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 and estimate reserves, 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.
In late September 2003, we purchased essentially all of the working interests and associated 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 wells in the field that covers portions of Richland, Franklin and Madison Parishes, Louisiana had been plugged and abandoned, and production prior to the purchase 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 soon quit producing during a periodic work-over when water from a lower reservoir broke through along the casing exterior and into the producing reservoir.
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 high pressure gas injection line, converting it to a gas gathering and sales line, and installed a simple gas processing plant in the field to allow natural gas sales 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 oil in place that might be recoverable through significant investment. 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 intermittent discussions with potential industry partners skilled in CO2-EOR recovery methods to ascertain industry interest. During this time, we also began to acquire royalty and overriding royalty interests that ultimately aggregated 7.4%. With positive industry reception, and following negotiations during 2006 with two 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 farm-out, to Denbury Onshore LLC, a subsidiary of Denbury Resources. The farm-out included 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 included:
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, which is not expected to occur until sometime in the next decade.CO2 Recovery Potential at Delhi Field
Evolution Petroleum Announces Settlement of Denbury Litigation
Evolution Petroleum Corporation announced that it entered into a settlement agreement regarding its litigation with Denbury Onshore, LLC, a subsidiary of Denbury Resources Inc. The settlement resolves all outstanding disputes between the parties and provides a new foundation for continuing the successful development of the Delhi Field. The parties have agreed to this settlement to avoid the costs and uncertainty of continuing litigation with no admission of fault or liability by either party with regard to any of the claims or counterclaims. Each party dismissed with prejudice all of its claims and counterclaims in the litigation.
Pursuant to the settlement agreement, Evolution will receive a cash payment of $27.5 million on or prior to June 30, 2016, along with other mutual consideration between the parties. Among such other consideration, Denbury conveyed to Evolution a working interest in the Mengel Upper Glen Rose Sand interval (the "Mengel") within the Delhi Unit, proportionate to Evolution's 23.9% working interest in the primary Holt-Bryant zones in the Delhi Unit.
The Mengel, similar in reservoir characteristics to the rest of the Delhi Field, was originally part of the Delhi Unit. However, it was separated in title and ownership prior to Evolution's purchase of the Delhi Unit and, therefore, not included in the original transaction between Evolution and Denbury in 2006. Denbury acquired the Mengel working interest in late 2014. The Mengel has produced approximately 1.4 million barrels of oil and 5 billion cubic feet of natural gas to date from primary and secondary production. It currently does not produce significant amounts of oil or gas, but is believed to be prospective for CO2 enhanced oil recovery. It lies about 200-300' below the primary productive zones in the Delhi Unit and its areal extent is estimated to be 1,400 acres, or approximately 10% of the total area of the Delhi Unit. It is located within the boundaries of the current active CO2 flood. Its existing well bores and close proximity to the CO2 flood facilities should allow efficient incorporation within the Delhi CO2 flood at a reasonable capital cost and with attractive economics, subject to oil prices. The timing of joint development of the Mengel by the parties will be dependent on crude oil prices and other economic and technical aspects of the project. We do not expect to immediately record proved reserves for the Mengel.
In the settlement, the parties also reached agreements on other contractual issues related to Evolution's proportionate ownership of the CO2 recycle facility and associated real estate and terms related to long-term CO2 pipeline transportation costs following the late 2019 expiration of the current fixed price arrangement. In addition, Evolution will convey to Denbury approximately 0.2% of its overriding royalty interest effective as of July 1, 2016. Following this conveyance, Evolution's combined mineral and overriding royalty interests will be reduced from approximately 7.4% to 7.2%, while its working interest will remain unchanged at 23.9% with a net revenue interest of 19.0%, for a combined net revenue interest of 26.2%. The settlement further provides Evolution access to certain geological, geophysical and technical information regarding the Delhi Field for its internal analysis and reserves report.