Archive for Thursday, December 13, 2007

After years of decline, good times return to Kansas oil patch

December 13, 2007

Oil. Texas tea. Black gold.

Whatever you call it, oil in eastern Kansas during recent years was more like fool's gold than a ticket to a big payday. With prices as low as $10 a barrel, drillers could hardly pay the electric bill to run their pumps, let alone invest in new infrastructure.

Boy, have times changed.

With the price of a barrel of oil flirting with inflation-adjusted record highs -- nearly $100 per barrel recently -- eastern Kansas is pumping oil once again.

"The amount of oil produced in Kansas will go up. It is going up. It's been going up since 2001," said Tim Carr, scientist emeritus at the Kansas Geological Survey. "Most (Kansas) wells average a barrel and a half to two barrels per day. We're a high-cost producer."

When the price of oil was below $15 a barrel -- as it was for nearly a year from mid-1998 to mid-1999 -- it practically cost more to get the oil out of the ground than could be made selling the oil.

However, when the price rises, Carr said, developers go in and spend millions of dollars revitalizing existing wells.

With the current price of oil, it's not just time to revitalize and upgrade existing wells, it's time to dig.

According to data from the Kansas Corporation Commission, which requires companies to file Intent to Drill notices with its office, new wells this year are "way up," spokeswoman Rosemary Foreman said.

There have been 4,768 intents filed this year, compared with 3,747 in all of 2005 and 1,112 and 1,056 when oil was in the dumps in 1998 and 1999, respectively.

"It will keep going up as long as the oil price stays up," Carr said.

There's no indication the prices will decline soon, said Nick Powell, president of Colt Energy in Kansas City, Mo. Colt has drilling operations in eastern Kansas.

"The higher prices are allowing us to do a lot more than we're able to do at lower prices," he said. "And we're also looking for additional places to drill and take leases."

Oil tough to get

Oil is generally found in places that were once covered by water, according to the U.S. Geological Survey.

Oil is formed when living organisms die and then are covered by the sediment of a sea floor before they can fully decompose. As the pressure builds up over millions of year, that organic material turns into oil, gas and other fossil fuels.

Kansas was covered by a shallow sea that stretched from Texas north to Canada, east to the Rocky Mountains and west into Missouri about 100 million years ago.

In terms of development, a standard oil pump relies on simple pressure to force oil out of the ground. But there are ways to increase a well's productivity.

Secondary recovery involves flooding the wells with water or gases to increase the pressure driving the oil out of the ground. Tertiary recovery, which can involve injecting carbon dioxide or heat into a well, also is practiced in eastern Kansas.

But prices don't need to be this high to make secondary or tertiary recovery viable. With the level of prices now, Powell said, oil companies can afford to dig new wells on existing oil fields, and even look for new ones.

"At these prices, you can afford to dig dry wells," Powell said.

Kansas City-based energy company EnerJex is working with other companies to upgrade existing wells and dig new ones on oil fields across eastern Kansas -- including one south of Eudora known as the Little Wakarusa.

EnerJex went public in April and raised $9 million. With that money and borrowed money, the company has bought oil leases and equipment leading to 25 new wells.

"If oil were $25 or $30 a barrel, we wouldn't be doing this," said Steve Cochennet, president of EnerJex. "With technology and today's prices, we can go out there and do this."

Cochennet said the biggest barrier to increasing oil production in eastern Kansas is the high upfront costs involved with digging wells.

A case study

The Little Wakarusa field is an example of the fortunes of the Kansas oil industry.

In the mid-1980s, the field was producing 5,000 to 6,000 barrels of oil each year. That's modest by international standards, but typical in eastern Kansas.

When prices plummeted after the first Gulf War, production declined greatly. A thousand barrels were pumped in 1992, and 700 in 1994. By 1991, the field produced just 331 barrels, and only 214 barrels were produced in 2002, when oil was below $30 a barrel for most of the year.

In the following years, as prices increased, the level of production headed back into the thousands.

Last year, for instance, according to data from the Kansas Geological Survey, production hit 2,314 barrels. And it looks like this year will be even bigger.

In the first five months of 2007, the most recent data available, 2,266 barrels had been pumped. That doesn't consider the new wells that EnerJex is digging.

"We acquired (part of) that field back in April," Cochennet said. "It was producing eight to 10 barrels a day back in April. We've invested $1.5 million there and now it's producing 60 to 65 barrels a day."

More eastern Kansas oil isn't just good for those who drill. Landowners typically receive a one-eighth royalty for the drilling that goes on beneath their ground.

Counties benefit through higher property tax revenues, driven by land with oil being valued more highly. But a major beneficiary of the rise in oil prices and production is the state treasury.

The state charges a 4.3 percent tax for every barrel of oil pumped from the ground and sold, subject to certain exceptions and exemptions. Among the exemptions is the first two years worth of production from new wells.

Despite the fact that many new wells aren't yet generating tax revenues, the oil severance tax contributed $39.7 million to the state in 2006, according to the Kansas Department of Revenue. That's up from just $9.1 million in 1999. And of that $39.7 million, 93 percent goes straight to the state's general fund. The state's general fund pays for roads, schools and universities, among other things.

The other 7 percent goes to a county mineral tax fund. That money is then doled out to the counties where the oil was pumped from. In 2007, Douglas County received $193.30 in oil and gas tax revenue. Half goes to the county general fund and then the other half is divided among the school districts in the county that cover the mineral fields.

All in all, the oil industry in Kansas is booming, producing 35 million barrels in 2006 and on track to easily eclipse that mark this year.

"Over the last three years, oil has been a $4.5 billion to $4.7 billion per year industry," said Carr, the KGS scientist. "Back in '99, it was a $1.5 billion industry."

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