As oil and natural gas resources in the United States mature, a key component of Swift Energy’s competitive strategy is balancing opportunities at home and abroad.

In 2002, Swift recorded a major milestone in its international activities with its first commercial oil and gas production in New Zealand. The Company’s New Zealand properties produced 15.5 Bcfe of oil, natural gas, and natural gas liquids in 2002, which was 31% of the Company’s total production for the year. With these levels of production and cash flow, Swift’s New Zealand venture has become a self-sufficient operating entity.

Swift’s New Zealand production comes from the Company’s two core operating areas in the Taranaki Basin of the country’s north island—the TAWN Area and the Rimu/Kauri Area. The Company’s proved reserves in these areas increased 53% in 2002 to 155 Bcfe, replacing 444% of their 2002 production even after including the full effect of a net downward reserves revision of approximately 21 Bcfe. At year-end 2002, New Zealand reserves constituted 21% of the Company’s total reserves and consisted of 56% natural gas, 34% crude oil, and 10% natural gas liquids.

TAWN reserves, which are approximately 80% natural gas, were 66.9 Bcfe at year-end 2002, representing 8.9% of Swift’s total oil and gas reserves.

Strategically located approximately 17 miles north of Swift’s Rimu/Kauri Area, the TAWN Area includes four producing fields with 19 wells (including two service wells), hydrocarbon-processing facilities with excess capacity, and pipelines connecting the fields and facilities to export terminals and interior markets. The four fields include the Tariki and Ahuroa fields, which both produce from the Tariki formation, and the Waihapa and Ngaere fields, which both produce from the Tikorangi formation. The name TAWN is an acronym derived from the first letters of the field names.

In September 2002, Swift increased its ownership from 96.76% to 100% in all the TAWN petroleum mining licenses with the acquisition of interests held by a subsidiary of Bligh Oil & Minerals N. L. The transaction also included Bligh’s interests in two processing plants, the Waihapa Production Station and the Tariki Ahuroa Gas Plant, as well as associated pipelines in which Swift already had a majority interest.

The TAWN processing facilities and oil and gas pipelines, together with other infrastructure in the area, all of which have current excess capacity, provide synergies with Swift’s nearby Rimu/Kauri Area.

The current capacity of the processing facilities is up to 15,000 barrels of oil and condensate per day and approximately 40 million cubic feet (MMcf) of natural gas per day. Natural gas processing can be increased significantly with additional compression as needed.

A 32-mile (8-inch diameter) oil export line runs from the Waihapa Production Station to the Omata Tank Farm at New Plymouth, where oil export facilities allow for sales into international markets. A 32-mile (8-inch diameter) natural gas pipeline runs from the processing plants to the Taranaki Combined Cycle Electric Generation Facility near Stratford and on to the New Plymouth Power Station.

Early in 2002, the New Zealand government awarded Swift a petroleum mining permit (PMP 38151) covering 5,524 acres within the Rimu/Kauri exploration permit to fully develop the area around the Rimu-A1 discovery well for a primary term of 30 years. With its purchases from its partners, Swift now has a 100% interest in this permit.

Swift also expanded its interests in areas lying adjacent to the Rimu/Kauri Area in 2002 when the New Zealand government awarded Swift two additional exploration permits (PEP 38756 and 38759) to the north and east of the Rimu/Kauri permit (PEP 38719). In addition, the Company increased its interests from 7.5% to 15% in a petroleum exploration permit (PEP 38716) located between the Rimu/Kauri Area and the TAWN Area as part of its acquisition from one of its Rimu/Kauri partners.

Swift began commercial production from the facility in May 2002, less than two and a half years after the Company’s initial Rimu discovery. This set a record in New Zealand for this type of facility as companies have typically needed four to eleven years to initiate production following a discovery of this type.

