EXHIBIT 99.2
DEGOLYER AND MACNAUGHTON
4925 GREENVILLE AVENUE, SUITE 400
ONE ENERGY SQUARE
DALLAS, TEXAS 75206
APPRAISAL REPORT
AS OF
DECEMBER 31, 2002
ON
PROVED RESERVES
OF
CERTAIN PROPERTIES
OWNED BY
DENBURY RESOURCES INC.
SEC CASE
TABLE OF CONTENTS
PAGE
FOREWORD........................................................................................... 1
Scope of Investigation........................................................................... 1
Authority........................................................................................ 2
Source of Information............................................................................ 2
CLASSIFICATION OF RESERVES......................................................................... 4
ESTIMATION OF RESERVES............................................................................. 7
VALUATION OF RESERVES.............................................................................. 9
SUMMARY AND CONCLUSIONS............................................................................ 12
DEGOLYER AND MACNAUGHTON
4925 GREENVILLE AVENUE, SUITE 400
ONE ENERGY SQUARE
DALLAS, TEXAS 75206
APPRAISAL REPORT
AS OF
DECEMBER 31, 2002
ON
PROVED RESERVES
OF
CERTAIN PROPERTIES
OWNED BY
DENBURY RESOURCES INC.
SEC CASE
FOREWORD
- --------
Scope of Investigation
- ----------------------
This report presents an appraisal, as of December 31, 2002, of the extent
and value of the proved crude oil, condensate, natural gas liquids, and natural
gas reserves of certain properties owned by Denbury Resources Inc. (Denbury).
The reserves estimated in this report are located in Louisiana, Mississippi,
Texas, and offshore from Louisiana and Texas. The properties appraised are
listed in detail in related report entitled "Appraisal Report as of December 31,
2002 on Certain Properties owned by Denbury Resources Inc. SEC Case."
Reserves estimated in this report are expressed as gross and net reserves.
Gross reserves are defined as the total estimated petroleum to be produced from
these properties after December 31, 2002. Net reserves are defined as that
portion of the gross reserves attributable to the interests owned by Denbury
after deducting royalties and interests owned by others.
This report also presents values that were estimated for proved reserves
using initial prices and costs provided by Denbury. Prices are related to NYMEX
prices of $31.20 per barrel and $4.79 per million British thermal units (MMBtu).
No escalation has been applied to prices and costs. A
2
detailed explanation of the future price and cost assumptions is included in the
Valuation of Reserves section of this report.
Values of proved reserves in this report are expressed in terms of
estimated future gross revenue, future net revenue, and present worth. Future
gross revenue is that revenue which will accrue to the appraised interests from
the production and sale of the estimated net reserves. Future net revenue is
calculated by deducting estimated production taxes, ad valorem taxes, operating
expenses, and capital costs from the future gross revenue. Operating expenses
include field operating costs, compression charges, and the estimated expenses
of direct supervision, but do not include that portion of general administrative
costs sometimes allocated to production. Future income tax expenses were not
taken into account in the preparation of these estimates. Present worth is
defined as future net revenue discounted at a specified arbitrary discount rate
compounded monthly over the expected period of realization. In this report,
present worth values using a discount rate of 10 percent are reported.
Estimates of oil, condensate, natural gas liquids, and gas reserves and
future net revenue should be regarded only as estimates that may change as
further production history and additional information become available. Not only
are such reserves and revenue estimates based on that information which is
currently available, but such estimates are also subject to the uncertainties
inherent in the application of judgmental factors in interpreting such
information.
Authority
- ---------
This report was prepared at the request of Mr. Ronald T. Evans, Senior Vice
President Reservoir Engineering, Denbury.
Source of Information
- ---------------------
Data used in the preparation of this report were obtained from Denbury,
from records on file with the appropriate regulatory agencies, and from public
sources. In the preparation of this report we have relied, without independent
verification, upon information furnished by Denbury with respect to its property
interests, production from such properties, current costs of operation and
development, current prices for production, agreements relating to current and
future operations and sale of production, and various other information and data
that were accepted as
3
represented. A field examination of the properties was not considered necessary
for the purposes of this report.
