SWIFT ENERGY COMPANY 2000 ANNUAL REPORT

Development and Operation of Domestic Core Areas 

For Swift Energy, the year 2000 was a year of record revenues accompanied by record earnings. Revenues rose 73% from the previous year to $192 million, and earnings increased 207% to $59 million. At the same time, net cash provided by operating activities increased 74% to $128 million.

This exceptional performance resulted from the improved industry climate that substantially increased the profit margins from Swift’s oil and natural gas sales and more than compensated for a production level that remained essentially flat at 42 billion cubic feet of natural gas equivalent (Bcfe).

Over 93% of Swift’s year 2000 production came from its four core operating areas: the Masters Creek Area in Louisiana and the Brookeland Area, Giddings Area, and AWP Olmos Area in Texas. The Company began operations in the Masters Creek Area and the Brookeland Area in 1998 after obtaining the properties in a large acquisition. It began operations in the AWP Olmos Area in 1989 and in the Giddings Area in 1992.

In all its core areas, Swift focuses on improving the performance of wells already in production, thereby slowing their natural rate of decline and maximizing their recoverable reserves. It also focuses on increasing the areas’ production and reserves inventory through continued development drilling. In 1998, with many of these activities centered in the newly acquired properties, the Company’s production increased 54% from the previous year, and in 1999 it rose another 10%, in spite of slowdowns in drilling caused by the low oil and gas prices that prevailed throughout 1998 and early 1999.

In the year 2000, however, Swift faced production constraints arising from several factors, one being that the industry upturn that once again made drilling activity economically attractive also created keen competition for field services. In particular, the limited number of available drilling rigs forced the Company and its peers to postpone spudding new wells. Additionally, Swift was confronted with several engineering challenges and permit delays.

Before year-end the Company was successful in securing a number of drilling rigs and also overcame most of its other production problems, at the same time adding reserves in some core areas through acquisitions. However, all these activities occurred too late in the year to provide the anticipated impact on 2000 production. Instead, their full benefits will be realized in 2001, together with those from a 2001 drilling program already in full swing. The Company’s target for its 2001 domestic production is 46 to 50 Bcfe, representing an increase of 9% to 18% over its 2000 production.

With these production increases and the Company’s continued emphasis on operating efficiencies, Swift’s profit margins should remain strong in 2001 subject to continued high product prices. During the fourth quarter of 2000, Swift received a composite product price of $5.49 per thousand cubic feet of natural gas equivalent (Mcfe), which included a pre-tax operating margin of $2.97.

Masters Creek Area. The Masters Creek Area, located primarily in Rapides Parish and Vernon Parish in Louisiana, is a prime example of the Company’s efficient development and operation of core areas. When Swift acquired the Masters Creek Area in 1998, its proved reserves totaled 58.6 Bcfe. At year-end 2000, after having already produced 44.4 Bcfe for Swift, the area’s proved reserves had increased to 132.5 Bcfe, more than double the original reserves. The Masters Creek Area reserves comprised 26.1% of the Company’s year-end domestic reserves (21.1% of its total reserves) and 32.4% of its undeveloped domestic reserves (see table below).

The Masters Creek Area also provided 44.1% (18.7 Bcfe) of the Company’s total year 2000 production, with contributions from 11 successful development wells completed during the year. At year-end, Swift had interests in 68 wells in the Masters Creek Area and was the operator of 43 of the wells (see table below).

The Masters Creek Area consists of two major fields—the Masters Creek Field and the South Burr Ferry Field—plus several smaller fields. Covering 182,356 gross acres, the fields all produce primarily from the Austin Chalk formation. To produce from this formation, the Company first drills a vertical hole to the reservoir depth and then turns the well bore to traverse the reservoir horizontally, thereby successively intercepting natural vertical fractures in the rock that are filled with oil and/or natural gas.

Masters Creek Field. To date, the Masters Creek Field, which is located in the western portion of Rapides Parish and the eastern portion of Vernon Parish, has been the most productive field in the Masters Creek Area. It is also the center of the area’s operations, including a gas processing plant in which Swift has a 23.7% interest.

