Wichita Kansas drilling rigs that once could not punch holes fast enough when oil prices hit record highs less than a year ago are now sitting idle, their crews laid off. Tax revenues in oil-rich counties are plummeting. Marginal wells are shutting down.
With the world awash in oil supplies and oil prices down, states like Kansas are among the first to feel the economic aftershocks in its oil industry. Nearly 80 percent of the state’s oil production comes from small wells averaging slightly more than two barrels of oil per day — making them more vulnerable to steep fluctuations in oil prices.
Last summer, Kansas had 109 drilling rigs running in the state. By December, the number was cut in half. About 20 are probably now left, said Ed Cross, executive director of the Kansas Independent Oil and gas Association.
“That is a big drop,” Cross said.
Or put another way, each rig employs a crew of 13 workers, said Tom Casey, manager of Express Well Service and Supply Inc. in Victoria. That figures to $56 million in lost wages just for the lost drilling jobs.
That number doesn’t count the water haulers, seismic crews, surveyors, geologists, petroleum engineers that work on drilling projects, nor the companies that supply rigs the cement, tools and other products needed to drill new wells.
“All of those people, when the rigs shut down, they have to lay off people too,” Casey said.
In addition to the idled drilling rigs now parked across Kansas, about a third of the well service rigs that repair and maintain the wells are also down, Cross said.
In Kansas, operators are shutting down their money-losing marginal wells. Producing wells that break down due to mechanical problems are simply not repaired.
“It is not a big percentage as of yet, but the more this lasts the more it is going to happen,” Casey said. “Once a well is shut down it might take a lot of money (to reopen it) if equipment needs to be replaced.”
The average price paid for a barrel of oil last year in Kansas was $93. That compares to $66 a barrel paid in 2007 and an average of $33 a barrel during the first two months of this year.
“What happened is the pendulum swung too high when it got to $135 a barrel — that is what Kansas crude was on July 14 of 2008. That was too high. I didn’t talk to an oilman who thought that was a good thing. They all thought that was too high for the economy,” Casey said.
“But the price we got now — Kansas crude dipping there a couple of times below $25 since the first of the year — the pendulum is swinging the other way and that is too far. So somehow it needs to come back to the $50, $60, $70 range so people can afford to go out and look for oil again,” he said.
Nowhere is the pain likely to be felt more than in Ellis County, the state’s biggest oil producing county. About 8.5 percent of the oil produced in Kansas comes from there.
The other top producing counties are all located in northwestern Kansas: Rooks County with 5.4 percent, Russell County with 5.3 percent; Barton County with 5.2 percent and Ness County with 4.8 percent.
Casey, who put together a recent presentation on the economic impact in Ellis County, gave a grim forecast based on tax appraiser and industry figures:
• In 2008, the county had about 2,300 producing wells producing 3.1 million barrels of oil with a value of $296 million.
• Projections for 2009, assuming oil prices remain at levels seen during the year’s first two months, estimated the value of production in Ellis County would drop to $94 million.
• Farmers, who receive one-eighth of revenues for oil produced on their land, would lose an estimated $26 million this year.
• Based on current oil prices, property tax revenues in Ellis County are expected to drop by one third in 2009 from last year’s levels of $8.6 million, creating roughly a $2.8 million shortfall in oil tax revenues for the county. Last year, the oil industry accounted for 27 percent of total property taxes paid in Ellis County.
The Kansas oil industry was also hit particularly hard last summer when Tulsa, Okla.-based SemGroup declared bankruptcy, Cross said. SemGroup purchased 20 percent of the oil produced in Kansas, leaving producers scrambling to collect $140 million for unpaid oil the company purchased during seven weeks last summer.