Early in 2002, as part of its strategy in the changed industry environment, Swift Energy limited domestic exploratory drilling for the year and directed its development drilling in the U.S. to projects with lower risk and lower costs compared to those in the previous year. In particular, drilling projects in 2002 targeted reserves with stable, long-term production, and no drilling was done in the Austin Chalk trend where the production typically declines rapidly after early payout. The strategy also called for additional scrutiny of all operational expenses to improve their cost effectiveness.

Carrying out this program was greatly facilitated by Swift’s acquisition in 2001 of property in the Lake Washington Field in Plaquemines Parish, Louisiana, which met the Company’s criteria for drilling in 2002 and therefore became the focus of its activities. By year-end 2002, these activities not only had added significantly to the Company’s reserves base and production, but also had charted the course for an expanded domestic drilling program in 2003.

At year-end 2002, the Company’s proved reserves in the Lake Washington Area, which are over 95% oil, had increased from 7.7 million barrels of oil equivalent (MMBOE) at the time of the acquisition to 31.7 MMBOE, or more than 300%. With much of the field still unexploited and approximately 65% of the proved reserves still to be developed, Swift has embarked on a multiyear drilling program in the area to develop "high-quality" reserves with production that can be sustained for years. At year-end, the Lake Washington Area held 25% of the Company’s total proved reserves.

Located near the mouth of the Mississippi River, the Lake Washington Field was discovered in the 1930s but was only partially developed by a succession of operators. In 1969, it became a lake-covered field with water depths of 2 to 12 feet when Hurricane Camille collapsed a ring-shaped levee that had protected a sulfur mining operation within the area. Swift has a 100% working interest in approximately 11,000 net acres in the field, which includes an underlying salt dome structure with surface depths varying from about 1,200 feet at its peak down to about 10,000 feet over most of the acreage.

The Lake Washington Field produces from an east-west trend of Miocene age sand layers that lie one above the other around the salt dome. In general, the sand layers, some of which are up to 200 feet thick, are at their shallowest depths near the salt dome surface and slant downward with distance from the dome. The field itself is heavily faulted; that is, the sands are contained in numerous fault blocks (compartments) that can range in size from a few acres to several hundred acres. As a result, oil is trapped in isolated reservoirs surrounding the salt dome.

The Lake Washington Field produces from an east-west trend of Miocene age sand layers that lie one above the other around a salt dome. Hydrocarbon deposits (primarily oil) are found in sands contained in numerous fault blocks (compartments) surrounding the salt dome. Swift initiated the drilling of directional wells parallel to the dome’s surface in order to intercept multiple sand layers in the fault blocks.*   * The above conceptual diagram does not depict all relevant geologic and engineering information.

Before Swift became the operator of the Lake Washington Area, most of the drilling had occurred on the north and east sides of the dome. Swift began drilling in this same region but increasingly moved closer to the dome’s surface to intercept the "attics" of the fault blocks, which are regions closest to the dome surface that have a higher potential for containing hydrocarbons and have been bypassed by wells drilled further out from the structure. With the move toward the dome, Swift also converted from straight-hole drilling, where the well depths are limited by the dome’s salt surface, to directional drilling, where the holes are drilled parallel to the dome’s surface. This enables many more sands to be encountered at much deeper depths. In some cases, the bottom of the hole may be as much as 1/2 mile away from the surface location of the rig in the horizontal direction. Directional drilling also allows sidetrack wells to be drilled from the same surface location if the targeted sand is not originally encountered, as has been done for a number of Swift’s wells.

In general, the 50-plus productive sands in the Lake Washington Field are well known and identified by the alphabet or, at times, by the depths at which they were first found. When Swift began drilling in the field, it largely targeted the relatively shallow sands (typically the A through E sands at depths of 1,500 to 4,000 feet). In one well that was deviated down the north flank of the dome (the Cockrell-Moran #187), the Company was targeting the deeper H and K sands when, at a depth of 4,278 feet, it encountered a highly productive F sand that had not previously been known to contain hydrocarbons. The well is currently producing up to 1,200 BOE per day from a 179-foot thickness of this sand.

A productive F sand was also intercepted in five subsequent wells, three on the north flank of the dome and two on the southeast flank. The discovery of hydrocarbons in the F sand alone added 3.6 million BOE to Swift’s proven reserves at year-end.

Later in the year, three other productive sands were discovered. One, called the "2,000-foot sand," was initially identified on the northeast flank of the dome and subsequently in two wells on the north flank. Another, called the "8,400-foot sand," was discovered in one well on the far northern flank. The third, the shallow B sand not previously known to contain hydrocarbons, was found on the south flank of the dome.

