As of 12/31/07 - Our tertiary operations are our core assets and our principal focus. During 2007, we continued the expansion of our Phase I and Phase II tertiary floods and initiated tertiary projects at Lockhart Crossing, our first Louisiana field (Phase I — see description of the various phases below), Tinsley Field in Phase III, and Cranfield Field in Phase IV. We increased our potential tertiary flood candidates during 2007 with the acquisition of significant positions in Oyster Bayou, Fig Ridge and Gillock Fields, Phases VII and VIII, adding to our inventory of future tertiary floods. In addition to our development, expansion and acquisition of new floods, we also made the strategic decision to divest our natural gas assets in South Louisiana that did not contain future CO2 potential in order to further narrow our focus on CO2 enhanced oil recovery and our core assets. During the last eight years, we have learned an extensive amount about tertiary operations and working with carbon dioxide (“CO2”), and our knowledge continues to grow. We like these tertiary operations because (i) tertiary investments provide a reasonable rate of return, even at relatively low oil prices of around $30 per barrel, (ii) tertiary flooding exhibits a lower risk profile than conventional exploration and development, and (iii) to date, in our region of the United States, we have not encountered any industry competition. Generally, from the Texas Gulf Coast to Florida, there are no known significant natural sources of carbon dioxide except our own, and these large volumes of CO2 are the foundation for our entire tertiary program.

As of year-end 2007, we had a total of 69.5 MMBbls of proved reserves attributable to our tertiary operations, 48.3 MBbls are attributable to fields in Phase I with the balance in Phase II. To date, we have already produced over 20 MMBbls from tertiary operations and we have identified up to 314 MMBbls of additional potential or probable reserves (using the mid-point of several ranges) over and above our existing proven reserves that can be recovered through tertiary operations in our eight currently planned phases.

Through December 31, 2007, we invested a total of $1.0 billion on tertiary oil fields (including allocated acquisition costs) and have received $758.9 million in net operating income (revenue less operating expenses). Of this total, approximately $351.3 million was invested on fields which had little or no proved reserves at December 31, 2007 (i.e., significant incremental proved reserves are anticipated during 2008 and beyond). The proved oil reserves in our tertiary fields have a PV-10 Value of $3.2 billion at December 31, 2007, using constant NYMEX pricing of $95.98 per Bbl and we had an estimated PV-10 Value of our probable oil reserves in our tertiary fields of $7.3 billion using the same prices (on a unrisked basis, using mid-points of the reserve ranges). These amounts do not include the capital costs or related depreciation and amortization of our CO2 producing properties, but do include CO2 source field lease operating costs, royalty and transportation costs. Through December 31, 2007, we had a balance of approximately $371.0 million of unrecovered net cash flow for our CO2 source assets, including $180.3 million associated with CO2 pipelines.

Jackson Dome

We believe that having sufficient CO2 volumes is the key ingredient, if not the most important factor to our tertiary operations. We acquired our Jackson Dome CO2 source field in February 2001, giving us control of most of the CO2 supply in Mississippi, as well as ownership and control of the critical 183-mile NEJD CO2 pipeline. Since February 2001, we have acquired two additional wells and drilled 15 additional CO2 producing wells, significantly increasing our estimated proved CO2 reserves from 800 Bcf at the time of acquisition to approximately 5.6 Tcf as of December 31, 2007, replacing 164% of our production during 2007. Today, we own every producing CO2 well in the region. We plan to drill several additional CO2 wells during 2008, including four development wells and one exploratory well, to further increase our proven CO2 reserves and to obtain additional CO2 deliverability.

During the fourth quarter of 2007, we produced an average of 533 MMcf/d of CO2, a 35% increase over one year ago. We sold an average of 99 MMcf/d of CO2 to commercial users and we used an average of 434 MMcf/d for our tertiary activities. We estimate that our February 2008 daily CO2 deliverability was approximately 700 MMcf/d. By year-end 2008, we estimate that our planned tertiary operations and industrial customers will collectively require approximately 800 MMcf/d, which we believe we can attain with our planned 2008 Jackson Dome projects.

Man-Made CO2 Sources

We have entered into three agreements, and are having various levels of discussions with many others, to purchase (if the plants are built) all of the CO2 production from man-made (anthropogenic) sources of CO2 from planned solid carbon gasification projects. We project that the first one will not be completed until 2011. These plants may convert petroleum coke, coal, biomass or combinations of all three into a variety of products including ammonia, methanol, synthetic diesel fuel or electric power generation. We plan to use the by product of CO2 from these plants in our tertiary operations to recover oil that may otherwise not be produced. In addition, our use of this CO2 will also eliminate the release of this greenhouse gas into the earth’s atmosphere.

