SWIFT ENERGY COMPANY 1999 ANNUAL REPORT

Adding Value in the AWP Olmos Area

In the AWP Olmos Field in McMullen County, Texas, operations during the early years of the 21st century will continue to focus on adding value to the core area that Swift Energy has operated the longest. It is also the area that holds the largest single volume of the Company’s proved reserves (207.7 Bcfe, or 45.7%) and the largest single volume of its proved undeveloped reserves (83.6 Bcfe, or 36%).

Swift’s AWP Field is an ongoing success story. The Company began operations in the field in 1989 after increasing the working interests it had in approximately 65 wells located on a 4,900-acre leasehold position. From 1994 to 1997, Swift significantly increased its total leasehold acreage, which now stands at 33,530 net acres, and began an accelerated drilling program on the new acreage that continued until oil and natural gas prices dropped in 1998. By year-end 1999, the number of Swift-operated wells in the field totaled 460. Of these, five were added during 1999, most late in the year after prices had begun to recover.

During the year 2000, Swift plans to drill 12 more wells in the field, saving most of its 141 proved undeveloped locations for drilling in subsequent years. With each well having a productive life of 15 to 20 years, the Company expects to have long-term production from the field over several decades.

Fracturing the Olmos Sand. Swift’s continued production from the AWP Field and its position as the largest operator in the field provide another testimony to the expertise of Swift’s technical teams in successfully overcoming numerous operating challenges within economic constraints. The Texas Olmos sand has low porosity and very low permeability; thus the oil and natural gas within the reservoir are tightly bound and their production, like that from the Austin Chalk, is depletion driven. Unlike the Austin Chalk, however, the Olmos sand does not have natural vertical fractures into which the oil and natural gas tend to migrate and from which they can be produced. For production from the Olmos sand to be possible, the sand surrounding a well bore must first be artificially fractured to provide flow paths into the well.

At the time the Company began operations on the original 4,900-acre leasehold position, the fracturing process consisted in pumping massive quantities of a water-based gelled fluid and a sand mixture down the well bore and out into the formation under high pressures, with the deposited sand serving as a proppant to hold the fractures open. Swift’s technical teams immediately focused on decreasing the costs of this procedure and by 1992 they had greatly reduced the fracture job size.

Fracture Extension Program. When Swift began work in the new areas, however, the teams encountered virgin reservoir pressures and even lower permeability, which required that the fracture job sizes be greatly increased—some as much as 400%. Even then, it became apparent that most of the wells did not properly drain the reservoir until they underwent second fracture jobs.

With this knowledge and with the 1998 and 1999 drilling programs curtailed because of low prices, the Company initiated a large fracture extension program in which second fractures were performed on most wells. This program was highly successful, with each second fracture being much more efficient after the first fracture had reduced the reservoir pressure. It followed that a first fracture of smaller size, referred to as a "sacrificial" fracture, would be adequate for the initial completion of a well.

As the fracture extension program progressed, with each new well routinely receiving a second fracture after a period of production, Swift focused on cost savings by designing each fracture job for its specific reservoir conditions. It also gradually downsized the jobs. The gelled fluid was replaced with water alone, and the sand mixture, which consisted of a resin-coated sand and ordinary sand, was replaced with ordinary sand only. In addition, increasingly smaller quantities of both the fluid and the sand were used. As a result, by the end of 1998, each fracture job cost less than one-half of what the first fracture jobs performed in the new areas had cost.

Additional Cost Savings Initiatives. During 1999, substantial additional cost savings were realized when the truck loads of treated water required for compatibility with the gel chemicals were replaced with well water from the field. The water is pumped through lines laid across the field to fill ten 500-barrel "frac" tanks.

With this change and other innovations, fracture jobs that initially cost $250,000 per well in the new areas of the field now cost approximately $130,000 per well (with the two fractures per well each averaging about $65,000), and the results are much more satisfactory.

In the 1999 fracture extension program, 84 wells received second fractures with an average increase in recoverable reserves of approximately 290 MMcfe per well. With the resulting increased daily yield from the wells, the production from the AWP Field reached 13.1 Bcfe (30.5% of the Company’s total production) despite the reduced drilling program. The fracture extension program will continue in 2000 with 75 second fractures planned.

Also during 1999, an additional cost-savings measure was instituted when the Company converted an existing pipeline to carry frac water produced from the wells (approximately 2,500 barrels per day) to a disposal well drilled by Swift during the year. This eliminated the need to truck the water out at $1 per barrel, providing a savings of about $75,000 per month.

These improvements are typical of Swift’s AWP operations, which over the years have included numerous cost-savings measures, such as converting to slim-hole drilling, installing velocity strings (1-1/4-inch-diameter coiled tubing) in individual wells to increase their production, remotely monitoring field production, and remotely monitoring the fracture process. As a result, the AWP Olmos Field is an economically viable and reliable production area for which favorable transportation, processing, and marketing agreements have been negotiated.

This page was last updated on Saturday, February 08, 2003, at 07:28:53 PM.

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