Proud Past, Bright Future

Reflections of Chairman A. Earl Swift on Swift Energy Company’s 25^th Anniversary
November 2004

In life’s journey, milestones give us a chance to check our direction, to make sure we are still on course toward our desired destination. Like the original milestones that stood beside ancient roads, or the modern signage systems along today’s superhighways, these markers not only tell us where we are going but also help us to determine how far we’ve come and how much farther we have to travel.

Now that we have reached the milestone of Swift Energy Company’s 25^th anniversary, I want us to take advantage of the opportunity that this important marker provides. I want us to think about the past and future, not just of Swift Energy, but also of the oil and gas industry in which we operate. And because all businesses have strong moral and ethical obligations within our increasingly global marketplace, I also want to take a few minutes to discuss the ethical dimensions of business leadership in the evolving international economy.

I’ve been observing the evolution of the oil and gas industry a lot longer than most, having started back in the 1940s as a teenage laborer drafted by my dad to work in the Oklahoma oilfields. Later I worked a total of 24 years for Humble Oil Company and the Michigan-Wisconsin Pipeline Company. And then in 1979, I started Swift Energy Company, which has given me intimate knowledge about managing an independent producer in both good times and bad.

During all this time, I’ve always been interested in the big picture—not only in the past and present, but especially in the future—and one thing that has always struck me is just how short-lived the petroleum industry is destined to be.

If we look at world oil production and consider an estimated ultimate recovery (EUR) of 3 trillion barrels, which is one of the more optimistic estimates currently available, we find that oil production is likely to peak in at most another 20 years or so. A range of other estimates suggests that the peak could occur at any time within that 20-year period. In fact, a recent estimate published in the Oil and Gas Journal suggested the global peak in petroleum production could occur in the next couple of years.

Whenever the peak occurs, my own family will have witnessed the entire period of time from when oil first became a significant energy resource until it ultimately reaches its zenith. My father entered the business as a child laborer in 1915. My son Terry, who joined Swift Energy soon after it began, will likely see the ultimate peak in worldwide production before he retires. Another couple of generations after that watershed event, and the oil industry as we know it will be gone.

Although a mere blip on the timescale of human history, the petroleum age has been a catalyst for unprecedented progress. About half of the recoverable petroleum stored over eons has been consumed in a little over a hundred years. As a result of this enormous increase in global energy consumption, changes occurred at an accelerated pace in the 20^th century, as science and technology propelled mankind into a new era of human progress.

My own parents were born in the Indian Territory before it became part of the state of Oklahoma. When they were children, their families relied on horses hitched to wagons in order to travel any appreciable distance. In July 1969, my father and mother watched men walking on the moon using a new television that they rented especially for the occasion. Our nation went from traveling by horse and wagon to rocketing to the moon in less than a single lifespan.

As a child, I listened intently to stories of the first cars driven into Oklahoma from Kansas City. Later, as a young executive, I gladly traded my slide rule for a calculator and was awed by the output of early computers, which have now become mammoth relics of information processing replaced by lightweight laptops. More recently, I marveled as robots looked for life on Mars and the Hubble telescope sent back incredible photographs from the dawn of time. I have witnessed spectacular achievements in science, from the eradication of smallpox to the mapping of the human genome and the unleashing of the nuclear genie.

One can certainly marvel at the wonder of it all, but what does it really mean? Here at the beginning of a new century, as we near the pinnacle of the petroleum age, how is the world to respond to this dynamic new era that will be full of emerging opportunities and threats?

At Swift Energy our response is already well under way. We know that even after global oil production begins a permanent decline, abundant opportunities for independent oil and gas companies such as ours will remain available for many decades. In the United States, for example, oil production peaked in 1970, and it has been steadily and inevitably declining ever since. Even so, excellent opportunities in domestic petroleum production still can be found.

We have proved that fact since 2001 when we purchased interests in producing properties in the Lake Washington Field in South Louisiana. At the time, the acquired properties were producing less than 1,000 gross barrels of oil equivalent (BOE) per day. Applying modern technologies to improve operations, we produced an average of approximately 14,500 gross BOE per day in October of this year. From the time of purchase to year-end 2003, we increased our estimated net reserves in the field more than fourfold, from 7.7 to 43.5 million of barrels of oil equivalent, and upgraded our processing capacity from 2,000 to 20,000 barrels per day.