4
CLASSIFICATION OF RESERVES
Petroleum reserves included in this report are classified by degree of
proof as proved and are judged to be economically producible in future years
from known reservoirs under existing economic and operating conditions and
assuming continuation of current regulatory practices using conventional
production methods and equipment. In the analyses of production-decline curves,
reserves were estimated only to the limit of economic rates of production under
existing economic and operating conditions using prices and costs as of the date
the estimate is made, including consideration of changes in existing prices
provided only by contractual arrangements but not including escalations based
upon future conditions. Proved reserves classifications used in this report are
in accordance with the reserves definitions of Rules 4-10(a) (1)-(13) of
Regulation S-X of the Securities and Exchange Commission (SEC) of the United
States. The petroleum reserves are classified as follows:
Proved oil and gas reserves - Proved oil and gas reserves are the estimated
quantities of crude oil, natural gas, and natural gas liquids which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic
and operating conditions, i.e., prices and costs as of the date the
estimate is made. Prices include consideration of changes in existing
prices provided only by contractual arrangements, but not on escalations
based upon future conditions.
(i) Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test.
The area of a reservoir considered proved includes (A) that portion
delineated by drilling and defined by gas-oil and/or oil-water
contacts, if any; and (B) the immediately adjoining portions not yet
drilled, but which can be reasonably judged as economically productive
on the basis of available geological and engineering data. In the
absence of information on fluid contacts, the lowest known structural
occurrence of hydrocarbons controls the lower proved limit of the
reservoir.
(ii) Reserves which can be produced economically through application
of improved recovery techniques (such as fluid injection) are included
in the "proved" classification when
5
successful testing by a pilot project, or the operation of an
installed program in the reservoir, provides support for the
engineering analysis on which the project or program was based.
(iii) Estimates of proved reserves do not include the following: (A)
oil that may become available from known reservoirs but is classified
separately as "indicated additional reserves"; (B) crude oil, natural
gas, and natural gas liquids, the recovery of which is subject to
reasonable doubt because of uncertainty as to geology, reservoir
characteristics, or economic factors; (C) crude oil, natural gas, and
natural gas liquids, that may occur in undrilled prospects; and (D)
crude oil, natural gas, and natural gas liquids, that may be recovered
from oil shales, coal, gilsonite, and other such sources.
Proved developed oil and gas reserves - Proved developed oil and gas
reserves are reserves that can be expected to be recovered through existing
wells with existing equipment and operating methods. Additional oil and gas
expected to be obtained through the application of fluid injection or other
improved recovery techniques for supplementing the natural forces and
mechanisms of primary recovery should be included as "proved developed
reserves" only after testing by a pilot project or after the operation of
an installed program has confirmed through production response that
increased recovery will be achieved.
Proved undeveloped reserves - Proved undeveloped oil and gas reserves are
reserves that are expected to be recovered from new wells on undrilled
acreage, or from existing wells where a relatively major expenditure is
required for recompletion. Reserves on undrilled acreage shall be limited
to those drilling units offsetting productive units that are reasonably
certain of production when drilled. Proved reserves for other undrilled
units can be claimed only where it can be demonstrated with certainty that
there is continuity of production from the existing productive formation.
Under no circumstances should estimates for proved undeveloped reserves be
attributable to any acreage for which an application of fluid injection or
other improved
6
recovery technique is contemplated, unless such techniques have been proved
effective by actual tests in the area and in the same reservoir.
7
ESTIMATION OF RESERVES
- ----------------------
Estimates of reserves were prepared by the use of geological and
engineering methods generally accepted by the petroleum industry. The method or
combination of methods used in the analysis of each reservoir was tempered by
experience with similar reservoirs, stage of development, quality and
completeness of basic data, and production history.
When applicable, the volumetric method was used to estimate the original
oil in place (OOIP) and original gas in place (OGIP). Structure maps were
prepared to delineate each reservoir, and isopach maps were constructed to
estimate reservoir volume. Electrical logs, radioactivity logs, core analyses,
and other available data were used to prepare these maps as well as to estimate
representative values for porosity and water saturation. When adequate data were
available and when circumstances justified, material-balance and other
engineering methods were used to estimate OOIP or OGIP.
Estimates of ultimate recovery were obtained after applying recovery
factors to OOIP or OGIP. These recovery factors were based on consideration of
the type of energy inherent in the reservoirs, analyses of the petroleum, the
structural positions of the properties, and the production histories. When
applicable, material-balance and other engineering methods were used to estimate
recovery factors. An analysis of reservoir performance, including production
rate, reservoir pressure, and gas-oil ratio behavior, was used in the estimation
of reserves.
