News Column

Kansas Could See New Oil Boom

Page 4 of 1

Is Kansas about to hit the jackpot?

Gov. Sam Brownback greeted them and got to the point: Vast amounts of oil and natural gas are trapped in a rock formation in the state known as the Mississippi Lime. And energy companies are beginning to work it.

If the formation gushes as much oil and gas as hoped, Brownback said, it will help move the U.S. toward energy independence and boost the Kansas economy with billions in investment and income and thousands of good-paying jobs.

"This is a great day," Kansas Commerce Secretary Pat George told the conference, organized to talk about how small businesses could prosper from the possible boom.

Mark Richardson, a retired Kansas farmer at the conference, said "there are very few people I know who would be reluctant to have an oil well on their property. It's a definite yes about the optimism."

It's not yet known just how much oil and gas could be retrieved from the Mississippi Lime formation, but many hope it could be the biggest thing for the Kansas energy industry since the state's oil production peaked in the 1950s.

Some residents have already hit the jackpot. Energy companies have leased drilling rights on millions of acres stretching across much of southern Kansas and jutting into the northwest part of the state. About $2 billion has been poured into leases.

But the real money will come from the drilling the wells, already under way. The number of permits for horizontal hydraulic drilling, or fracking, used to help unlock the energy in the underground rock, has tripled since January.

A handful of southern Kansas counties are already seeing full hotels and packed restaurants. Job fairs are cropping up and companies that serve the energy industry are seeing a pop in business.

Kiowa, Kan., which a few years ago was told it and other small towns in the region were certain to decline, sees a lifeline.

"We've been praying for growing pains," said Mayor Brandon Farney. "It's an exciting time."

Many hope for a boom like the one that has reshaped the economy of North Dakota, which is now producing more than 700,000 barrels of oil a day, making it the second largest producer in the United States behind Texas. North Dakota will outclass Kansas in energy production, the experts say, but the increased production in Kansas will join North Dakota's to help wean the U.S. from oil imports.

"Kansas is going to be a major player in this," Brownback said.

Despite the optimism, there are still questions about just how big it is going to be.

A learning curve

The Mississippi Lime formation was created 330 million years ago. It's a limestone layer stretching under more than 17 million acres in northern Oklahoma, much of Kansas and a small corner of Nebraska. In Kansas, the limestone is up to 1700 feet thick at a depth of roughly 3,500 to 6,000 feet.

The energy companies are in the middle of a learning curve in how best to drill and recover the oil and natural gas from the "Mississippian play," as it's called in the industry. They, for example, have to find the sweeter spots to drill in the formation.

But in what could be the game changer for Kansas, the oil and natural gas are at relatively shallow depths, making for less costly wells. A Kansas well, for example, costs about a third as much as a North Dakota well.

So even if a Kansas well is less productive, it can still be very profitable. SandRidge Energy of Oklahoma has leased 1.3 million acres in Kansas and claims it's able to get a 55 percent financial return on wells.

"It's a very low risk area that has a high rate of return," CEO Tom Ward said in a conference call with analysts.

The company plans to spend $700 million in Kansas next year and drill 180 to 200 wells.

After being absent from Kansas for nearly three decades, Big Oil has also decided to return.

Shell Oil has leased about 700,000 acres and drilled a dozen wells so far with mixed results. But a company executive believes there is a "huge upside" in Kansas that could last for decades.

"This is for real," said David Todd, vice president of production for the Shell Exploration & Production Co.

How much oil and natural gas the drillers will find in the Mississippian play is difficult to peg because of the lack of estimates.

But IHS, a global information company whose vice chairman is Daniel Yergin, the author of the Pulitzer Prize-winning book on oil, "The Quest," recently penned a number for some of its clients.

IHS estimates that the formation has 3.6 billion BOE, which stands for barrels of oil equivalent. BOE includes barrels of crude oil and converts natural gas from cubic feet, its typical measurement, into barrels that have the energy equivalence of oil.

North Dakota's Bakken field, by comparison, has reserves of 12.4 billion BOE.

But the Mississippi Lime formation "doesn't have to be a Bakken to be a big deal," said Rex Buchanan, interim director of the Kansas Geological Survey.

Already adapting

Most of the drilling so far has been in Kansas counties along the Oklahoma border.

Farney, the mayor of Kiowa, flies his own plane and at night sees a landscape around town that has been transformed by drilling rigs lit up and operating 24 hours a day.

"At night it used to be dark in the country and it's not anymore," he said.

The Center for Applied Economics at the University of Kansas said in a recent report that the state's economy should see $116 million in extra income from new jobs and royalties in the first quarter of 2013. If there is a full-blown boom, that would soar to $1.1 billion a quarter by 2022.

The report sought to be conservative by assuming there would be 7,500 wells drilled, although there could be more.

State officials have also traveled to North Dakota for advice. They saw a state overwhelmed.

Oil workers making six-figure incomes are living in homeless shelters because of the lack of housing. Many restaurants have to open at 4 p.m. because of a labor shortage that leaves high school students the only ones available for the jobs. Road and bridges are in bad shape because of heavy truck traffic.