Even with these gains, the Lake Washington Field still presents us with a diversified mix of additional opportunities for significant long-term growth. Lying in inland coastal waters and producing from multiple Miocene sands surrounding a centrally located salt dome, the field is heavily faulted and water driven, with hydrocarbons pushed to regions closest to the salt face. To intercept multiple reservoirs, we drill directionally down the flanks of the dome. Through September 2004, we had drilled 111 wells at depths ranging from 3,000 to 10,000 feet with a 79% success rate. In the process, we encountered over 70 different pay zones and discovered one major horizon that had not been previously identified. In order to more fully tap the field’s potential, we recently completed the acquisition of three-dimensional seismic data covering the entire core area and are merging it with purchased seismic data covering about 550 square miles to the west of our area. The analysis of the combined data will greatly enhance our knowledge of the field and facilitate the planning of future programs, especially as we drill to deeper horizons.

Based upon our success in Lake Washington, we remain very excited about the opportunities that exist for finding and producing additional oil both in the United States and abroad, even as global oil production eventually peaks and declines. We are equally optimistic about the long-term future for finding and producing natural gas, which will be the fuel of choice for taking up the slack as oil production declines.

Since the beginning of civilization there has been a definite progression in humanity’s use of energy. That progression has always been toward fuels that contain more energy per unit carbon—in other words, toward more efficient, less polluting energy alternatives. The history of energy usage is a story of transitions—first from wood to coal, then from coal to petroleum, and now from petroleum to natural gas. Eventually, we can anticipate going from natural gas to nuclear power, fuel cells, solar photovoltaics, or other advanced technologies. In the first few decades of this century, however, natural gas will take center stage.

In both the United States and the world as a whole, natural gas resources are more abundant than oil resources. Natural gas is cleaner and more efficient than other available fossil fuels, and over the last decade, gas-fired generating technologies have undergone tremendous technological progress. The new global high-tech economy will create strong incentives in both developed and developing nations to turn toward gas-fired electricity generation as a way of meeting growing energy requirements. For a host of reasons, natural gas is the world’s best immediate hope for a successful transition away from growing global dependence on Middle Eastern oil.

But along with great opportunities come great challenges. The era of cheap, easy-to-find energy is over. In both the United States and Canada, conventional supplies of gas will become less available and growth in gas supplies will increasingly come from tight reservoir sands and other unconventional resources, as well as from imports of liquefied natural gas from abroad. Even when conventional natural gas resources are discovered, they will be at deeper horizons. All of this suggests that long-term growth in natural gas supplies will generally require a continuation of the current era of higher prices.

At Swift Energy, we have considerable experience in finding and developing domestic natural gas supplies, particularly natural gas resources residing in tight sands. Our very first drilling programs in West Virginia during the early 1980s involved tight sands, and in 1989 we began drilling in the tight sands of the AWP Olmos Field in South Texas after we had purchased and began operating a number of producing wells in that area. Over time, we have greatly improved our technology for exploiting tight sands resources. Some of our more important improvements include techniques for fracturing the rock surrounding a well bore in order to create better pathways for oil and gas to flow to the surface. Other improvements have included converting to economical slim-hole drilling, using coiled tubing strings as gas lifts, and remotely monitoring production. Today, after 16 years of production, the AWP Olmos Area continues to be our Rock of Gibraltar, a steady and dependable source of long-term production that we anticipate will continue to be a significant part of our production mix for many years to come.

With the AWP Olmos Field and the Lake Washington Field, we have two long-term core areas of operation, one primarily producing natural gas and the other producing oil. In addition, we have two other domestic core properties—the Brookeland Area in East Texas and the Masters Creek Area in Western Louisiana—both of which produce both oil and gas from the Austin Chalk trend with initial high deliverability.

