Swift Energy’s domestic drilling operations throughout 2004 continued to be focused in the Lake Washington Area in Plaquemines Parish, Louisiana, and, to a lesser extent, in the AWP Olmos Area in McMullen County, Texas. Both these areas hold long-lived reserves—mostly oil in Lake Washington and natural gas in AWP—and both have a high percentage of drilling successes, with each contributing significantly toward maintaining the Company’s production over a multiyear period. Together, they also hold 62% of Swift’s proved undeveloped domestic reserves, so that drilling programs will continue in the two areas for a number of years.

During 2004, Swift Energy drilled a total of 54 domestic wells—10 exploratory wells with a 40% success rate and 44 development wells with an 84% success rate, for an overall success rate of 76%. These were fewer than the 71 wells drilled in 2003 because of a scheduled slowdown in Lake Washington to accommodate an extensive three-dimensional seismic survey and facility improvements.

The domestic wells drilled in core areas in 2004 included 30 wells in Lake Washington and 15 wells in AWP, all with 100% Swift working interest, and one well in the Masters Creek Area in Central Louisiana with a 94% working interest. No wells were drilled in the Brookeland Area in East Texas. Outside its core areas, Swift drilled or participated with smaller working interests in seven wells in South Texas (see page 20) and in one well drilled in Mobile County, Alabama.

Swift’s total domestic production in 2004 was 42.1 Bcfe, exceeding its 2003 domestic production by 25%. Domestic production comprised 72% of the Company’s combined production from the United States and New Zealand. With most of Swift’s recent drilling activities located in Lake Washington, that field was the Company’s largest domestic producer, contributing 55% of Swift’s domestic production in 2004 compared to 36% in 2003. AWP contributed 21% in 2004 compared to 25% in 2003.

Swift’s domestic proved reserves at year-end 2004 totaled 652.7 Bcfe, comprising 81.6% of the Company’s total proved reserves. Domestic reserves were up only slightly from their year-end 2003 value; however, Lake Washington reserves increased 11.6 Bcfe from 2003 levels. Lake Washington and AWP together held over 71% of Swift’s year-end domestic reserves.

With the increasing dominance of Lake Washington’s oil reserves, plus the acquisition of two other similar properties in 2004 (see page 19), Swift’s domestic proved year-end natural gas reserves have changed from 71.7% of total reserves at year-end 2000 to 36.8% of total reserves at year-end 2004.

Oil and gas sales from Swift’s domestic properties in 2004 totaled $258.7 million, which was 83% of the Company’s total sales. Capital expenditures related to domestic exploratory and development drilling were nearly $100 million in 2004 and are projected to be $150 million to $170 million in 2005.

LAKE WASHINGTON AREA

Swift Energy established the Lake Washington Area as its fourth domestic core area when it acquired majority interests in producing properties in the Lake Washington Field in early 2001. At the time of purchase, the properties, which lie in inland waters along the Louisiana Gulf coast, were producing less than 1,000 gross BOE per day. At year-end 2004, they were producing over 15,500 gross BOE per day, up from approximately 11,000 BOE per day during December 2003. The total Lake Washington production for 2004 was 3.8 million BOE, or 23.2 Bcfe, a 92% increase over the field’s 2003 production.

Swift’s proved reserves in Lake Washington have also greatly increased—from 7.7 MMBOE estimated at the time of purchase to 45.4 MMBOE (or 272.5 Bcfe) at year-end 2004, even after the Company had produced 40.9 Bcfe from the field since its acquisition. At year-end 2004, Lake Washington reserves comprised 42% of the Company’s domestic proved reserves and 34% of its total proved reserves.

The Lake Washington Field, in which Swift holds 15,199 net acres, produces from multiple stacked Miocene sand layers radiating outward and downward from the surface of a centrally located salt dome. The surface depths of the salt dome vary from about 1,200 feet at its peak down to about 14,000 feet over most of Swift’s acreage.

Because the field is heavily faulted, sections of the sand layers and the hydrocarbons they contain are trapped in multiple fault blocks (isolated reservoirs) around the dome. And because the field is primarily water driven, the hydrocarbons within the blocks tend to be pushed upward into the higher regions of the sand layers that lie closest to the salt dome, regions that are referred to as fault block "attics." Typically, each well drilled in a fault block is designed to intercept as many attics containing "pay sands" as possible.

Drilling is conducted with barge-based rigs positioned in the field’s inland waters. Because most of the target fault blocks drilled by Swift to date have been adjacent to the dome, their attics have abutted the dome. In order to hit as many attics as possible, directional drilling has been employed. The hole is first drilled vertically down to target the uppermost attic and then is angled down the flank of the salt dome to penetrate other lower attics. If the area of the block is no more than 5 to 15 acres, drilling is generally limited to one well per block; however, for a large block, on the order of 100 to 120 acres, a successful well is usually followed by additional offset wells in order to drain as much as possible from the larger attic volumes or to reach attics not penetrated by the original well. To date, the depths of the wells drilled by Swift have generally ranged between 1,500 and 10,000 feet, the average being around 6,000 feet.

