Delhi Field
The Delhi Holt Bryant Unit in the Delhi Field, currently our most strategic asset, is being redeveloped by a subsidiary of Denbury Resources, Inc., as operator, through an enhanced oil recovery (EOR) project utilizing CO2 technology:

• As of December 31, 2007, Denbury reported to us that approximately $73 million of capital had been charged to the project, excluding the $50 million acquisition cost they paid to us.
• In January 2008, the first leg of the 24” CO2 pipeline to Delhi became operational at Denbury’s Tinsley Field, just east of the Mississippi River in Mississippi.
• For calendar year 2008, Denbury announced an $80 million capital budget for the Delhi Field and pipeline.
• During calendar year 2009, Denbury anticipates to commence CO2 injection at Delhi by midyear and to commence related production on or about late 2009. 
• Denbury has stated that its independent reservoir engineer has estimated probable CO2-EOR reserves at Delhi to be 33 million barrels net to Denbury’s interests, which correlates to EPM’s estimates herein.

We, and various other companies that submitted offers to participate with us, believe that the Delhi Holt Bryant Unit is an excellent candidate for a CO2-EOR project.  Its favorable rock characteristics, large unproven reserves remaining in place, miscibility potential, previously successful secondary recovery operations, low cost of drilling to a relatively shallow depth and relatively close location to naturally occurring CO2 reserves approximately 100 miles east of the Delhi Field are highly favorable. In June 2006, we conveyed a farmout to Denbury for all of our working interests in the Delhi Holt Bryant Unit and 75% of our working interests in certain other depths of the Delhi Field. For this, we received approximately $50 million in cash, a 25% reversionary working interest in the Delhi Holt Bryant Unit and a commitment by Denbury Resources to install a CO2-EOR project in the Delhi Holt Bryant Unit utilizing their proved reserves of CO2 (the “Delhi Farmout”).  We also retained separately acquired royalty and overriding royalty interests aggregating 7.4% in the Holt Bryant Unit, as described in more detail below.

The Delhi Field, located in northeastern Louisiana, 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 W. D. Von Gonten & Co., the third party reservoir engineering firm that prepares our independent estimate of proved reserves, the Delhi Field has produced more than 200 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. However, the pressure maintenance waterflood did not utilize a more traditional and effective five spot flood pattern that generally results in a more complete reservoir sweep and oil recovery.

At the time we began our oil and gas operations in late September 2003, we purchased the working interest and an 80% net revenue interest in the Delhi Field (from the surface to the top of the Massive Anhydride, but excepting the Mengel Unit), for approximately $2.8 million, including the assumption of a plugging and abandonment reclamation bond. All but 43 wells in the acquired property had been plugged and abandoned, and production averaged approximately 20 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.

Following the purchase, we initiated a conventional redevelopment program of re-completing wells to new reservoirs, reactivating existing wells and completing a five well development drilling program targeting 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.
Concurrent with these activities, we completed internal studies indicating that the reservoirs in the Delhi Holt Bryant Unit, the dominant oil producing reservoirs, were believed to be less than 50% depleted. 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 for an EOR project.

Following extended negotiations with candidates, we accelerated our redevelopment plan in June 2006 by selling a major portion of our Delhi Field interests in the form of a farmout (the “Delhi Farmout”) to a subsidiary of Denbury, the dominant CO2-EOR operator on the Gulf Coast and owner of substantial reserves of naturally occurring CO2 in the Jackson Dome Field in northwestern Mississippi. Important aspects of this transaction include:

• We received $50 million in cash, pre-tax.
• Denbury committed to install a CO2-EOR project in the Holt Bryant Unit at their sole expense and to expend a minimum of $100 million on the project, subject to penalty payments to us for shortfalls in such expenditures. 
• Denbury committed the required portion of its nearby CO2.reserves.
• We retained mineral royalty and overriding royalty interests aggregating 7.4% and a 25% reversionary working interest (20% additional revenue interest).  We currently project the PV-10, as defined previously, of these interests to approach $275 million based upon a flat crude oil price over the life of the project of $96.
• Our 25% reversionary working interest in the CO2-EOR project reverts when cumulative project revenues less direct field operating costs and royalties reach a fixed total of $200 million.
• We expect to claim proved reserves associated with the CO2 project following first production response to CO2 injection, which is projected to occur late in 2009.
  
  




CO2 Recovery Potential at Delhi Field
Current estimates by various parties of the original oil-in-place (OOIP) in the Delhi Holt Bryant Unit range from 400 million barrels of oil and up.  The initial portion of the Unit included in the expected CO2 patterns is estimated to be approximately 350+ million barrels of oil.  Production from the Unit to date is estimated to be approximately 190 million barrels of oil, therefore recovery to date has been less than 50% of OOIP and over 200 million barrels of oil are estimated to remain in the reservoirs.

The most logical method for recovering a large portion of this huge potential is through the injection of carbon dioxide in a miscible gas flood. CO2 flooding is a commonly applied enhanced oil recovery method, used wherever CO2 is readily available in 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 miscible 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. 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. Denbury Resources has stated that their ongoing CO2 projects in Mississippi are projected to recover (in reservoirs similar to Delhi) 17% - 20% of OOIP.  EPM is projecting a more conservative gross recovery of 15% of swept OOIP, or approximately 53 million gross barrels of incremental oil production. Our projected net probable reserves in the Delhi CO2 project are also based upon reaching the defined payout after approximately 6 million gross barrels of oil production.  

Several technical and administrative factors are necessary for a successful CO2 flood. The technical factors include access to a source of CO2, formation pressure sufficient to allow "miscibility" of the CO2 into the oil and a reservoir that is amenable to high contact rates for the CO2. Fortunately, the Delhi Field exhibits these characteristics with (i) naturally occurring reserves of CO2 present in the Jackson Dome Field in northwest Mississippi near to and east of the Delhi Field, and (ii) apparent miscibility pressure and available reservoir contact points as evidenced by success of the previous pressure maintenance/ waterflood and CO2 pilot tests. Additional evidence is available via several pilot tests conducted by a prior operator of the Delhi Field that demonstrated CO2 injection increased oil production in the Unit. At that time, development did not proceed, most likely due to the decline in oil prices in 1986.