In our Brookeland Area and Masters Creek Area we have applied different techniques, but they, too, are examples of how technology can open up hard-to-exploit resources to economical production. The Austin Chalk trend is characterized by natural vertical fractures that frequently become deposits for oil and gas accumulations. So that multiple deposits can be tapped in one well, the wells are first drilled vertically down to the Austin Chalk horizon and then gradually turned into a horizontal direction to intercept multiple fractures. Frequently, dual-lateral wells are drilled with two holes diverging in different directions in the reservoir. By intercepting multiple fractures, horizontal drilling technology has made the exploitation of Austin Chalk resources more economical. With these wells having initial high production and quick payout, thereafter declining in production rather rapidly, these two core areas provide an excellent balance to the long-lived production associated with our wells in the Lake Washington Area and the AWP Olmos Area. In earlier operations, we drilled other Austin Chalk wells in and around the Giddings Field in Texas with high success for about eight years, but because of their characteristic production declines, these wells are no longer part of our core operations.

All four of our domestic core areas, each of which still hold substantial proved reserves, were originally developed by other companies and acquired by us when they were placed on the market. Throughout our history, we have focused on a tandem approach to growth that emphasizes producing property acquisitions when product prices (and therefore property prices) are relatively low and emphasizes exploration and development drilling when prices are relatively strong.

In acquiring producing properties, we focus on those areas in which we can obtain sufficiently high working interests to act as operator and where we can substantially enhance reserves and production through subsequent drilling activity. With the concentration of reserves in the core areas, we can benefit from economies of scale in drilling and production, and with operational control we can better manage production, expenses, capital allocations, and field development. We also benefit from the technical expertise and experience that our people have with these properties. In short, our portfolio of domestic core operating areas provides us with a diversified mix of reserves in regard to production profiles (that is, long-lived versus initial high deliverability), geographic locations, oil-to-gas ratio, growth opportunities, and risks, while at the same time helping us to maintain economies of scale, operational flexibility, and competitive advantages in expertise and experience. When we branch out to explore and develop new producing properties, we keep these same criteria in mind.

Although exciting domestic opportunities remain available, we decided over a decade ago that long-term growth could better be accomplished with some diversification overseas. U.S. oil production has been declining for almost 35 years with no real signs of abating, and while domestic natural gas production has been growing since the mid-1980s, its growth over the next couple of decades is likely to be at a much slower pace.

The first country we ultimately chose to diversify in was New Zealand, a beautiful country with friendly people and a great place to do business. In fact, a recent study by the World Bank rated New Zealand as the best place in the world to conduct business, just ahead of its closest competitor, the United States. Its advantages include established oil and gas markets, existing infrastructure, a modern legal system, a reasonable tax structure, excellent royalty terms for oil and gas production, and a population with a generally positive attitude toward the United States.

In New Zealand, we have been focusing in the Taranaki Basin of the country’s north island. The Taranaki Basin represents an area with significant unexploited potential in a mix of geological environments, and it also provides proximity to attractive markets with relatively low political risk. In particular, finding new natural gas supplies has become an increasing priority for the people of New Zealand. The nation’s single largest source of natural gas supply—the aging Maui Field which only a few years ago provided as much as 70% of the country’s natural gas production—has begun what is expected to be an abrupt decline. Meanwhile, the nation’s natural gas demand continues to grow. Natural gas supplies about 20% to 30% of the nation’s electricity needs, and in overall energy consumption natural gas only slightly trails behind oil as the second-highest form of energy consumed.

We now have two core areas of operation in the Taranaki Basin—the Rimu/Kauri Area, which has evolved around our 1999 discovery well, and the TAWN Area, which we acquired from another operator. We sell the oil we produce on the world market, while providing New Zealand with needed natural gas. We anticipate pursuing other opportunities in the country within exploration permits we have been awarded by the government.

In hindsight, it is obvious that our decision to do business in New Zealand was a good one. It is also obvious that one of the major reasons things have worked out so well is that, in addition to the fact that we speak the same language, we operate from essentially the same cultural values and ethical standards and have similar traditions of laws and institutions. With our two peoples so much alike, misunderstandings are minimized, mutual trust is developed, and long-term relationships can be cultivated.