For depletion-type reservoirs or those whose performance disclosed a
reliable decline in producing-rate trends or other diagnostic characteristics,
reserves were estimated by the application of appropriate decline curves or
other performance relationships. In the analyses of production-decline curves,
reserves were estimated only to the limits of economic production based on
current economic conditions.
In certain cases, when the previously named methods could not be used,
reserves were estimated by analogy with similar wells or reservoirs for which
more complete data were available.
The gas reserves included herein are reported as sales gas. Sales gas is
defined as that gas to be delivered into a gas
8
pipeline for sale after separation, processing, fuel use, and flare. All gas
volumes are expressed at a temperature base of 60 degrees Fahrenheit ((degree)F)
and at the legal pressure base of the state or area in which the reserves are
located. Condensate reserves estimated herein are those to be recovered by
conventional lease separation. Natural gas liquids reserves are estimated to be
those attributable to the leasehold interests appraised based on historical
yield information.
In the preparation of this study, as of December 31, 2002, gross production
estimated to December 31, 2002, was deducted from gross ultimate recovery to
arrive at the estimate of gross reserves. In some fields, this required that the
production rates be estimated for up to 3 months, since production data from
certain properties were available only through September 2002.
At the request of Denbury, data available from wells drilled on the
appraised properties through January 22, 2003, were used to prepare the
estimates shown herein. New wells drilled and logged after December 31, 2002,
are the OCS G 18863 Block A 9 well JA 2, in North Padre Island Block A-9 field,
and the Oak Estates 2 well in Lake Gero North field. Both wells were logged
early in January 2003. The reserves attributable to these wells are classified
as proved undeveloped.
The table below presents estimates of the proved reserves, as of December
31, 2002, of the properties appraised, expressed in barrels (bbl) or thousands
of cubic feet (Mcf):
OIL AND NATURAL GAS TOTAL
CONDENSATE LIQUIDS LIQUIDS GAS
(BBL) (BBL) (BBL) (MCF)
---------------- ---------------- --------------- ----------------
Gross Reserves
Developed Producing 55,039,125 815,950 55,855,075 220,064,172
Developed Nonproducing 29,431,993 174,936 29,606,929 138,692,724
Undeveloped 43,378,603 287,625 43,666,228 110,949,144
---------------- ---------------- --------------- ----------------
TOTAL GROSS 127,849,721 1,278,511 129,128,232 469,706,040
Net Reserves
Developed Producing 40,285,349 442,495 40,727,844 96,136,096
Developed Nonproducing 21,541,648 128,240 21,669,888 46,675,748
Undeveloped 34,671,539 134,101 34,805,640 58,135,629
---------------- ---------------- --------------- ----------------
TOTAL NET 96,498,536 704,836 97,203,372 200,947,473
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VALUATION OF RESERVES
- ---------------------
Revenue values in this report were estimated using the initial prices and
costs provided by Denbury. Future prices were estimated using guidelines
established by the Securities and Exchange Commission (SEC) and the Financial
Accounting Standards Board (FASB).
In this report, values for proved reserves were based on projections of
estimated future production and revenue prepared for these properties.
The following assumptions were used for estimating future prices and costs:
Oil and Condensate Prices
Oil and condensate prices were calculated using differentials
furnished by Denbury for each lease to a NYMEX price of $31.20 per
barrel and held constant thereafter. The weighted average price over
the lives of the properties was $28.78 per barrel.
Natural Gas Liquids Prices
Natural gas liquids prices were calculated using the 2002 average
ratio to the NYMEX price of $31.20 per barrel. These prices were held
constant over the lives of the properties.
Natural Gas Prices
Natural gas prices were calculated for each lease using differentials
furnished by Denbury to a NYMEX price of $4.79 per MMBtu and held
constant thereafter. The weighted average price over the lives of the
properties was $4.96 per thousand cubic feet.
10
Operating and Capital Costs
Current operating and capital costs, based on information provided by
Denbury, were used in estimating future costs required to operate the
properties. In certain cases, future costs, either higher or lower
than current costs, may have been used because of anticipated changes
in operating conditions. These costs were not escalated for inflation.
