The investigation of carbonate-ramp deposits of the upper San Andres Formation that crop out along the Algerita Escarpment, New Mexico, focused on characterizing the complex heterogeneity associated with depositional and diagenetic processes at the interwell scale. Detailed geologic mapping revealed a series of upward-shallowing parasequences, 10 to 40 ft thick, that form the geologic framework for the reservoir model. Parasequence boundaries are typically marked by tight mudstone/wackestone beds that display variable degrees of lateral continuity, ranging from several hundred feet to more than 2,500 ft and are important as potential flow barriers. Detailed permeability measurements (using both mechanical field permeameter and core plugs) of the grainstone rock-fabric unit in parasequence 1 were made at scales of t inch, and 1, 5, 25, and 100 ft. Within parasequence 1, distinct variability of petrophysical characteristics occurs at scales well below those of interwell spacing (660 to 1,330 ft). Geostatistical analyses of permeability measurements indicate varying permeability correlation at the different measurement scales. In all cases, however, approximately half of the permeability variability (variance) is due to locally random heterogeneity (nugget effect). Conditional simulation of permeability in parasequence 1 indicates apparent randomness owing to the large nugget effect. Numerical waterflood simulations using conditional permeability realizations were compared with numerical simulations using geometric-mean permeability distribution and gave similar results. Simulations using small-scale heterogeneity and associated capillary-pressure phenomena will increase sweep efficiency compared with simulations using a facies-averaged permeability distribution with single capillary-pressure curves.