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Dear Shareholders:
Last year was definitively a year of extremes with record high oil
prices topping $145 per barrel mid-year, then dropping below $40 per
barrel late in 2008. Our stock price vacillated along with the price of
oil, trading as high as $40 per share during the period of high oil
prices, and trading as low as one-eighth of that price when oil prices
declined. The continuing low commodity and equity prices in early 2009
reflect the impact of a growing global recession.
Along with high oil prices, which steadily increased until mid-year
2008, we faced escalating operating and capital costs, project delays
and a shortage of trained personnel, which together created significant
compensation inflation in our industry. One favorable aspect of the
declining oil prices in the second half of the year is that costs have
begun to come down, and we have been able to fill most of our needs for
personnel. For example, our tertiary operating costs decreased 18%
sequentially between the third and fourth quarters of 2008, from $26.81
per BOE in the third quarter to $21.86 per BOE in the fourth. We expect
these costs to be further reduced in 2009, potentially to the upper
teens if oil prices stay below $50 per barrel, as a significant portion
of these costs track commodity prices. On the capital side, we commit to
significant expenditures as far as two years in advance. So, while we
are seeing cost reductions in some areas, it will take a little longer
to fully recognize the full measure of material savings in our capital
costs.
On the personnel front, recently we have been able to selectively add
key personnel, and we continue to improve the training and experience of
our operational staff. The past few years have reinforced how important
our personnel are to our success, and how qualified personnel shortages
can be a limiting factor to rapid growth.
Despite the distractions of a collapsing economy, 2008 was a good year
for us in many ways.
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We added 88.9 MMBOE of proved reserves (before netting out 2008
production, property sales and reserve revisions due to pricing),
including 63.4 MMBOE in our CO2 tertiary
floods, primarily at Heidelberg, Tinsley and Lockhart Crossing
Fields. Our finding and development costs, all-in (including the
changes in future development costs) were $12.23 per BOE, not only
an excellent result when compared to others in our industry, but one
which should improve over time as we add probable reserves from
these same fields in the future. Using the more common “short-cut”
method of computing finding costs, which excludes the changes in
future development costs and unevaluated properties, our 2008
finding costs would be less than $7.00 per BOE.
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The Delta Pipeline was completed as far as Tinsley Field (Phase III)
in early 2008, allowing us to increase our CO2
injection rates as development of the field progressed. Substantial
progress was made on the 81-mile portion of the Delta Pipeline from
Tinsley to Delhi Field (Phase V), and this portion of the pipeline
is expected to be ready for service by mid-2009.
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Tinsley Field responded to CO2 injection in
April 2008 with production increasing steadily since that time to a
fourth quarter average of 1,832 Bbls/d. We expect production from
this field, our largest tertiary flood to date, to increase further
in 2009.
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We began injection at our first tertiary flood in Louisiana,
Lockhart Crossing Field (Phase I), in December 2007, with our first
oil production response early in the third quarter of 2008.
Production at this field averaged 555 Bbls/d in the fourth quarter
of 2008.
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We completed the conversion of a natural gas line to CO2
service midyear and began injecting CO2 at
Cranfield (Phase IV). First oil production response occurred in
early 2009.
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Overall, our tertiary oil production increased to an annual average
of 19,377 Bbls/d in 2008, a 31% increase over 2007 tertiary
production levels, the primary driver for our record annual
production level of 46,343 BOE/d.
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Production from the Barnett Shale area in Texas was relatively flat
throughout the year, averaging 12,699 BOE/d, about the same level as
fourth quarter 2007 production. This area did, however, produce our
second largest increase in proved reserves. We added approximately
19.5 MMBOE (117 Bcfe) of reserves here during 2008. We drilled 38
wells in this area during 2008, but due to lower natural gas prices,
we have substantially curtailed drilling activity in this area for
2009.
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We began construction of the 320-mile Green Pipeline late in 2008
after almost two years of planning. This line will run from
Donaldsonville, Louisiana, southeast of Baton Rouge, to the recently
acquired Hastings Field south of Houston, Texas, and will
interconnect with the NEJD Pipeline. We expect this pipeline to cost
around $730 million, of which we have spent $230 million and expect
to spend approximately $430 million during 2009. By late 2009 or
early 2010, we expect to finish the line from Donaldsonville,
Louisiana, to the east shore of Galveston Bay, with plans to finish
the line to Hastings Field by the end of 2010. Initially we
anticipate transporting CO2 from our natural
source at Jackson Dome on this line, but ultimately expect that the
Green Pipeline will be used to ship predominately man-made
(anthropogenic) sources of CO2. We believe
that this line will be a major strategic asset for us for years to
come.
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Lastly, we have put Denbury into a position to weather the economic
conditions we find ourselves in. We have significantly improved our
liquidity with our recent $420 million subordinated debt offering,
coupled with the other steps taken during the last six months, which
included a $400 million increase in our bank commitment amount,
cancellation of the $600 million acquisition of Conroe Field,
purchase of oil derivative contracts for 30,000 Bbls/d during 2009
with a floor price of $75 / Bbl, and a reduction of our 2009 capital
budget. We
will continue to monitor our progress and look for additional ways
to maintain our liquidity, lower our costs and improve our
efficiencies.
Lower oil prices have reduced our cash flow and will require us to slow
our development pace, but it will not deter us from our favorable
strategy. The new administration in Washington has stated that they want
to reduce CO2 emissions, which is likely to be
part of any new climate legislation. This legislation would likely be
either a cap and trade system or a carbon tax, either of which would
provide an economic incentive to capture CO2 from
existing and future industrial plants. We could potentially benefit from
any such legislation, as we are one of the few companies currently
capable of taking large volumes of man-made CO2
and safely sequestering it in underground reservoirs. We will ultimately
need more CO2 to continue our growth, and others
will need a way to sequester their CO2 emissions.
Potentially, both needs can be met through the same solution.
As a feature of this year’s annual report, we have tried to illustrate
graphically our strategy of combining CO2 capture
with incremental oil production. By increasing domestic oil production,
we reduce the need for imported oil, the real villain behind the United
States’ trade deficit, whilst benefiting local and state governments,
local employment, mineral owners, and ultimately, Denbury shareholders.
Denbury is in excellent shape to carry out this strategy, better than
any time in the 20 years since it was founded in my living room!
Therefore, I have decided that this is an appropriate time to let the
experienced team at the head of the Company take more responsibility,
while I take a turn at the back of the peloton (to use a cycling
analogy). I intend to step down as President and CEO on June 30th, but I
will continue as Co-Chairman of the Board and retain an active role in
the Company’s strategic planning.
The new team will be led by Phil Rykhoek as CEO and Tracy Evans as
President and COO, but our Investment Committee approach, where
decisions are made by consensus amongst senior management, will remain
and ensure our continuity.
We look forward to a successful 2009 and beyond.

Gareth Roberts
President and Chief Executive Officer
March 6, 2009 |