Typically, Austin Chalk wells have had high initial production rates and early payout followed by sharp declines. In the Masters Creek Field, however, the declines have been slower, and the wells have had longer production lives. For example, six wells placed in production in this field in late 1998 or early 1999 had each already produced from 6.2 to 11.3 Bcfe by year-end 2000, yet they were still producing 5.0 to 7.5 million cubic feet of natural gas equivalent (MMcfe) per day at year-end 2000. This higher production is partially attributed to the fact that, unlike most of the Austin Chalk, the Masters Creek Field is water driven.

While desirable for increasing production, the water-driven reservoir can present severe engineering challenges because of the huge quantities of salt water that accompany the oil and gas production. The salt water is separated from the oil and gas and travels through a network of pipes leading to salt water disposal wells. During 2000, the salt water volumes produced in the Masters Creek Field exceeded the disposal system’s capacity. As a result, production from some wells had to be constrained until Swift obtained permission from the state to drill five additional disposal wells, all of which are now in service.

The large volumes of water also caused the buildup of scale along the interior walls of the well bore tubulars, necessitating one- to two-day shutdowns of the wells, sometimes on a monthly basis, so that the scale could be removed by an acidizing process. The scale buildup is now being attacked with an "inhibitor squeeze" in which a time-released corrosion inhibitor is injected directly into the producing formation. In a test of this process in late 2000, production levels were maintained over a much longer time period than when the standard acidizing process was used.

Another problem was caused by lower than average ambient temperatures during December 2000 that resulted in the formation of hydrates in surface equipment. The hydrates were ice crystals formed by "wet" gases at pressure drop locations, effectively plugging the lines. This problem was solved by introducing methanol in the system to lower the freezing point of the gas.

While these production problems were being addressed, Swift successfully completed six of seven development wells in the Masters Creek Field, retaining a 100% working interest in one well and an average working interest of 89.4% in the other five wells. Three more wells were drilling at year-end. During 2001, Swift plans to drill six additional development wells in the Austin Chalk formation in the Masters Creek Field, all with high working interests and, in some cases, with estimated ultimate recoveries greater than 6 Bcfe per well. At the beginning of the year, the Masters Creek Field had 21 identified proved undeveloped locations.

South Burr Ferry Field. The South Burr Ferry Field, located in the southwest corner of Vernon Parish and extending down into Beauregard Parish, is a largely undeveloped field. With additional interests procured in 1999, Swift became sole operator of the field. In the original acquisition, the Company also obtained fee mineral rights, which give it the royalty position in the wells.

Swift drilled its first well in the South Burr Ferry Field late in the year 2000, retaining a 92.5% working interest. The Company spudded a second well in January 2001, with two additional wells planned for early in the year. At year-end 2000, the field had four identified proved undeveloped sites, with estimated ultimate recoveries up to 6 Bcfe per well. The South Burr Ferry Field has the possibility of evolving into an independent core area for the Company.

0ther Masters Creek Area Fields. The Masters Creek Area also includes several small fields in Vernon Parish. During 2000, Swift participated in four successful wells drilled in these fields by another operator, with an average working interest of 28%. The Company currently has interests in two proved undeveloped locations in these fields.

Brookeland Area. Swift’s Brookeland Area is comprised of the Brookeland Field only, which spans the width of northern Newton County, Texas, and extends westward into Jasper County, Texas. Covering 130,180 gross acres, the Brookeland Area was acquired in 1998 along with the Masters Creek Area and also produces from the Austin Chalk formation. In this area, however, the reservoir is depletion driven rather than water driven and therefore does not require a large salt water disposal system. The Brookeland Area also has its own gas-processing plant, which is 20% owned by Swift.

The Brookeland Area provided 10.5% (4.5 Bcfe) of the Company’s total year 2000 production, with its remaining reserves totaling 71.3 Bcfe, or 14% of Swift’s domestic reserves (11.3% of its total reserves). Of this volume, 62.3% (44.4 Bcfe) was undeveloped.

At year-end 2000, Swift had interests in 98 producing wells in the Brookeland Area and was the operator of 66 of the wells. During 2000, the Company drilled three development wells in Newton County, with retained working interests of 69.6%, 100%, and 100%, and participated in two wells drilled by another operator in Jasper County. At year-end, three additional wells were being drilled in Newton County.

For the year 2001, the Company plans to participate in 17 additional development wells in the Brookeland Area—ten in Newton County and seven in Jasper County—serving as the operator of nine of the wells in Newton County and one well in Jasper County.

