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Elk Petroleum Ltd (ASX: ELK) Elk and Denbury agree to jointly develop the Grieve Field

Grieve Enhanced Oil Recovery (EOR) Project Elk and Denbury Agree to Jointly Develop Grieve Field
 
Highlights
- Elk and Denbury have entered into an agreement to develop the Grieve EOR Project
- The agreement provides for Denbury to:
   - Sole fund all project costs up to US$28.5 million (gross)
   - At Elk’s election, provide further funding support for the next US$34.3 million of total field expenditure (gross)
   - 100% build, own and operate a 3-mile connecting CO2 supply pipeline to the Grieve Field (budget estimate US$1.2 million) and to be leased to the joint venture
   - 100% build, own and operate surface facilities including compressors and associated plant (budget estimate $50 million) and to be leased to the joint venture
- Denbury to assume a 65% working interest in the Grieve Field and become operator
- Denbury is an outstanding joint venture partner:
   - Leading player in CO2 enhanced oil recovery (EOR) projects in the US
   - Strong and experienced management and operational capabilities
- Elk will retain a 35% working interest in the Grieve Field with no further funding expected to be contributed by Elk to reach first production
- Elk will retain 100% rights to the Niobrara Formation in the Grieve Field
- Various assignments and other matters are required to be completed
 
Elk Petroleum Ltd (ASX: ELK) is pleased to advise that its wholly owned USA subsidiary, Elk Petroleum Inc., has signed an agreement with Denbury Onshore LLC a wholly owned subsidiary of Denbury Resources Inc (NYSE; DNR) (Denbury) to develop the Grieve EOR Project located in Natrona County, Wyoming.
 
The joint venture will target the recovery of an estimated 12 – 24 million gross barrels (MMbbls) of oil from the Muddy Formation at the Grieve Field with the development expected to proceed by way of carbon dioxide (CO2) enhanced oil recovery. Denbury is an experienced EOR operator and is recognised as a leader in the application of this technology. Denbury will assume a 65% working interest in the Grieve EOR Project and become operator. Elk will retain a 35% working interest in the Grieve EOR Project and will retain sole rights to appraise and develop the oil potential in the Niobrara Formation.
 
Denbury will sole fund the first US$28.5 million of project costs which will cover well costs (injectors, producers and workovers), routine operating expenses and initial CO2 purchases to allow the commencement of CO2 injection and pressure build up at the earliest opportunity (Phase 1 Funding). At Elk’s election, Denbury may fund Elk’s share of the next $34.3 million of field expenditure on a cost recovery basis – i.e. Denbury will be entitled to recover Elk’s share of these costs with accrued interest from Elk’s share of first oil revenue (Phase 2 Funding). Elk may or may not, at its discretion, elect to sole fund its share of Phase 2 Funding depending on circumstances prevailing at the time.
 
Funding requirements beyond Phase 2 Funding will be met by the joint venture parties on a working interest basis.
 
Elk and Denbury will jointly own the Grieve EOR Project including its wells and field facilities. Denbury will build a 3-mile connecting pipeline to bring the supply of CO2 from Anadarko’s existing CO2 pipeline to the Grieve Field. The cost of this pipeline is currently estimated at approximately US$1.2 million. Denbury will own this pipeline 100% and lease the pipeline to the joint venture. Denbury will also build and own the essential surface infrastructure required for the separation and processing of produced fluids and recompression of CO2 for re-cycling. The cost of the surface infrastructure is preliminarily estimated at approximately US$50 million. Denbury will lease its 100% owned processing facilities to the joint venture as well as charge the normal monthly operating costs of the facilities.
 
Based on current cost estimates and field expectations, the agreement with Denbury provides sufficient funding to take the Grieve EOR Project through to first oil production.
Elk will retain 100% ownership of the oil export pipeline recently purchased from Chevron which is expected to be used to transport produced oil from the Grieve Field to Casper for sale into the market. Elk will also receive a small royalty from Denbury if cumulative production exceeds 12 MMbbls.
 
Managing Director Bob Cook observed that “This unique joint venture package provides Elk with the funding to unlock the considerable untapped potential at Grieve. Elk will retain significant equity exposure to a large resource base of 12 - 24 MMbbls of oil from the field, which is anticipated to be produced at a rate in the range of 4,000 - 12,000 barrels of oil per day during peak production. This partnership provides Elk with the opportunity to benefit from Denbury’s depth of experience, and balance sheet strength, and provides Denbury with the opportunity to make an entry into a development-ready EOR project in the northern Rockies. I am looking forward to working with Denbury on developing this project.”
 
A number of completion matters remain to be addressed before the agreement with Denbury comes into effect, including the finalisation of the surface infrastructure lease agreement, the finalisation of the pipeline lease agreements and the assignment of the Exxon Mobil and Anadarko agreements. While these completion matters are being dealt with, Denbury and Elk are proceeding with preliminary engineering work, surveys, environmental assessment and other work to ensure the Project stays on schedule whilst Denbury prepares to take over operatorship of the project and finalise an updated development plan. It is anticipated that CO2 injection will commence in the first quarter of 2012, with a target date for first oil production of 2014.
 
Mr Cook also commented that ”While this new arrangement provides the financial basis for locking in the Grieve development and value, it will allow Elk to move its focus to capturing greater value from its other assets, for example, from appraisal of the Niobrara Formation potential at Grieve as well further developments at Ash Creek and Hereford. Elk will also pursue other opportunities for additional EOR projects.” 
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