Oil and gas reservoirs are dynamic systems that are constantly changing during their production history. As production draws down reservoir pressure, changes take place in the reservoir in the form of effective stresses, reduced permeability and fracture flow characteristics in stress sensitive reservoirs such as the fractured chalk reservoirs in Texas and the overpressured reservoirs in the Gulf of Mexico. Quite often, severe subsidence accompanies pressure draw down in reservoirs such as the high-porosity diatomite fields in California or the Chalk reservoirs in the North Sea, causing severe casing damage, borehole breakouts and other problems. For example, during 1935-65 the surface above the Wilmington oil field in California subsided 33?, costing damage in excess of $100 MM to various facilities. By 1987 about 13? of seafloor subsidence was measured above the Ekofisk field in North Sea and the entire cost to raise platform and to protect storage facilities exceeded $400 MM. Casing failures have occurred in more than two-thirds of the wells in this field. Sandia National Laboratory has adopted an integrated geomechanics approach based on laboratory, field research and numerical model simulations to understand and develop tools for managing the stress-sensitive reservoirs. Detailed field and laboratory studies of deformation features such as fractures, bands etc. have been completed on a number of stress-sensitive formations to understand the genesis of these features for planning the most effective recovery operations. Because of the apparent relationship between compaction bands and certain borehole breakouts, Sandia organized a special session during the fall meeting of the American Geophysical Union in 1999 to discuss this important production problem. Using idealized network models, the complexity of hydraulic flow paths in heterogenous porous media has been demonstrated. This will help to understand the mechanism of displacement of oil from pore space during waterflooding or enhanced oil recovery processes and in predicting transportation of contaminants in an underground aquifer. Improved simulation of fractured reservoirs will lower development costs of these reservoirs by 10%. The 3-D, nonlinear finite-element geomechanical simulation of the Lost Hills and the Belridge fields in California reveal the evolution of the subsurface stress and the displacement fields in the reservoirs and the overburden, and show how production and injection patterns affect their spatial and temporal variations. This simulation is being applied as a reservoir management tool to mitigate surface subsidence and well failures. It is estimated that this technology will reduce well failure from 10% to 5%, thereby saving the operators $25-$50 MM per year. Successful implementation of tools for managing stress-sensitive reservoirs developed in this project should help to add 5.2 BBO and 58.0 TCF of natural gas to the national reserves that will ultimately generate $34 and $12 billion in royalties and taxes and 60,000 new jobs in different sectors.