All of the foregoing adds up to a proud past and a bright future for Swift Energy, both in the United States and overseas. As the founder and the chairman of the board over the past 25 years, I feel extraordinarily good about the direction in which the company is going. I have great confidence in both its current management personnel and its technical staff and feel secure that all company actions will be handled properly. As I have been known to say, everything is going according to plan. Even if we have at times been buffeted by industry price cycles, we have consistently achieved success in accomplishing our mission, which we have repeatedly stated is to “achieve efficient, sustained growth in the volume and net present value of its proved reserves.” The underlying premise is that reserves growth leads to increases in oil and gas production and sales, which in turn lead to higher cash flows and earnings and ultimately to increases in stakeholder value.

As I declare that Swift Energy has a bright future, I am keenly aware that corporate success is not the end of our responsibilities. In my role as chairman of Swift Energy, I have always realized that my responsibilities, and those of my peers, extend beyond the business interests of our companies and their stakeholders or even the social and environmental obligations we have to the communities in which we operate. Business leaders have a broader moral and ethical obligation to society in general—an obligation that goes well beyond scrupulous adherence to applicable laws and regulations.

In fulfilling this ethical obligation, business leaders need to be aware that their decisions are increasingly taking place in a multicultural environment. We are part of a global economy comprised of many different cultural communities. So I want to take a little time to talk about what I refer to as “multicultural ethics” in our emerging global order.

The oil industry was one of the first industries to give us a foretaste of how truly interdependent the world is becoming. Back in the early 1970s, after domestic oil production began its inevitable downturn, the U.S. became increasingly dependent upon imported petroleum from abroad. Prior to that time, domestic petroleum prices were largely regulated through a production quota system implemented by the Texas Railroad Commission and other domestic regulatory bodies.

By 1973, that comfortable system of domestic controls began to unravel. Power shifted for a time to OPEC and then to global markets in general. Today, oil is truly a global commodity upon which everyone in the world depends.

From time to time, I’ve heard politicians, citizen groups, and business leaders talk about the goal of U.S. energy independence. Such a goal is a pipe dream, and even more, it is a major misunderstanding of the world in which we now live. Even if America could achieve energy self-sufficiency—which it can’t—it would still be irrevocably tied to a global economy that depends on petroleum for its lifeblood. Our energy security is no longer just a matter of our own energy supplies. We succeed or fail as part of an international economic order. As UK Prime Minister Tony Blair once stated, "We are all internationalists now, whether we like it or not."

As interdependent as we are, our ties are largely limited to the slender thread of our common economic interests. While we are part of a global economy that has resulted in profound changes in all of our organizations and institutions, we have not yet created a system of common values required for effective systems of global cooperation and control. Our feet are planted firmly in two different worlds. Economically, we live in a technically sophisticated global system, but socially and culturally, we live in a patchwork of parochial and ethnocentric cultures based upon values formed in an earlier age, or worse yet, we live in individualistic isolation where each person thinks almost exclusively of his or her own personal goals and aspirations.

We have seen the impact of this dichotomy both at home and abroad, as authority systems have failed to keep pace with the complexities of modern global life. As a young executive in the oil business, I often saw million-dollar deals concluded over a handshake. Values of honesty and fair dealing were enforced informally by the local business culture. The culture provided better protection than any formal written contract because the industry was still dominated by a small tightly knit group of business leaders. Anyone who chose to disregard handshake agreements would get a bad reputation within the industry and would soon find it difficult to make any further deals. As a result, the vast majority honored their verbal commitments despite the lack of a formal legal document.

Today, the oil and gas industry, like nearly every other industry, has become an impersonal global enterprise. An army of lawyers and regulators is needed to police potential wrongdoers. Informal management styles have given way to more formal business practices. Across the nation, we have seen the effect of business cultures that failed to effectively enforce ethical standards. Well-known scandals at WorldCom, Enron, and Arthur Andersen are just a few examples. The result is inefficient regulation and a drag on economic performance. We will never have an efficient regulatory environment until we rebuild our business cultures with a better grounding in the ethical principles flowing from human nature. These ethical principles must be universal, consisting of a limited set of values upon which almost all of us in all cultures can agree.

A multicultural ethic could not, of course, be all-inclusive. Rather, as its name implies, it would be built upon fundamental principles of nondiscrimination, toleration, and acceptance of diversity. But acceptance of diversity does not necessarily require moral relativism. The limited number of ethical absolutes required for effective business organizations can be drawn from an understanding of the basic human nature we all possess, without resorting to any particular religious or cultural points of view.