The future revenue to be derived from the production and sale of the proved
reserves, as of December 31, 2002, of the properties appraised is estimated as
follows:
PROVED
----------------------------------------------------
DEVELOPED DEVELOPED TOTAL
PRODUCING NONPRODUCING UNDEVELOPED PROVED
---------------------------------------------------------------------
Future Gross Revenue, $ 1,607,099,117 864,422,870 1,315,554,606 3,787,076,593
Production and Ad Valorem Taxes, $ 61,776,745 32,873,032 42,930,347 137,580,124
Operating Costs, $ 441,454,158 160,089,796 305,069,080 906,613,034
Capital Costs, $ 20,604,511 42,907,557 204,756,464 268,268,532
Future Net Revenue*, $ 1,083,263,703 628,552,485 762,798,715 2,474,614,903
Present Worth at 10 Percent*, $ 734,804,064 333,971,626 357,444,166 1,426,219,856
* Future income taxes have not been taken into account in the preparation of
these estimates.
Timing of capital expenditures and the resulting development of production
were based on a development plan provided by Denbury.
In our opinion, the information relating to estimated proved reserves,
estimated future net revenue from proved reserves, and present worth of
estimated future net revenue from proved reserves of oil, condensate, natural
gas liquids, and gas contained in this report has been prepared in accordance
with Paragraphs 10-13, 15, and 30(a)-(b) of Statement of Financial Accounting
Standards No. 69 (November 1982) of the FASB and Rules 4-10(a) (1)-(13) of
Regulation S-X and Rule 302(b) of Regulation S-K of the SEC; provided, however,
that (i) certain estimated data have not been provided with respect to changes
in reserves information and (ii) future income tax expenses have not been taken
into account in estimating the future net revenue and present worth values set
forth herein.
11
To the extent that the above-enumerated rules, regulations, and statements
require determinations of an accounting or legal nature or information beyond
the scope of our report, we are necessarily unable to express an opinion as to
whether the above-described information is in accordance therewith or sufficient
therefor.
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SUMMARY AND CONCLUSIONS
- -----------------------
Denbury owns working and royalty interests in certain properties located in
Louisiana, Mississippi, Texas, and offshore from Louisiana and Texas. The
estimated net proved reserves of the properties appraised, as of December 31,
2002, are summarized as follows, expressed in barrels (bbl) or thousands of
cubic feet (Mcf):
OIL AND NATURAL GAS TOTAL
CONDENSATE LIQUIDS LIQUIDS GAS
(BBL) (BBL) (BBL) (MCF)
--------------- --------------- --------------- --------------
Net Reserves
Developed Producing 40,285,349 442,495 40,727,844 96,136,096
Developed Nonproducing 21,541,648 128,240 21,669,888 46,675,748
Undeveloped 34,671,539 134,101 34,805,640 58,135,629
--------------- --------------- --------------- --------------
TOTAL 96,498,536 704,836 97,203,372 200,947,473
The estimated revenue and costs attributable to Denbury's interests in the
proved reserves, as of December 31, 2002, of the properties appraised under the
aforementioned assumptions concerning future prices and costs are summarized as
follows:
PROVED
----------------------------------------------------
DEVELOPED DEVELOPED TOTAL
PRODUCING NONPRODUCING UNDEVELOPED PROVED
--------------------------------------------------------------------
Future Gross Revenue, $ 1,607,099,117 864,422,870 1,315,554,606 3,787,076,593
Production and Ad Valorem Taxes, $ 61,776,745 32,873,032 42,930,347 137,580,124
Operating Costs, $ 441,454,158 160,089,796 305,069,080 906,613,034
Capital Costs, $ 20,604,511 42,907,557 204,756,464 268,268,532
Future Net Revenue*, $ 1,083,263,703 628,552,485 762,798,715 2,474,614,903
Present Worth at 10 Percent*, $ 734,804,064 333,971,626 357,444,166 1,426,219,856
* Future income taxes have not been taken into account in the preparation
of these estimates.
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All gas volumes in this report are expressed at a temperature base of 60
(degree)F and at the legal pressure base of the state or area in which the
reserves are located.
Submitted,
/s/ DeGolyer and MacNaughton
DeGOLYER and MacNAUGHTON
SIGNED: March 19, 2003
/s/ James W. Hail
--------------------------------------
James W. Hail, Jr., P.E.
Executive Vice President
DeGolyer and MacNaughton