As successful Lake Washington wells are completed for production, also from barge-based rigs, their casings are perforated at one or more of their deepest pay sands, with those at higher elevations kept behind pipe for perforations at later dates. All the wells are currently producing from only one sand zone, but many casings have sliding sleeves that allow the production to be switched to another zone where perforations exist. Subsequent perforations could allow a single well to produce from sequential zones for many years.

The well completion process includes procedures to prevent the influx of the formation sand through the perforations into the wellbore, which can disrupt production. In most wells to date, Swift has displaced the small-grain sand around the perforations with large-grain sand—known as installing gravel packs. In some recent wells, however, the Company has converted to "frac packing," a process that involves pumping the large-grain sand or other proppant out through the perforations and into the formation at rates and pressures exceeding the pressure required to fracture the formation. The sand deposited within the fractures, plus a high concentration of sand near the wellbore, then provides pathways that increase the oil flow into the wellbore. At the same time near-wellbore formation damage from drilling and completion is minimized.

The many Miocene sand layers slanting downward from the salt dome are mostly identified by letters of the alphabet, with others named for the depths at which they were first found. To date, Swift has encountered 70 different pay zones in the Lake Washington sands and has made completions in 33 pay zones, with an average of 148 feet of net pay per completed well.

Through 2004, Swift had drilled 120 Lake Washington wells with a 78% success rate. The 2004 drilling program consisted of 30 wells with a 70% success rate—23 development wells with 19 completions and seven exploration wells with two completions. For most of the year, the Company operated only one drilling rig in the field because of the on-going seismic survey, but in the fourth quarter three drilling rigs were briefly deployed.

Swift’s Lake Washington drilling program has continued to include various locations around the salt dome, with wells completed in the F sand generally being the highest producers. As reported in earlier years, the F sand was not known to be productive in this area before Swift drilled the 2002 Cockrell-Moran #187, a development well that was deviated down the north flank of the dome and found pay in the F sand at a depth of 4,278 feet. The well initially produced 1,200 barrels per day and at year-end 2004 was still producing about 700 barrels of oil plus 160 Mcf of natural gas per day, with cumulative production of approximately 706,000 barrels of oil and 101 MMcf of gas.

Another 2002 development well, the SL-212#104 well that discovered the 8,400-foot sand on the northwest side of the dome, has also remained a consistent producer. At year-end 2004, it was still producing 800 barrels of oil per day and also producing 600 Mcf of natural gas per day. Its cumulative production at year-end 2004 was 496,000 barrels of oil and 439 MMcf of gas.

The field’s two highest producers drilled in 2004 were both completed in the F sand on the north side of the dome. One was the CM-221 development well, which was drilled in May and at year-end was producing over 1,000 barrels per day. The other was the CM-268 development well, which was drilled in August and was producing over 980 barrels per day at year-end. The CM-268 found 379 feet of net pay in nine different sands.

Additional F sand producers were also drilled on the north side of the dome during 2004, one of which, the CM-286, had 644 feet of net pay in eight different sands. On the northwest side of the dome, one successful well was drilled to the Li sand and another to the I sand.

Following the discovery of an all natural gas well in the shallow 2,000-foot sand during 2003, another gas well was completed in 2004. At year-end the BLDCM #18, a second-quarter development well drilled on the north side of the dome with 379 feet of total net pay in 10 different sands, was producing approximately 3 MMcf of gas per day in the SP-7 sand at a depth of about 7,900 feet. In addition, the SL-212 #132, a 2003 development well drilled on the northwest side of the dome, was producing approximately 1 MMcf per day from an upper region of the 6,500-foot exempt zone after earlier producing oil from a lower region.

The Lake Washington Area currently produces about 10.5 MMcf of gas per day, of which about 8.0 MMcf is marketed, with the remainder used as needed to maintain gas lift pressure for the oil wells and to operate equipment.

During assessments of its Lake Washington proved reserves in 2004, Swift engaged Integrated Reservoir Solutions Division of Core Laboratories to perform a reservoir analysis on the F sand on the north side of the salt dome. Their analysis of a whole core sample taken from the F sand in the CM-221 well showed that the volume percentage of oil in place was higher than previously assumed. As a result, the oil recovery factors for the F sand, used in reservoir calculations, will also be higher than for average sands. This type of information allows the Company to optimize primary and secondary reserves performance from high-quality reservoirs like the F sand. Current plans are to use the same procedure for optimization in other regions of the field and for other high-quality zones, particularly the D zone.