By year-end 2002, Swift had encountered 44 different pay zones in the wells it had drilled in the Lake Washington Field and had completed wells to produce from 16 of the zones with an average net pay of 140 feet of sand per completed well. The initial average production rate per well was 200 to 240 BOE per day, with each well accessing an average of approximately 345,000 BOE of unrisked reserves.

As Swift continues drilling in the Lake Washington Field, it will proceed around the salt dome. In selecting new well locations, it will look for attic locations updip from previous known production and also for untested fault blocks. It will also add wells in fault blocks that require multiple wells to drain effectively, and it will redrill wells that were prematurely abandoned by earlier operators because of mechanical problems or the unavailability of adequate completion technologies. In all cases, the dual objective is to increase both production and reserves.

Swift has already identified over 70 future drilling sites, but when one successful well is drilled in a new fault block, it can lead to 10 to 20 additional wells in the same block. The plans are to keep two drilling rigs in the field during 2003 to drill 50 to 60 development wells and two exploratory wells (see page 16). In preparation for this accelerated program, the state and federal permitting processes are well under way for a number of wells, and the field’s infrastructure has undergone considerable upgrading.

The facility upgrades have been carried out on several fronts. Among the most important was the expansion of the field’s processing capability from an initial 2,000 barrels of oil per day to 9,250 barrels of oil per day at year-end 2002, with plans to expand to 14,000 barrels of oil per day at year-end 2003.

Swift Energy diversified its 2002 production base in the United States by increasing production from the Lake Washington Area and in New Zealand by initiating commercial production in the Rimu/Kauri Area and by acquiring the TAWN Area.

Another crucial upgrade was the addition of a capability for on-site three-phase (oil-water-gas) separation of the production. When Lake Washington was acquired, only two-phase separation was possible (liquids-gas), with the liquids being sent to another company for separation and sale. In order to accomplish the three-phase separation and sell the oil directly, the Company had to rebuild a Lease Automated Custody Transfer unit (LACT unit) near an Exxon pipeline. After delays caused by Tropical Storm Isidore and Hurricane Lili, the unit was placed in operation at the end of November. A more centrally located LACT unit with automated controls will be added during 2003.

Still another important upgrade was the conversion of two older wells into salt water disposal wells. The water-driven field produces significant quantities of salt water along with the oil, and on-site separation of the liquids requires that disposal wells be available for the reinjection of the salt water. A third salt water disposal well will be added shortly.

Other infrastructure upgrades have included installing new gas compressors and other equipment to improve the field’s gas lift system. In essentially all the wells in the field, the oil is produced with gas lift, where the gas that has been separated from the production is compressed and reinjected into the well bores to artificially lift the produced fluids.

Numerous other upgrades were related to safety and environmental issues and to the maintenance of three tank battery platforms within the lake and their associated flow lines. All of Swift’s production is gathered at the three platforms, and on-going field work includes the laying of new flow lines to the platforms as new wells are completed.

As would be expected, mobility in the lake is critical. Field personnel routinely travel from place to place in boats, and the drilling rigs move within the lake on barges to drill and case each well. Completion rigs also move around on barges to perforate the well casings at the producing zones and install gravel packs around the perforations. The gravel packs, which are essential for preventing the producing zone sand from entering and clogging up the well bore, are created by displacing the smaller-grain sand near the perforations with large-grain sand that will not clog the wells and will maintain the flow of oil and gas into the well.

In order to reduce costs, the completion rig operates only when it can complete several wells at the same time with no lost time in between. Also to reduce costs over the long term, Swift simultaneously completes two zones in some wells so that the production can be switched from one zone to the other without bringing the completion rig back. This is a significant savings since a single gravel pack completion usually costs about $450,000 and two gravel pack completions can be done at the same time for about $600,000.

Even with an accelerated program in 2003, the full development of the Lake Washington Area will require several years. In 2002, its production was 740,138 BOE (4.4 Bcfe, or 8.9% of Swift’s total production) and is expected to more than double in volume in 2003. With continuing increases, the Lake Washington Area is destined to become a source of stable, long-lived producing reserves for Swift for years to come.

AWP OLMOS AREA. The AWP Olmos Field in McMullen County, Texas, has been contributing to Swift Energy’s production since 1989 and often is cited by Swift as a model field with long-lived reserves. At year-end 2002, Swift’s interests in the field, which cover about 28,000 net acres, still accounted for 30.4% of the Company’s proved reserves.