1998 ANNUAL REPORT 

Expanding Operations in the Austin Chalk Trend

For Swift Energy, an upside to plunging oil and natural gas prices is the opportunity to acquire valuable producing properties at attractive prices in the Company’s areas of expertise. Such was the case in 1998, with Swift announcing in July that it had made the largest acquisition in its history—an $87.0 million purchase from Sonat Exploration Company. The acquisition included interests in 156 producing wells, over 200,000 net undeveloped acres, and a 20% interest in two natural gas processing plants with a combined capacity of up to 250 million cubic feet of gas per day.

The new properties are located in the Austin Chalk trend, a formation with numerous hydrocarbon-bearing fractures that first caught the oil industry’s attention in 1961 when a highly successful well drilled in Lee County, Texas, hit a large fracture filled with oil. Although other wells that followed were less successful, by the late 1980s specialized drilling techniques were available that allowed operators to drill horizontally and intercept multiple fractures with a single well bore. Frequently, dual-lateral holes were drilled in opposite directions, doubling the possibility for fracture interception.

Inflation-Adjusted Crude Oil Prices (Constant 1998 Dollars per Barrel)
		During the 50-year period between 1879 and 1929, average annual U.S. oil prices (adjusted for inflation to 1998 dollars) varied from a low of under $9 per barrel in 1915 to a high of over $23 in 1920, but seldom fell below the 1998 average price ($10.88). Inflation-adjusted prices in 1998 were the lowest the industry had experienced since just after World War II.

 

Convinced of the reliability of the techniques, Swift began drilling horizontal wells in the Austin Chalk in 1992, primarily in the Giddings Field in Fayette County but also in other surrounding counties. Through 1998 the Company’s Austin Chalk drilling program included 78 wells with 68 successes, for a success rate of 87%. Of these, 23 wells were drilled in 1998, 18 of which were successful—16 of 19 development wells and two of four exploratory wells.

Two New Fields

The Austin Chalk trend meanders along the Gulf Coast through a number of Texas counties and Louisiana parishes. Most of Swift’s newly acquired properties, called the Toledo Bend Properties because of their proximity to Toledo Bend Lake along the Texas and Louisiana border, are located in the Brookeland Field in two Texas counties (Jasper and Newton) and in the Masters Creek Field in two Louisiana parishes (Vernon and Rapides).

The Toledo Bend acquisition has greatly expanded Swift Energy’s presence in the Austin Chalk trend. At the time negotiations for the acquisition were completed, the properties’ proved reserves were audited at 91.1 Bcfe. However, through an extensive work program that included geological and engineering field studies and placed new wells in production during the second half of the year, the Company increased the proved reserves associated with the properties at year-end to 130.5 Bcfe, or 30% of Swift’s total proved reserves.

This increase in reserves was reached despite the fact that 11.6 Bcfe had already been produced from the properties, an amount that accounted for 30% of Swift’s total 1998 production.

Production Potential

Typically, Austin Chalk wells produce at very high initial rates and pay out within about 18 months, declining to substantially lower but still significant rates in succeeding years. At the time Swift assumed operations of the Toledo Bend Properties, most of the wells had established production histories that could easily be projected; however, nine dual-lateral wells that had been completed in the Masters Creek Field had not yet been placed in production, primarily because of the lack of pipeline access. When the nine wells began producing before year-end, their combined gross daily production was 83.5 million cubic feet of gas equivalent (29.4 MMcfe net to Swift), even though the Company was operating the wells at less than their maximum deliverability owing in part to the low prices prevailing in the industry.

Three new development wells in which the Company had interests were also completed in the Masters Creek Field before year-end, including one operated by Swift that was placed in production at 9.1 MMcfe per day in February 1999 with net revenue interests of 20% belonging to the Company.

Dendritic Fracturing

In order to maximize production levels from the Toledo Bend Properties, Swift will apply "dendritic fracturing" to stimulate production in selected wells. In this process, massive quantities of water and small amounts of hydrochloric acid are pumped at a high velocity down a well bore and out into its horizontal leg(s), eventually spreading out into the formation’s natural fractures, some of which may have become clogged. The objective is to clean out the fractures to improve hydrocarbon flow into the horizontal legs. In order to focus the fluid flow on the clogged passageways, a gel mixture is first pumped into the well bore to temporarily block the open passageways, thereby diverting the subsequent high-pressure flow to the clogged fractures. Once all the fluids have been pumped in, the well is shut in and allowed to recover through gravity segregation, the water sinking to the bottom of the fractures and the oil and gas rising to the top and feeding into the horizontal legs of the well.

The dendritic fracturing technique has been used with success by other operators in the Austin Chalk. When Swift first applied the technique to a well in 1998, the well’s average production increased from 20 barrels of oil and 20,000 cubic feet of gas per day to 275 barrels of oil and 1,000,000 cubic feet of gas per day.

 

^aSee definitions of proved reserves, proved developed reserves, and proved undeveloped reserves on page 48.
^bFor a discussion of these areas, see pages 6-13 and pages 40-42.
^cTexas natural gas reserves of 1.1 Bcf that are dedicated to a Company volumetric production payment agreement are excluded from corporate reserves.

Undeveloped Properties

In addition to yielding current high production levels, the Toledo Bend acquisition, which includes some properties outside the two major fields, will provide the Company with a long-term drilling program. The two principal fields alone contain approximately 40% of Swift’s undeveloped proved reserves. Although many of these undeveloped properties will not be drilled until prices improve, most of the leases are secured for a number of years and therefore their development can await price increases.

To date, 47 proved locations have been identified for development wells in the Toledo Bend Properties.

Joint Ventures

In other areas of the Austin Chalk trend, Swift’s 1998 drilling was largely carried out under joint venture agreements with industry partners, as it has been since 1993.

During the year, Swift entered into an agreement with Chevron USA Production Company to jointly develop approximately 70,000 net acres in the Texas counties of Fayette, Colorado, and Austin, with the Austin Chalk trend one of several targeted formations. Each company holds a 50% working interest within the area of mutual interest, and Swift serves as the operator.

Under this agreement, Swift drilled a successful single-leg exploratory well in the Austin Chalk in Colorado County that was placed in production in February 1999 at 12.7 MMcfe per day with net revenue interests of 33.6% owned by the Company.

As a result of a joint venture with Union Pacific Resources (UPR), Swift holds 5.9% net revenue interests in a development well drilled in the Austin Chalk by UPR in Washington County, Texas. This well was placed in production at 58 MMcf of natural gas per day—the highest initial rate of any well with which the Company has been associated. Future Swift-UPR joint ventures will also be carried out in Washington County, as well as in Fayette County and Austin County.

In another joint venture—with Chesapeake Energy Corporation—Swift drilled three successful development wells during the year in Fayette County. The well in which the Company had the highest net revenue interests (79.1%) tested at a rate of 1,165 barrels of oil and 1.8 MMcf of natural gas per day.

A joint venture with Belco Oil and Gas Corporation resulted in four successful wells (one exploratory, three development) in Fayette County, all drilled by Swift.

 

^aSwift is the operator of 815 producing wells and 21 service wells. The Company has interests in 1,696 producing wells and 57 service wells.

^bTexas natural gas reserves of approximately 1.1 Bcf that are dedicated to a Company volumetric production payment agreement are excluded from the Company’s reserves; however, the above table includes 0.9 Bcf of natural gas production delivered under the terms of that production payment agreement during 1998.

^cIncludes Alabama, Arkansas, and Nebraska.

This page was last updated on Saturday, February 08, 2003, at 07:28:48 PM.

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