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Archive for Wednesday, March 31, 2004

Higher prices spark resurgence in oil patch

March 31, 2004

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High oil prices are causing plenty of grousing at the pump, but they are cause for celebration in the Kansas oil patch.

"We've got a lot of drilling going on, a lot of activity," said Tim Carr with the Kansas Geological Survey, based at Kansas University in Lawrence. "When prices are good, you see people trying more unconventional things and reopening the older, less productive wells."

Experts say higher crude oil prices are the reason oilmen are looking for new sources of oil and natural gas. The higher prices also help them afford investments in new technology such as three-dimensional and four-dimensional seismic exploration equipment, drilling equipment for horizontal wells, gel polymer treatments for old wells and injections of carbon dioxide.

"We've actually seen an increase in production in both oil and natural gas," Carr said.

Wells contain a finite amount of oil and natural gas. As oil wells get older, their flow slows and eventually they produce greater amounts of water and smaller amounts of oil. The same is true of natural gas wells.

That natural decline would amount to about 9 percent to 13 percent a year in production nationwide, if no new wells were drilled.

"Just holding production steady means a lot of drilling is going on," said Edward Cross, executive vice president of the Kansas Independent Oil & Gas Assn. In 2002, oil and gas production was a $3 billion-plus industry in Kansas.

Landowners get one-eighth of revenues generated at the wellhead as a royalty. In addition to the income tax the state makes on oil profits, it collects a special tax of 4.3 percent that goes into the general revenue fund, said Alan DeGood, president of the association.

As busy as the oil patch is now, it could be even busier, said Jim Daniels, president of Murfin Drilling of Wichita.

Factors holding back growth include the high cost of insurance, particularly workers' compensation, Daniels said.

The state also lacks enough geologists, geophysicists and people who know how to operate drilling rigs, Carr said.

He said prices would have to remain high to attract such industry specialists. When crude oil prices reach $25 a barrel or more, profits are sufficient to encourage exploration, Cross said. Friday's price for Kansas crude was $31 a barrel.

"Prices were down to $8 in 1998," he said. "That isn't enough to pay for operating many Kansas wells."

Marginal wells may produce only two barrels of oil a day. The lifting cost -- the money it takes to bring the oil to the surface -- ranges between $10 and $18 to $20 a barrel.

According to the Kansas Corporation Commission, 512 wells were drilled in Kansas in 1998, when the average oil price for the year was $11.23.

In 2003, the number of wells drilled jumped to more than 1,785 as oil prices averaged $25.25 for the year.

"If the prices stay up, we'll see extra rigs being built and extra people coming in," Carr said.

In the meantime, oil explorers hope the new technologies, such as one Murfin Drilling is working on with KU, will help them capitalize on the high crude prices.

Murfin Drilling is experimenting with carbon dioxide injections to increase production in older wells in the Hall-Gurney field near Russell.

Last December, scientists injected carbon dioxide recovered at the Russell ethanol plant into specially selected sites in the field.

If the procedure, which has been successfully used elsewhere, works in Kansas, the carbon dioxide will force pools of oil trapped in rock formations into existing production wells, increasing the amount of oil pumped from the wells.

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