The cost of this man-made CO2 will likely be higher than CO2 from our natural source, but the location of these plants could mitigate some of the incremental cost of transportation and we believe that there could potentially be a type of carbon credit in the United States in the future which would, if enacted by our government, significantly lower our cost for this CO2.

We see these sources as a possible expansion of our natural Jackson Dome source, assuming they are economical, and we believe that our potential ability to tie these sources together with pipelines will give us a significant advantage over our competitors, in our geographic area, in acquiring additional oil fields and these future potential man-made sources of CO2. The potential volumes of CO2 from these plants could be very significant to us as the smallest plant would produce approximately 200 MMcf/d of CO2.

CO2 Pipelines

As of January 2008, we have three CO2 pipelines in service, the NEJD 183-mile CO2 pipeline that runs from Jackson Dome to near Donaldsonville, Louisiana acquired in 2001, our 84-mile Free State Pipeline that was completed in 2006 and runs from Jackson Dome to our Phase II tertiary fields in East Mississippi, and the first 31-mile segment of our most recently completed pipeline, our Delta Pipeline which runs from Jackson Dome to Tinsley Field, northwest of Jackson, Mississippi. We have completed the reconditioning and conversion of the natural gas pipeline, we acquired from Southern Natural Gas Company in 2006, to CO2 service and plan to begin transporting CO2 down this line in the second quarter of 2008 to our first Phase IV field, Cranfield Field. During 2008 we plan to further extend our Delta Pipeline by building a 24" 68-mile extension from Tinsley Field to Delhi Field with completion of this segment anticipated around year-end 2008.

We are also working on a 24" pipeline, named the Green Pipeline, to transport CO2 to Hastings Field and our 2007 Southeast Texas acquisitions, Oyster Bayou, Fig Ridge and Gillock Fields. The Green Pipeline will connect the southern end of our existing NEJD CO2 Pipeline, near Donaldsonville, Louisiana, to Hastings Field, near Houston, Texas, this distance estimated to be between 300 and 320 miles. Based on our latest estimates, this pipeline is expected to cost between $700 million and $750 million. Our efforts in 2007 were focused on engineering design, right-of-way acquisition and securing the manufacturing of the 24" pipe. Although our definitive schedules are still in flux, our goal is to begin construction of the Green Pipeline around year-end 2008 and hope to have it completed around year-end 2009. Initially, we anticipate transporting CO2 from our natural source at Jackson Dome in this line, but ultimately we expect that it will be used to ship predominately man-made (anthropogenic) sources of CO2.

Tertiary Oil Fields

We talk about our tertiary oil operations by labeling operating areas or groups of fields as phases.

Phase I

Phase I, in Southwest Mississippi, includes several fields along our 183-mile NEJD CO2 Pipeline. The most significant fields in this area are Little Creek, Mallalieu, McComb and Brookhaven. Phase I was our first area of tertiary operations which began with the purchase of Little Creek in 1999, contains the largest quantity of proven tertiary reserves (48.3 MMBbls) and has produced almost all of our tertiary production to date (18.9 MMBbls). We estimate that there are up to 16 MMBbls of additional potential reserves in this area, primarily from anticipated higher recovery rates, in addition to further expansion of existing floods and implementation of enhanced recovery projects in smaller fields.

During 2007, most of our Phase I work was related to further expansion of the floods and facilities in existing fields and initiation of a flood at Lockhart Crossing, our first Louisiana field. Production from this area averaged 12,864 Bbls/d in the fourth quarter of 2007, an increase of 31% over the fourth quarter of 2006 average production level. We expect our tertiary oil production in this area to further increase in 2008 in all of our fields except for Little Creek Field, our oldest flood which began to decline in 2006, including initial oil production from Lockhart Crossing Field late in 2008.

Phase II

Phase II, in East Mississippi, currently contains three active CO2 projects. This area has 21.3 MMBbls of tertiary proven reserves as of December 31, 2007 plus an estimated 55 MMBbls of additional potential reserves from future tertiary operations. After completion of our Free State CO2 Pipeline from Jackson Dome to Eucutta Field in 2006, we initiated injections at three of our Phase II fields, Eucutta, Soso, and Martinville Fields. We saw our first oil production response in 2007 and during the fourth quarter of 2007, these three fields averaged over 4,500 Bbls/d. As a result of the production response, we were able to book over 11 MMBbls of proved reserves at Soso and Martinville during 2007. We expect production to continue to increase in this area throughout 2008. Our 2008 capital budget includes the construction of the pipeline lateral from our Free State Pipeline to Heidelberg Field, our largest conventional field, in order to initiate tertiary operations, with initial injections expected to commence there during 2009.