Locating and evaluating Lake Washington reserves was also a principal goal of a three-dimensional seismic survey conducted by Swift during the third quarter of 2004. Analysis of the data, which is under way, is expected to help identify targets for future exploratory drilling at depths of 10,000 feet and greater (see page 19). In the meantime, the data are being examined to enhance and expand the 2005 drilling inventory of intermediate targets (at 6,000- to 12,000-foot depths). They will also provide insights relative to reservoir management and future facility designs.

Swift’s drilling inventory now includes approximately 98 drilling permits for both shallow and intermediate depths. Swift plans to drill at least 30 wells in the area in 2005, most at depths greater than 5,000 feet. Drilling to shallower targets is being deferred until the second half of the year because the CM-3 processing platform that removes hydrogen sulfide–bearing gas from the "sour" crude found in many of the shallow targets in the southern portion of the field is currently operating at or near capacity. Expansion of the capacity of the CM-3 platform up to 10,000 barrels per day is a near-term goal.

The field’s other two processing platforms, the 212 platform and the 6700 platform, handle Swift’s "sweet" crude production, and while their combined capacities are currently adequate, additional intrafield delivery systems are being installed to balance their loads. These systems, when combined with planned compression additions and infrastructure improvements in this area of the field, will allow the combined capacity of these two platforms—20,000 barrels per day—to be realized. The compression additions will also allow for the expansion of the gas lift system capacity, further increasing production capacity and efficiency. Additionally, potential improvements and additions to the gas treating system are being reviewed to help mitigate the downtime and reliability issues experienced with the treating unit in 2004.

Infrastructure improvements for processing of oil and gas and its delivery to market via pipeline or barge have comprised a large portion of Swift’s Lake Washington operations since the property was acquired. During 2004, capital expenditures for facility upgrades in the field totaled approximately $13.5 million, with expenditures of about $25 million anticipated for 2005.

As the 2005 Lake Washington operation continues, it is anticipated that the analysis of the seismic survey data (see page 19) will confirm a number of prospects around the salt dome that have been developed by the Company’s geologists for depth ranges of 7,000 to 14,000 feet. These and even deeper wells are expected to increasingly encounter high-pressure gas, which to date has been virtually untapped on Swift’s acreage. The Company plans to begin drilling deep exploratory wells beginning in the last half of 2005 and to continue the program for the next three to four years.

AWP OLMOS AREA

The AWP Olmos Area in McMullen County, Texas, the oldest of Swift’s current core areas of operations, was established in 1989 when the Company became the operator of approximately 65 producing natural gas wells located on a 4,900-acre leasehold position in the AWP Olmos Field.

The Company immediately began drilling additional wells to increase production from long-lived reserves held in the field’s tight Olmos sand, each well having the potential to produce for 15 to 20 years.

To improve operations, Swift began focusing on the massive and costly process used to fracture the formation around the wells and induce gas flow into the wells. By varying the fracturing fluids and accompanying sands pumped down the wells and out into the formation, together with optimizing their injection rates, Swift cut fracturing costs dramatically while improving production.

The Company also found that performing two or more smaller fracture procedures separated in time was more effective for a new well than conducting a single large one. It followed that second fractures should also be performed on older wells for maximum production.

The Company also concentrated on various methods for increasing the upflow of gas in the wells, which was slowed by droplets of condensate carried in the flow stream falling back into the wells and blocking the flow (liquid loading). To minimize this problem, Swift began installing small-diameter (1-1/4-inch) coiled tubing in new wells as a lifting mechanism. The tubing restricted the cross section of the gas flow, increased its velocity, and prevented the fallback of the droplets. With the success of this technique, used for the first time in the AWP Field by Swift, the Company also began retrofitting older wells with the coiled tubing.

In 1994, the Company acquired an additional 8,830-acre leasehold position, adding other new leaseholds through 1996 and instituting an intensive drilling program. Additional improvements over the years included a reduction in operational costs with the adoption of slim-hole drilling techniques and remote operations to monitor production and perform other tasks. Although drilling in the area has been reduced in recent years, at year-end 2004 the AWP Area had 512 producing wells with Swift holding 100% working interests in almost all the wells. Of these, 13 producers were added in 2004 out of 15 wells drilled. In addition, four secondary fractures and four coiled-tubing installations were carried out on older wells.

Also in 2004, plunger lift was installed on 19 wells in the field that had previously been equipped with pumping units. On average, the switch in the lifting mechanism increased daily production by about 40 Mcf per day per well, at the same time reducing operating expenses by about $500 per well per month due to lower electricity use and less periodic workover expense.

At year-end, the AWP Olmos Area consisted of 27,534 net acres with proved reserves of 192.4 Bcfe, 29.5% of the Company’s domestic reserves and 24.1% of its total reserves. Remaining undeveloped proved reserves totaled 64.6 Bcfe. AWP production during 2004 was 9.0 Bcfe, comprising 21.3% of Swift’s domestic production and 15.4% of its total production.

Plans for the AWP Area in 2005 include drilling 12 to 15 wells and performing 15 fracture stimulations on wells that could benefit from additional stimulation.