Archive for Sunday, March 6, 1994


March 6, 1994


— The first oil well on record in Douglas County was drilled in 1887 near the old Santa Fe depot in Lawrence. But the industry's heydays have given way to hard times.

Texas Tea in Kansas

Oil production in area counties in 1992, according to the Kansas Geological Survey, Kansas University:

Douglas County

A long-time Kansas industry that has pumped hundreds of millions of dollars into the state's economy is slowly suffocating.

The industry: independent oil producers.

The culprit: rock-bottom oil prices.

Most longtime eastern Kansas oil producers and industry watchers say they've never seen it so bad.

``We thought '86 was bad, but it's worse now,'' said Steve Korf, an environmental geologist district supervisor with the Kansas Corporation Commission in Chanute. ``In '86, you had a good price that went to not much. Now you had a crummy price going to worse. It came from nothing and went to worse.''

``The producers are worried that if this price continues, they won't be in business a year from now -- if they last that long,'' said Nick Powell, president of the Eastern Kansas Oil and Gas Assn.

Ten years ago production and employment peaked, and beam pumps -- they look like big versions of bobbing chicken toys -- became familiar sights in corn and milo fields and next to roads in northeast Kansas.

But then oil prices started a long downward slide, and as a result came layoffs, decreased production and eventual bankruptcies.

Staying above water

George Sell is one of the survivors. Sell, president of Pioneer Petroleum Inc., a well service company based in Ottawa, recently had to lay off three more workers, leaving him with a work force of six.

``At one time we had 46, back in '85 and '86,'' he said. ``It's just deteriorating away. Eastern Kansas oil production, in a little longer there won't be any. We've shut down about 100 wells in Miami and Franklin counties. There's just not enough money to pay the bills.''

He's not alone.

Bob Reusch of Reusch Oil Service in Ottawa has been in the oil business in Kansas for 15 years, drilling new wells and maintaining wells. Lately, however, he's been shutting them down.

``I plugged 10 last year, all in Franklin County,'' he said. ``Those were the first I ever plugged.''

Powell's company, Colt Energy Inc. in Overland Park, also has been faced with hard economic times.

``Our company has shut-in approximately 200 wells - that's about 20 percent - and laid off 20 percent of the work force,'' he said. ``Most of the people I've talked to have laid off 20 to 40 percent of their work force.''

Price boom goes bust

More than 93 percent of the state's wells -- including most wells in eastern Kansas -- are stripper wells which produce fewer than 10 barrels of oil daily, but those wells sit atop an oil reserve estimated at 12.4 billion barrels.

Since 1944, 20,763,081 barrels of oil have been pumped in Franklin, Douglas and Jefferson counties, 91 percent of it in Franklin County, according to Kansas Geological Survey records.

In boom times Kansas wells produced 155,000 to 160,000 barrels a day, but that has fallen to 136,000 barrels a day, said Lanny Schoeling, liaison engineer with the Tertiary Oil Recovery Project at Kansas University.

Sell recalls when oil sold for $42 a barrel, a benchmark price that most veteran producers knew would not last forever, he said.

``But we never did think it would be selling for $7 or $8 a barrel,'' he said. ``I really had considered it would level off between $18.50 and $22. I've got reports by a petroleum engineer who predicted $180 a barrel by '94. I knew at the time that wasn't going to happen. But I was counting on $18.50 to $22.''

Oil fields in eastern Kansas are relatively shallow -- ranging from 700 to 1,500 feet -- which reduces pumping costs.

But eastern Kansas crude is heavier, so producers have to sell for less than the price set for the light crude produced in places like Saudi Arabia.

``The general public hears the mercantile price, but we're $3 off the mercantile,'' said Lester Town, who is headquartered in Paola. ``Plus we're docked another dollar, dollar and half for gravity. Right now the mercantile is at $14.25 or $14.50, our posting is at $11.25, we're netting about $9.50 on our oil right now.''

``Just about every lease I have is losing money,'' said Dean Kramer, who owns Kramer's Oil Field Service and a supply store in Wellsville. ``With oil prices that low, just about everybody is losing money.

``In 1990 I was producing 780 barrels a day, but now I'm at 590. I lost 200 barrels just because I can't spend the money to keep production up. Your production goes down big-time.''

Eastern Kansas producers are paying more to ship crude farther because the state has only two refineries where it once had 11, said Larry Tenk, a long-time producer based in Ottawa.

``When you lose a refinery, you lose a lot,'' he said. ``You can get a better price here.''

``Our markets used to be local,'' Town said. ``Now our oil is shipped to Humboldt, and the market is soft.''

Economic effects far-reaching

The state's oil industry generates $600 million a year in revenue, and its loss would throw thousands out of work, shut down oil-producing and related industries and even affect the state treasury, Powell said.

``Oil producers buy a lot of electricity in rural areas,'' he said. ``Other buyers - the farmers and people in rural towns - will have to pick up costs and will see their rates go up.''

Other costs to the state include taking over abandoned oil wells. That's the bailiwick of the Kansas Corporation Commission and Korf, who works in the conservation division and is witnessing first-hand the struggles of oil producers.

``In most cases when oil prices go down, our workload goes up,'' Korf said. ``We become more responsible for more wells, there are usually more spills, and when producers shut the leases, the land owner is not getting their royalty check. They usually call in more complaints.

``A lot of leases that are shut down still have operators, but I imagine we have probably 30 percent of the leases in eastern Kansas that are not operating due to bankruptcies. We don't have the funding to take care of all of them. We take care of the ones that are, environmentally, the worse problems.

Government help sought

U.S. Sen. Nancy Kassebaum, R-Kan., last week called on President Clinton to support a package of relief measures being developed by oil-state senators.

Details are still being worked out but could include ways to give small-volume producers regulatory relief and minimize their tax penalty, said Derek Schmidt, one of Kassebaum's legislative assistants.

``We're looking at not only thousands and tens of thousands of jobs in Kansas and other states, but permanently losing a domestic energy source,'' Schmidt said. ``Once it's plugged, it's never economically viable to redrill. It makes sense environmentally to pump existing wells rather than drill new wells. And there's always the issue of dependence on foreign oil.''

Scientists with the Tertiary Oil Recovery Project, the research arm of the oil operators in Kansas, have shifted their focus and are now trying to help Kansas oil producers survive until prices rebound.

``We're helping with the technology,'' said Schoeling, the project's liaison engineer. ``We're looking for ways to reduce operating expenditures, so they can produce more efficiently.''

The efficiencies include cutting electricity costs and redesigning pump units, he said.

Finding ways to cut costs will help, but only an increase in oil prices will keep the remaining producers alive.

Meanwhile, they watch with some irritation as the U.S. government spends millions of dollars to develop the Russian oil industry and to purchase 1.5 million barrels of North Sea oil for the nation's strategic reserves, Powell said.

``When the auto industry was in dire shape, if the U.S. government had spent $30 million to buy Toyotas, what would the political ramifications have have been of that?'' he said. ``I'm sure they'd say they bought the cheapest oil they could. I'm sure Toyotas were the cheapest. But you wouldn't find the government doing that. ... Nothing, absolutely nothing, is being done about the oil industry, even though thousands of people are losing their jobs.''

If farmers can get government subsidies to keep them afloat, why can't the government lend a hand to oil producers, Sell wonders.

``The only difference between us and the farmers and earthquake victims, they all get subsidies and we don't,'' he said. ``I've got a lot of oil I haven't produced, if they want to give me 10 cents a barrel for not producing it.''

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