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.

• 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.

• 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.

• 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.

• 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.

• 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.

• 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.

• 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.

• 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.

• 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