Creating a common set of multicultural values is the greatest challenge facing the world today, for it will be the first step toward solving many of the major problems before us, whether they are poverty or illiteracy, public health or environmental pollution, the spread of nuclear weapons or global terrorism. At present, these problems remain intractable precisely because their solution requires international cooperation, and the world cannot achieve the needed cooperation because it has not yet come to a fundamental agreement on basic values.

So where do we look for the moral leadership needed to create this multicultural ethic? Business leaders are largely responsible for building the global economy, which puts them in the best position to bring diverse cultures together in pursuit of common goals. The time has come for business leaders to shoulder more of the burden for moral leadership. Many effective leaders accepted this responsibility long ago, realizing that shaping the vision and values of their organizations is their primary responsibility. Leadership requires much more than just knowing what to do. Leaders must create an organizational consensus around a course of action that resonates with the deeply held values that motivate human behavior. Leaders do this by promoting their own moral values and tying those values to a vision of a better future.

How, then, do business leaders determine the appropriate multicultural values to build into their organizations, as well as into the broader society?

First and foremost, they must promote the bedrock values they believe in personally. Anything other than deeply held personal beliefs would be both hypocritical and ineffective. Leaders must accept the fact that they are role models. As long as they are in a leadership position, the members of the organization constantly look to them for both direction and motivation. A leader's thoughts and emotions no longer belong exclusively to him or her alone. Over time, the true attitudes and values of the leader will inevitably weave their way into the fabric of the organization's culture. Under this kind of scrutiny, any insincerity on the part of the leadership will become apparent. Leaders must therefore follow the ancient admonition of Socrates to "know thyself." Only through realistic self-knowledge can leaders hope to articulate a common vision and set of values that have any significant chance of long-term success.

Second, leaders must be open to personal growth and change. Multicultural values will be created through a process of competition and dialog. No one person, not even the leader, will have the complete set of values that can succeed in a multicultural environment. Therefore, the flow of values between leaders and their organizations must become a two-way street. To some extent, leaders must let their organizations shape their own personal value systems if they are to be effective in shaping the values and culture of their organizations.

Business leaders must also become good students of human nature. By definition, multicultural values cannot be based upon one religion, culture or nationality. They must be based on what we have in common, and the only thing that we all share is our common humanity. The basic drives of human nature must ultimately become the common thread from which we weave a multicultural tapestry.

I believe that human beings make decisions in only one of three ways: 1) as individuals, basing their decisions upon their own self interest, 2) as a group, basing decisions upon some sort of consensus building process, and 3) by relying on some sort of authority, such as hierarchical leadership, the rule of law, or shared moral values.

The universality of the three decision-making processes seems obvious. Everyone wants to be free to make his or her own decisions. At the same time, everyone needs the companionship and the sense of belonging that comes with being part of a group, and finally, everyone wants to believe in something or someone, to conform his or her behavior to some kind of authority, whether that authority comes internally from religious, political, or cultural values or externally from leadership or laws. I have spent a lot of time trying to understand human nature, and I have become convinced of these truths: in interpersonal relationships, people are always striving to be free, to belong, and to achieve. Balancing these three basic drives of human nature can become a foundation for a multicultural ethic.

In addition to focusing on human nature, achieving common multicultural values will require that every organization look beyond its own narrow mission to the goals and values of the broader society in which it functions. No organization is an island. Effective business leaders must therefore focus on the needs of all their stakeholders, not just their stockholders. Unfortunately, one of the most important negative impacts of corporate scandals over the last couple of years has been the reinforcement of the market's obsession with short-term changes in shareholder value.

Business leaders are at least partly responsible for this obsession. They have not effectively communicated to the public that real value is not built in a day by a few celebrities. A widespread understanding of this simple truth could have avoided some of the excesses of the dot-com bubble, and it provides one of the best protections against corporate abuse in the future.