Phase III

Tinsley Field, northwest of Jackson Dome, was the most significant field acquired in our $250 million January 2006 acquisition. Tinsley, the only field in Phase III, is one of the largest oil fields in the state of Mississippi, and while it has no current proven tertiary oil reserves, we believe that it has in excess of 40 MMBbls of incremental potential recoverable oil reserves from tertiary operations.

The acquisition of the field included an 8" pipeline which we converted to CO2 service in 2007 and initiated injections. We also built a 24", 31-mile replacement line from Jackson Dome to Tinsley, during 2007, that was placed in service in January 2008 with a resultant increase in injection rates thereafter. We expect to have our first enhanced oil production from Tinsley Field in the second half of 2008, and if the production response is significant before year-end, we anticipate booking a portion of the forecasted proved reserves at Tinsley during 2008.

Phase IV

Phase IV includes Cranfield and Lake St. John Fields, two fields, located on opposite sides of the Mississippi River, with Cranfield located in Mississippi and Lake St. John located in Louisiana, both in the Southwest Mississippi area just west of our Phase I fields and both acquired during 2005. We believe that these two fields have approximately 28 MMBbls of potentially recoverable oil from tertiary operations. During 2006, we acquired an 18" natural gas pipeline that runs from Gwinville Field in central Mississippi, through Cranfield Field and then terminates at the Mississippi River. During 2007 we reconditioned and converted the pipeline from natural gas service to CO2 service and expect to place the pipeline in service during the second quarter of 2008, at which time we will begin CO2 injections at Cranfield. We do not expect any significant oil production from Cranfield until 2009, and Lake St. John Field will not be flooded for a couple more years as it will require that we extend the pipeline under the Mississippi River to the field.

Phase V

Phase V consists of Delhi Field, a Louisiana field we acquired in May 2006 for $50 million, plus a 25% reversionary interest to the seller after we have achieved $200 million in net operating revenue, as defined in the agreement. We believe that Delhi Field has approximately 33 MMBbls of potentially recoverable oil from tertiary operations. We expect the CO2 pipeline to be completed to Delhi around year-end 2008, with CO2 injection to commence shortly thereafter, and expect our first oil production late in 2009.

Phase VI

We also plan to ultimately flood Citronelle Field, a field in Southwest Alabama, acquired in our $250 million January 2006 acquisition, which we believe has over 25 MMBbls of potentially recoverable oil from tertiary operations. However, in order to flood this field, we will need to extend our Free State Pipeline from Eucutta Field another 60 to 70 miles to Citronelle Field. We have not yet firmly scheduled this expansion.

Phases VII and VIII

During November 2006, we acquired an option to purchase, on September 1, 2008, or September 1, 2009, with an effective date of January 1 of the following year, Hastings Field, a strategically significant potential tertiary flood candidate located near Houston, Texas. The purchase price for the conventional proved reserves will be determined at the time the option is exercised, either by agreement or by a pre-designated independent petroleum engineering firm. As consideration for the purchase option, we made an upfront payment of $37.5 million, with additional payments totaling $12.5 million due or paid during 2007 and 2008. None of the option payment amounts will be credited against the purchase price if we exercise the option.

We believe that Hastings Field possesses from 50 to 80 MMBbls of reserve potential from CO2 tertiary floods, more reserve potential than any other single field in our inventory. Currently, we are working on the right-of-ways required to build a pipeline we have named our Green Pipeline to transport CO2 to this field (see CO2 pipelines above). The Hastings Field was the first significant strategic addition in this area, giving us an anchor field in this region. We have already expanded our field inventory in this area as we purchased Oyster Bayou and Fig Ridge Fields with tertiary potential for $42 million in March 2007 and other small fields, Gillock Fields near Hastings Field, in late 2007. We believe Oyster Bayou and Fig Ridge have significant tertiary reserve potential estimated to be between 25 and 35 MMBbls and project that Gillock Field has approximately 10 MMBbls of additional potential incremental oil. Since our CO2 pipeline to this area is not expected to be completed until year-end 2009, our goal is to continue to pursue the acquisition of other fields in this area, which will help reduce the cost of CO2 for each field by fully utilizing the proposed pipeline and thereby reducing our transportation cost per Mcf.