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Elk Petroleum And Denbury Resources Move Closer To Production From Grieve With Rapid EOR Progress

Enhanced oil recovery (EOR) player Elk Petroleum (ASX: ELK) is encouraged by the progress made by operator Denbury Resources (NYSE: DNR) a US$6 billion market cap., on the Grieve EOR project in Wyoming.

"Denbury, as operator of the Grieve field, has embarked upon a complete makeover of the field and facilities. In a matter of months they will have renewed Grieve into a near new production state," Elk managing director Bob Cook said.

"With the injection of carbon dioxide, the Grieve wells are anticipated to reach production rates similar to those achieved during their original production phase.

"We are encouraged by the enthusiasm with which Denbury has undertaken field work since receiving BLM approval to proceed with the project."

Cook added that progress has been made on the sale of its 100% owned crude export pipeline, which is an integral component of the Grieve EOR project.

Grieve EOR Project

Denbury, which has extensive experience in EOR operations, has advanced the in-field pipework phase of the project rapidly in a very short time.

It is stringing distribution headers the length of the Grieve field and running flowlines radially from the headers to the wells.

Preparation of the site for installation of the processing and injection facilities is also progressing well with earthworks of the first bench (level) of three benches completed and form work underway for the foundations for the facilities.

Denbury expects to drill in October the first of two new wells this year that target the Madison (Mississippian) formation to initially source water to accelerate the re-pressuring of the shallower Muddy formation.

Produced water from the Madison will be injected concurrently with the injection of the carbon dioxide into the Muddy formation, which is the target formation for the EOR project. This accelerated re-pressurization will lead to earlier first oil production.

Carbon dioxide flooding is expected to start in the fourth quarter of 2012 with first EOR oil expected in the middle of 2014.

The project targets the additional recovery of up to 24 million barrels of oil from Grieve.

Besides providing water, the water production well will also be cored through the Muddy reservoir, providing essential information about the original oil water contact and hence the original oil in place volume as well as further information about the oil potential of the shallower Niobrara formation.

Elk retains sole rights to the Grieve Niobrara, which displayed strong oil shows and other positive indicators at the Grieve-39A well that it drilled in 2009.

The Grieve Oil Field was discovered in 1954 by Forest Oil and has produced 30.2 million barrels of oil with the peak rate of 12,000 barrels of oil per day achieved in 1960.

Elk has a 35% working interest in the Grieve EOR project while Denbury holds the remaining 65%.

Grieve crude export pipeline

The Grieve crude pipeline is being re-commissioned to transport crude from the Grieve EOR project 32 miles to crude storage and distribution systems in Casper.

As part of the re-commissioning operation, an "intelligent pig" (an internal pipeline survey tool) will travel the full length of pipeline to measure the wall thickness of the pipe before oil transportation operations commence.

Preparations to accommodate the length of the intelligent pig have involved extending the pig launcher and receiver at each end of the pipeline. The intelligent pigging operation is scheduled for late September 2012.

Elk added there is local interest in acquiring the pipeline. It plans to participate in and operate the venture.

Ash Creek EOR project

At Elk's 100% owned, the company is currently processing and interpreting 2D seismic that it acquired in August.

Results from this work us expected by the end of September and will be used to fine tune future development plans for the field.

Work is also continuing on commissioning recently completed well workovers and installed field facilities.

Ash Creek oil production is currently about 25 barrels per day with water being injected at about 1000 barrels per day. A further increase in oil production to 40 barrels per day is expected prior to implementing the 1st Stage of the chemical flood EOR project.

This will be achieved by utilising the production and injection wells of the 1st Stage flood and the re-entry of other currently abandoned Ash Creek wells. The chemical mixing and dispensing facilities will be installed later this year and chemical injection is expected to commence late in 2012 or early in 2013.

Elk is working closely with a major chemical supplier to finalise the choice of chemicals to be injected; the scope of this work has been expanded to test alternative chemical combinations and lower concentrations of injected chemicals. This work should lead to lower cost operations than previously anticipated.

Analysis

While Elk has flown under the radar due to the lack of knowledge about EOR plays, EOR is a proven technology and in the hands of an experienced operator like Denbury, a valuable tool for recovering additional oil from existing oil fields.

Denbury's experience has also been displayed in the rapid progress that has been made in the re-development of the Grieve field.

For investors looking for an energy play, Elk offers significant upside potential at a market cap. of just $26 million with future production from the Grieve field. Denbury is also a $6 billion company, whose involvement as operator ups the stakes and potential for Elk, considerably.

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