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Archive for Sunday, June 9, 1996

OIL PRODUCES LEFT OUT OF CURRENT GAS WINDFALL

June 9, 1996

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Prices paid to oil producers have remained constant, forcing small Kansas oil producers to reduce costs.

The recent gasoline price increase didn't improve profits for Douglas County oil producers.

In fact, President Clinton's decision to release oil from the nation's Strategic Petroleum Reserve coupled with Iraq's move back into the world oil market may ensure that 1996 will be another year of poor profits for the longtime independent oil producers, several oil company owners said.

The oil reserve was tapped last month to cut prices at gas pumps throughout the country because of a slow supply. Also, OPEC is working to ease Iraq back into the oil market for the first time since it invaded Kuwait in August 1990 and was slapped with a U.N. ban.

"When the price finally starts to go up and we begin to see some profits, everyone starts screaming about how expensive gas is," said Nick Powell, president of Colt Energy Inc., a 15-year-old crude oil production company operating in eastern Kansas, including Douglas County.

"In 1988, people were getting $15 a barrel; eight years later, we're still getting $15 or $16 a barrel. There really hasn't been an increase, but our costs keep going up."

The recent gasoline shortage brought oil prices up to about $24. Since then, prices have dropped to about $20 a barrel. The industry also saw a short increase in 1990, during the Gulf War.

But Powell contends that gas prices are at a 30- to 40-year low, if adjusted for inflation, meaning that gasoline prices haven't increased with the county's annual 2 percent to 3 percent inflation rate.

To battle poor profits for more than 10 years, Colt Energy and other companies lowered operating costs by laying off workers and almost eliminating the use of high-tech equipment. Most local companies are using the same oil-finding and monitoring techniques that were used 20 years ago.

The survivors

Most oil producers in Douglas County and eastern Kansas are small, family-owned businesses that have been around for more than 20 years. Powell referred to the business owners as a "hearty, optimistic bunch."

"Most of these guys are producing a few barrels to 10 to 20 barrels a day," said Powell, former president of the Eastern Kansas Oil and Gas Assn., who has worked with the state Legislature on environmental issues. "They are eternal optimists who believe somewhere down the road prices will have to increase."

The largest operator in Douglas County produced 105 barrels a day in 1994, and the second largest produced 44 a day. The other 21 oil companies working in Douglas County produced between .3 and 12 barrels a day.

Lester Town, a partner in Town Oil, a Paola-based company started by his father in 1948, leases wells in Douglas County as well as nine other eastern Kansas counties. When his father started out, the price of a barrel of oil was $3.

Town can remember when the oil crunch hit in 1970 and prices quickly increased because of a nationwide oil shortage. Interested companies from Oklahoma, Texas and California, as well as Canada, Venezuela and other countries, immediately set up makeshift businesses in Kansas. Production in the area almost tripled in less than 10 years.

In the 1980s, prices dropped drastically, sending many companies into bankruptcy.

"In a period of four to five months, prices fell by about $17 and devastated most oil companies," Town said.

Now all that's left is the survivors.

"Those of us who can survive are fewer and fewer," Town said. "For 11 years, the oil business in eastern Kansas has basically been in a depression compared to the rest of the economy.

"Right now, a lot of the longtime producers are selling out, retiring. They didn't think prices would stay this low this long. None of us did."

And competition is steep in the world oil market. Kansas oil companies pump fewer than 120,000 barrels of oil a day from the state's 50,000 wells but are competing with other countries, including Saudi Arabia. A well in this Middle Eastern country can bring as much as 75,000 barrels of oil a day; an average Saudi well yields about 5,000 barrels a day. Many of these wells are flowing and don't require the expensive pumping system.

Total oil production in Douglas County in 1993 was 75,000 barrels, extracted from 128 active wells, down from 85,000 barrels from 138 active wells the previous year.

Eternal optimists

After a decade of low prices, Town and Powell aren't giving up, but many oil well operators are. During the oil production peak in 1985, there were about 75 million barrels of oil produced in Kansas. Last year, 43 million barrels were extracted, according to the Kansas Geological Survey.

The development of Third World countries and growing popularity of large automobiles will propel the demand for oil, Town and Powell said. Higher speed limits approved in many states during the spring legislative session also will spur gas usage.

Town said most Americans don't have the same gas conservation ideas they had in the '70s and early '80s. And, alternative fuels, which may have been a threat to oil producers at one time, appear to be far from competitive because of costs, he said.

"We don't want to see the American public taken to the cleaners; after all, we are a part of the American public," Town said.

If gas prices increase by 10 cents a gallon at the pump, it increases the price of a barrel of oil by $3. Such an increase can make a difference in the industry, he said.

"I don't think the American public realizes how cheap our oil prices are here."

Russell Laws of the Kansas Geological Survey said statistics show that the oil business in Kansas has improved this year. More oil well operators are taking their wells deeper and discovering oil. Last year by this time, 631 new wells had been drilled; so far this year, operators have drilled 825 new wells.

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