At the beginning of 2001, the Brookeland Area had 25 identified proved undeveloped locations. Most are with estimated ultimate recoveries of 0.6 to 3.6 Bcfe per well, but some are above 6 Bcfe per well.

Giddings Area. Swift’s Giddings Area is located in the four Texas counties of Fayette, Colorado, Austin, and Washington, where the Company drilled its first horizontal wells in the Austin Chalk formation in 1992. Swift now has interests in 81 wells in this area and serves as operator of 47 wells. The Company’s reserves in the area total 18.3 Bcfe (4% of its domestic proved reserves), of which 4.7 Bcfe remain undeveloped. The area provided 7.2% (3.1 Bcfe) of the Company’s 2000 production.

In the year 2000, Swift participated in seven development wells drilled in the Giddings Area, all but two in Fayette County. Four of the wells in Fayette County, all drilled by another operator, were completed successfully. Swift had a 21% working interest in two of the wells and a 25% working interest in the other two. The Company also has interests in two identified proved undeveloped locations in the Giddings Area.

AWP 0lmos Area. Swift’s first significant core area of operation, and the one still holding the largest single volume of the Company’s proved reserves, is located in the AWP Olmos Field in McMullen County, Texas. Swift’s operations in the field began in 1989 on a leasehold of 4,900 acres that has since increased to 31,162 net acres.

The AWP Olmos Area provided 31.9% (13.5 Bcfe) of the Company’s year 2000 production, even though its production during December 2000 was curtailed by approximately 50 MMcfe because of the same type of hydrate formation problem caused in the Masters Creek Field by low ambient temperatures. In this case, however, the gas was wet because of the injection of water into the reservoir during formation-fracturing procedures (see below).

At year-end 2000, the AWP Area’s proved reserves totaled 234.3 Bcfe, which was 26.6 Bcfe higher than its year-end 1999 reserves. The increase was primarily due to the continuing development of the field, but also to the addition of some purchased reserves (see page 17). The AWP reserves comprised 46.2% of Swift’s total year-end domestic reserves (37.2% of its total reserves) and included 88.9 Bcfe that were still undeveloped. Thus, the Company will be drilling in the area for many years into the future. Currently, Swift is operating 483 wells in the area.

Swift continues to be the largest operator in the AWP Olmos Field, having successfully overcome numerous technological challenges presented by the Olmos sand, which is a depletion-driven reservoir with low porosity, low permeability, and no natural fractures. For production to be possible, the sand surrounding a well bore must first be artificially fractured to provide flow paths into the well. The fractures are induced when massive quantities of water-based fluid and a sand mixture are pumped down a well bore and out into the formation under high pressure, with the deposited sand serving as a proppant to hold the fractures open.

Throughout its AWP operation, Swift has focused on improving the effectiveness of its fracturing techniques, including tailoring the fracture jobs for the specific reservoir conditions surrounding each well. In particular, the compositions of the fracturing fluid and sand have been varied from expensive gelled fluid and resin-coated sand to ordinary well water and ordinary sand.

For the last few years, it has been Swift’s practice to routinely perform at least two relatively small fracture jobs on each new well several months apart rather than one large fracture job when the well is being completed. The time interval in between fractures allows for a reduction of reservoir pressure during production so that the second fracture job can extend the fractures to greater distances from the well with less resistance and less cost. Because a second fracture can significantly increase a well’s production, it has become the practice to also perform second (or more) fractures on older wells, thereby increasing the ultimate percentage recovery of reserves from the entire field.

To date, the percentage recovery of reserves per well outside the original leasehold acreage (where virgin reservoir pressures are being encountered) is less than it was within the original acreage. Swift believes, however, that its continued emphasis on better fracturing techniques and its second-fracture policy could significantly enhance production for the lives of AWP wells—with an ultimate recovery of 60% in some cases. The Company estimates that if the average recovery on wells that are already existing could be increased by just 15%, the total reserves in the field would increase by about 200 Bcfe.

During 2000, Swift performed 67 second fractures in the AWP Olmos Field and drilled 27 development wells with 25 successes. At year end, a well spudded in 2000 was still drilling, and 12 more wells are expected to follow in 2001. The Company also expects to perform 48 second fractures during 2001.

At year-end, the AWP Olmos Field had 160 identified proved undeveloped locations for future drilling.

This page was last updated on Saturday, February 08, 2003, at 07:28:56 PM.

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