The station is designed to handle 3,500 barrels of oil and 10 MMcf of natural gas per day (about 31 MMcfe per day) during its first phase of operation. With minimal additional capital, the plant’s capacity can be more than doubled to 8,250 barrels of oil and 20 MMcf of gas per day (approximately 70 MMcfe per day) with options for even further expansion.

However, production results for 2002 were disappointing because of formation damage found to have occurred during drilling and completion. An evaluation conducted by Integrated Reservoir Solutions Division of Core Laboratories, an international company specializing in reservoir analysis, found that the water-based fluids used during drilling and completion had caused formation damage in the Tariki sandstone surrounding the well bores. The damage, which reduced permeability, included predominantly water blockage, as well as fines migration and clay swelling.

Wells believed to have been affected by formation damage include all three development wells drilled in 2002: the Rimu-A2A, which was a sidetrack of the Rimu-A2 and was drilled to a depth of 13,225 feet to the Upper Tariki sand; the Rimu-B3A, which was an unsuccessful sidetrack to the Rimu-B3 and was drilled to a depth of 15,853 feet to the Upper and Lower Rimu limestones; and the Kauri-A3, which was drilled to a depth of 4,921 feet to further evaluate and delineate the shallow Manutahi sands.

Swift’s first deep exploratory well in the area, the Kauri-A1, which was drilled early in 2002 to a depth of 14,764 feet to the Kauri and Upper Tariki sands, also appears to have been affected. Before the second exploratory well, the Kauri-A4, was spudded in June, the Company’s own preliminary analysis had indicated that oil-based drilling fluids might improve the well’s productibility. As a result, the Company drilled the Kauri-A4 well with an oil-based drilling fluid. The well reached a total measured depth of 15,252 feet (true vertical depth of 13,277 feet) and intersected several of its primary targeted intervals, including the Kauri sands, the Lower Tariki sand, and the Cretaceous sands. It also intersected a targeted seismic anomaly that had been identified just above the Kauri sands and intersected in the Kauri-A1 well. While of excellent sand quality, the lower sands in the Kauri-A4 well were deemed noncommercial, and the well was tested in the Kauri sands found at a depth of 7,879 feet, where it flowed naturally at rates that averaged approximately 2.1 MMcfe per day. The well will be hydraulically fractured in the Kauri sands using the recommended procedures during the first half of 2003.

Favorably impacting revenues from oil and gas sales are the rates of New Zealand’s government royalties as compared to the U.S. equivalent. For the TAWN Area, Swift pays a 10% royalty on net sales revenues after allowable deductions. For the Rimu/Kauri Area, it pays a 5% ad valorem royalty. In the United States, Swift’s production is covered by both severance and ad valorem taxes of 9% to 12.5% and landowner royalties of 12.5% to 25%.

Swift generally sells its New Zealand oil production under short-term contracts lasting one year or less, using a reference price of APPI (Asian Petroleum Price Index) Tapis, an internationally recognized crude oil index that is quoted at least weekly. The price is adjusted for various fees and premiums.

Natural gas from the TAWN properties is sold under several contracts, including a long-term contract to Contact Energy Limited. At year-end 2002, 69% of TAWN’s proved natural gas reserves were associated with this long-term natural gas contract. Swift has negotiated for any excess deliverability to be sold at current market rates.

Swift’s natural gas production from the Rimu/Kauri Area is sold under an agreement with Genesis Power Limited, a New Zealand state-owned enterprise, to provide 40 petajoules (approximately 38 Bcf) of natural gas over a 10-year period that began in 2002.

With its 100% ownership of interests in the TAWN Area and the Rimu/Kauri Area and their close physical locations, the Company’s long-term view is that the fields and infrastructure in these two core areas will eventually be integrally connected. This consolidated position will be one more step in Swift developing a significant presence in New Zealand and increasing its synergies in the Taranaki Basin. In addition, both the TAWN Area and the Rimu/Kauri Area offer on-going exploration potential as discussed on pages 16-17 of this report.