Over the last 10 years, U.S. natural gas supplies have failed to keep pace with natural gas demand.

Because Swift Energy currently focuses on U.S. onshore natural gas reserves, it must compete successfully within the dynamic environment of the U.S. natural gas industry.

Demand for clean-burning natural gas has tremendous potential for growth, having increased about 25% over the last 10 years. Meanwhile, U.S. production has not kept pace with demand, rising only about 14% since 1985. In the past, Canadian imports made up the supply shortfall, but growth in imports is now experiencing a slowdown. In addition, a decline in U.S. proved natural gas reserves has narrowed the excess production capacity available to meet peak demands, as demonstrated by supply shortfalls during the winter of 1995-96. Because of the high demand and low supplies during frigid weather in the Northeast, near-month prices on the New York Mercantile Exchange (NYMEX) futures market averaged approximately 75% higher during January 1996 than during January 1995. Unfortunately, NYMEX price increases weren't reflected uniformly in what producers received for their production. Variations occurred because of inherent timing differences between the futures and spot markets and because of regional factors. NYMEX prices are based on prices at the Henry Hub, a Louisiana pipeline intersection that feeds the Northeast. Cash market prices in other regions are often substantially lower, depending on local weather, pipeline capacity, and other conditions.

The market's response to the supply squeeze during the 1995-96 winter indicates that natural gas prices are very likely to rise in the future as demand continues to increase faster than supply. However, the volatility of prices in recent years is a reminder that prudent producers should not rely on price appreciation when establishing strategy. Even if prices remain low, sophisticated producers such as Swift can prosper by using advanced technologies to increase drilling success rates and lower costs. The benefits of the new technologies position Swift Energy to perform well even in a low-price environment and to reap even greater rewards if prices rise as expected.