Commitments and Contingencies

6 Months Ended

Jun. 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 thepreviously 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 in Medicine Bow, Wyoming, purchase 70% of the CO2 captured from Mississippi Power Company's Kemper County Integrated Gasification Combined Cycle ("IGCC") project in Mississippi, and purchase 100% of the CO2 captured byAir Products LLC (“Air Products”) at a third-party refinery in Port Arthur, Texas.  Thesenew contracts each have an initial term of 15 to 16 years and include options to extend the term.We estimate that thesenew 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 200 MMCF/d of CO2 from the MBFP project in2015, 115 MMcf/d of CO2 from the IGCC 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.TheIGCC and Air Products plants are currently being constructed and MBFP is in the initial stages ofconstruction but its completion is still contingent upon securing debt financing and equity commitments and receipt of all necessary consents and approvals.

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 taxesin the various states in which we operate, and from time to time receive assessments for potential taxes that we may owe.  We have received a $15.0 million assessment from the Mississippi taxing authority for use tax, penalties and interest covering the 2004-2007 period.  We believe this assessment is significantly in excess of any amounts owed and we are appealing the assessment. We do not believe the outcome of this matter will have a material adverse effect on our financial position or results of operations.

We are involved invarious 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.