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Commitments and Contingencies
9 Months Ended
Sep. 30, 2011
Commitments and Contingencies [Abstract] 
Commitments and Contingencies

Note 7. Commitments and Contingencies

 

In March 2011, we entered into three long-term supply contracts to purchase CO2 from future anthropogenic sources in the Gulf Coast and Rocky Mountain regions. The three contracts are in addition to the previously disclosed long-term supply contracts Denbury currently has in place in the Gulf Coast, Rocky Mountain and Midwest regions. Under the three new contracts, Denbury will purchase 100% of the CO2 captured from the DKRW Advanced Fuels LLC's Medicine Bow Fuel and Power LLC ("MBFP") project near Medicine Bow, Wyoming, purchase 70% of the CO2 captured from Mississippi Power Company's Kemper County Integrated Gasification Combined Cycle ("Mississippi Power") project in Mississippi, and purchase 100% of the CO2 captured by Air Products LLC (“Air Products”) at a third-party refinery in Port Arthur, Texas.  These new contracts each have an initial term of 15 to 16 years and include options to extend the term. We estimate that these new sources will supply approximately 365 MMcf/d of CO2 for our enhanced oil recovery operations, although under certain circumstances, we may be obligated to purchase up to 460 MMcf/d, a portion of which would be at a reduced price per Mcf. We expect to begin taking delivery of approximately 100 MMCF/d of CO2 from the MBFP project in 2015, 115 MMcf/d of CO2 from the Mississippi Power project by 2014, and 50 MMcf/d of CO2 from Air Products in late 2012. Our aggregate maximum purchase obligation for CO2 purchased under these three contracts would be approximately $110 million per year (assuming purchases of 460 MMcf/d), plus transportation, assuming a $100 per barrel NYMEX oil price.  The purchase price of CO2 will fluctuate based on the changes in the price of oil. 

 

As is the case with all of our long-term supply contracts to purchase CO2, the three agreements entered into in March are subject to various contingencies. The Mississippi Power and Air Products plants are currently being constructed, and the MBFP project is contingent upon securing debt financing, equity commitments and receipt of all necessary consents and approvals.

In conjunction with the August 1, 2011 Riley Ridge acquisition, we assumed the 20-year helium supply contract under which the original participants in Riley Ridge agreed to supply helium to a third party purchaser.  Subsequently, we amended this contract to provide for annual delivery (to the 8/8ths working interest) of 127 MMcf of helium (previously 200 MMcf) during the first two years of the contract and thereafter provides for delivery of 400 MMcf of helium per year.  If the contracted quantity of helium is not supplied, we are obligated to compensate the third party helium purchaser for the amount of the shortfall in an amount not to exceed $8.0 million per year.

In the third quarter of 2008, we obtained approval from the National Office of the Internal Revenue Service (“IRS”) to change our method of tax accounting for certain assets used in our tertiary oilfield recovery operations. As a result of the approved change in method of tax accounting, beginning with the 2007 tax year we began to deduct, rather than capitalize, such costs for tax purposes, and applied for tax refunds associated with such change for our 2004 and 2006 tax years. Notwithstanding its consent to our change in tax accounting in 2008, the IRS subsequently exercised its prerogative to challenge the tax accounting method we used. In late January 2011, we received a Technical Advice Memorandum (“TAM”) issued by the IRS National Office disapproving our method of accounting and revoking its consent to our change, on a prospective basis only, commencing January 1, 2011. As a result of the prospective nature of the IRS's determination, there should be no change in our position with respect to the deductibility of these costs for 2007, 2008, 2009 and 2010. However, refund claims of $10.6 million for tax years through 2006 are pending and are subject to review by the Joint Committee on Taxation of the U.S. Congress. We are unable to assess the outcome of any such review, nor how that outcome may affect the other years covered by the TAM.

 

We are subject to audits for sales and use taxes and severance taxes in the various states in which we operate, and from time to time receive assessments for potential taxes that we may owe. Currently, we have no material assessments for potential taxes.

 

 We are involved in various lawsuits, claims and other regulatory proceedings incidental to our businesses. While we currently believe that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position, results of operations or cash flows, litigation is subject to inherent uncertainties. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on our net income in the period in which the ruling occurs. We provide accruals for litigation and claims if we determine that a loss is probable and the amount can be reasonably estimated.