all of our then outstanding debt.
• We retained significant participating interests through a reversionary working interest of 23.94% (19.15% revenue interest net to us).  We expect the value of these interests (along with the separately acquired royalty and overriding royalty interests aggregating 7.4%) will substantially exceed the $50 million cash component of the Delhi Farmout, subject to future oil prices, operating expenses, anticipated EOR performance and project completion by the Operator.
• The Operator committed to install a CO₂-EOR project in the Holt Bryant Unit and expend a minimum additional $100 million on the project over the first 6-1/2 years, subject to penalty payments to us for shortfalls in such expenditures. All capital expenditures related to the project are borne by the Operator prior to payout.
• The Operator is the dominant CO₂-EOR operator on the Gulf Coast, currently operating a large number of CO₂-EOR projects and owns naturally occurring CO₂ reserves that we believe to be sufficient to meet the needs of the Delhi project and which have been dedicated to the Delhi project.
• Our reversionary working interest in the CO₂-EOR project is based on a defined $200 million threshold, subject only to expansion of the project through acquisitions, and our reversionary working interest occurs when cumulative project revenues less direct operating costs in the field reach the threshold.
• We further retained a 23.94% working interest (19.15% net revenue interest) in certain other depths outside of the Holt Bryant Unit within the Delhi Field, and believe that additional development potential may exist in the shallower depths.
• Based on our independent engineering report, we will bear no capital expenditures for our proved reserves.
• Based on the project being approved by the State of Louisiana as a qualified tertiary recovery project, we do not expect to bear any severance tax on our net production until the full project reaches payout, including cost of capital.  

As of June 30, 2010, our independent reservoir engineer assigned 9.4 MMBO of proved reserves and 5.7 MMBO of probable reserves net to our interests at Delhi, with combined PV-10 of $275 million.
  
CO₂ Recovery Potential at Delhi Field
The most logical method for recovering a large portion of this huge potential is through the injection of carbon dioxide in a miscible or immiscible gas flood. CO₂ flooding is a commonly applied enhanced oil recovery method, used wherever CO₂ is readily available to oil reservoirs similar to the Delhi Field. Naturally occurring reserves of CO2 are present in the Jackson Dome Field in northwest Mississippi, near to and east of the Delhi Field.  CO₂ flooding generally, but not always, follows water flooding. The CO₂ aids oil recovery primarily by absorbing into the oil and reducing oil viscosity and surface tension to allow the oil to move more easily (improved mobility). The CO₂ also causes the oil to swell, thereby increasing localized pressure. When the CO₂ injection is continuous or combined with water injection to help move the oil, industry experience has shown that incremental recovery of an amount of oil of around 10% - 20% of the original oil in the reservoir can be attained, depending upon type of rock, original oil saturation, level of secondary recovery, amount of CO₂ injected, reservoir depth and other factors.

Based on DNR’s project plan, D&M is projecting EOR gross recovery of 17% of swept OOIP, or approximately 60 million gross barrels out of the swept OOIP of 357 MMBO. Our independent reservoir engineer has further assigned an additional 8 MMBO of probable reserves through the addition to the project of four other reservoirs in the Unit. D&M further projects that our deemed payout will occur in 2016, based on a flat NYMEX oil price of $76.