Successful business organizations also must exhibit a real commitment to the local communities where they do business, and one of the most important contributions a business can make to a local community is to create jobs. All too often, nations have dropped their barriers to international trade and investment only to see burgeoning unemployment with accompanying social disruption. Some disruption is inevitable, but it can be minimized if corporations take their responsibilities as a local employer seriously. At Swift Energy, one way we do this is by hiring locally. In our New Zealand subsidiary, roughly 90 percent of our employees are from New Zealand. We have found that as a local employer, we become part of the local communities where we operate. We influence those communities, and those communities influence us.

In addition, business leaders have a responsibility to cultivate leadership abilities in other people. No organization can attain long-term success unless it can create a climate that attracts and mentors good leadership. From the moment I founded Swift Energy, I have remained focused on the continuing development of the company’s management. Our policy has generally been to promote employees from within who have been instrumental in past successes. As a result, we have seasoned management teams in place in the United States and in New Zealand, many of whom have worked together for over a decade.

But business leaders should take a wider view when cultivating leadership within their organizations. They must encourage their employees to become community leaders as well as leaders within the company itself. Once business organizations inculcate their corporate cultures with multicultural values, they must facilitate the dissemination of those values into the broader society. They can accomplish this objective by becoming involved in their local communities and by encouraging their employees to do likewise.

A key area for community involvement will be education and training. Outside the family, education plays the most important role in the formation of values. The business community needs to invest in education to facilitate the growth of human capital, but it also needs to be concerned with the values being taught. Preparing children to succeed in a global marketplace will require that they be exposed to religious, ethnic and cultural diversity during the education process. Basic skills such as reading and math are crucial, but basic skills also include learning to work effectively in a diverse environment. Diversity benefits everyone, not just minorities. As Supreme Court Justice Sandra Day O'Connor recently stated in one of the Michigan affirmative-action cases: "American businesses have made clear that the skills needed in today's increasingly global marketplace can only be developed through exposure to widely diverse people, cultures, ideas, and viewpoints."

If making these points makes me sound like a preacher or politician standing on a soapbox, then so be it. Never has the world needed moral leadership and vision from the business community as badly as it needs it today, and as part of the business community, Swift Energy has an important role to play.

Harry S Truman once said that, “Men make history and not the other way around. In periods where there is no leadership, society stands still. Progress occurs where courageous, skillful leaders seize the opportunity to change things for the better.”

I have that quote hanging on my office wall. Every day it reminds me of my responsibilities as a business leader. Like countless other business leaders throughout our interdependent global economy, every day brings me another opportunity to make a difference by changing things for the better.

On the milestone of Swift Energy’s 25^th anniversary, I can say that we have seized most of the opportunities that have come our way. We can be proud. Not only have we built value for our stakeholders and provided good jobs for our employees, we have also contributed to the world’s energy supplies in an ethical, safe, and environmentally responsible manner. And we have made a difference for those communities where we operate, both in the United States and overseas.

Looking to the future, we are well positioned for sustained growth in proved reserves and production, giving us confidence that we can add significant value for our stakeholders for many years to come. We have great employees led by an experienced and capable management team. Perhaps most important of all, we have a culture that believes in honesty, integrity, and responsibility, not only towards our stakeholders, but also towards the broader society. I consider Swift Energy to be a company of role models, people who have the right character and temperament to provide moral leadership both inside and outside of our organization.

Having checked our course against our 25-year milestone, I can say with assurance that we remain on course. We have come a long way, and we have the opportunity to go a good deal further. I have always had a vision of an oil and gas company that succeeds not only in business but also in life. One that adds value for its shareholders, but that also contributes to the communities where it operates. One that creates quality jobs for people, but that also inculcates good values into society. I think we’ve done all that, but I also believe we can still accomplish much, much more, continuing to make a difference for many years to come.

Selected Articles Authored By A. Earl Swift:

The Dynamics of Organizational Relationships, World Energy, Vol. 5, no.1, April 2002, pp.48-54.
The Evolution of Organizational Relationships: Multicultural Ethics and the New World Order, World Energy, Vol. 5, no. 2, August 2002, pp. 114-120.
The Interdependence of Organizational Relationships: Leadership in the New World Order, World Energy, Vol. 5, no. 3, October 2002, pp. 28-37.
The Integration of Organizational Relationships: The Role of Authority in the Global Economic Order, World Energy, Vol. 6, no. 3, August 2003, pp. 42-49.
 

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