Nothing like that is happening in Kansas yet, although in some parts of the state the traffic is rising and motels haven't had a vacancy for months.

Richardson, the retired farmer, still owns about 1,000 acres near Hutchinson. He remembers that not long ago the typical lease payment for drilling rights was $3 an acre and one-eighth of the price of the oil recovered. He recently leased the drilling rights to part of his land for $300 an acre and one-sixth the value of the oil produced.

Another landowner nearby got a bigger lease payment and the potential boom has become "coffee shop talk," Richardson said.

"It's hard to find anyone that is a naysayer about it."

At a recent job fair in Hutchinson, companies were looking for drilling rig workers at wages of $22 an hour and pipeline welders at $32 an hour.

Shawn Rosenberg, 39, left his job as a stocker for Coca-Cola to study natural gas technology at a community college in Great Bend, Kan. He thinks he can get an entry-level energy job that will pay at least $35,000 a year.

"In this area that is pretty good," he said. "I want to have an opportunity to move up."

Kiowa, with just over 1,000 people, was a starting point for those seeking free land in the Cherokee Strip Land rush to Oklahoma in 1893.

Today, it's seeing another opportunity. One energy company gave the town $72,000 for a digital projector for its movie house and another has paid for equipment for its police and fire departments.

But the town, although optimistic, is taking a cautious stance. The energy companies have told Mayor Farney they will let him know when the energy boom is for real. So far, he said, he hasn't heard back.

Faye Conaway and Bob Pedigo are partners spending $800,000 on a new 20-room motel in Kiowa that will open next year. The motel will serve workers and others associated with the energy business flooding into the area.

"I think there is a future here," said Pedigo. "But if the oil business goes away, all bets are off."

A difference maker

Wayne Woolsey owns Woolsey Energy Corp. in Wichita, which has a deep history as part of a Kansas oil industry.

The state's best days were in the 1950s and early 1960s. Crude oil production peaked at 124 million barrels of oil per year and 883 billion cubic feet of natural gas.

In 2011, the state produced just 41.5 million barrels of oil and 322 billion cubic feet of gas. The average Kansas oil well now produces less than 3 barrels of oil a day.

In the mid 1990s, Woolsey decided to focus on some southern Kansas counties over the Mississippi Lime.

The formation was well known to Kansas oil companies. For decades, they had drilled vertical wells there. For some of the vertical wells, they had even used fracking, which uses pressurized water, chemicals and sand to fracture rock and release oil and natural gas.

Fracking actually has a long history in Kansas. It was the first state to try the method -- in 1947 -- and over the years deployed it in more than 50,000 vertical wells not only in the Mississippi Lime but other rock formations.

Energy companies have now developed horizontal fracking which is far more productive. It has become controversial in many parts of the country because of fears that it will contaminate ground water. So far, studies have given support to both sides of the debate.

Although vertical fracking in the Mississippi Lime wasn't that productive, it left behind a record of production and geological information that is helping energy companies study the formation.

Woolsey, working with a geologist, became convinced there were several hundred million barrels of oil that could be recovered with horizontal fracking in just a few counties in southern Kansas.

He drilled three wells and each was a disappointment. The fourth wasn't.

It came in at 30 barrels an hour. It soon dropped off but still produced about 350 to 400 barrels daily, even though it was shut off part of the day. The well also produced a million cubic feet of natural gas a day.

Woolsey credits the success to tweaks in drilling and changes in the frequency of the fracking.

The Mississippi Lime has a complex geology that can change in a short distance, and the amount of oil and natural gas in it can change as well.

"You have to learn the rock," he said.

A good 'play'

Travel a few miles southwest of the city of Medicine Lodge and you wonder if you're still in Kansas. The area, known as the Gypsum Hills, has flat mesas, high hills and red soil. It also has oil wells.

In November, Tug Hill Operating Co. was wrapping up drilling with a 164-foot rig that had been working around the clock. The rig's 21 workers drilled 5,500 feet down into the limestone and then 5,000 feet horizontally to expose more of the rock to fracking.

"It's pretty easy drilling," said Jay Dennis, the company's drilling superintendent.

Tug Hill is a Fort Worth, Texas, company that in 2010 formed a unit with a group of partners that includes oilman Boone Pickens. The unit focuses solely on Kansas, and has leased 850,000 acres and plans to add 50,000 more. It has drilled 10 wells so far.

The information gathered from the vertical drilling in the Mississippi Lime was convincing enough for a major investment that is now north of $250 million.

"This is a good place to operate," said Michael Radler, CEO of Tughill.

With the drought, finding enough water for the fracking can be an issue. Electricity, needed to power the pumps for years, can also be a problem. The company is working with electric utilities and cooperatives and is also mulling whether to build mini power plants at some of its wells.

But the economics of the Mississippi Lime are as good as expected. The well drilled in the Gypsum Hills cost $3.2 million compared to more than $8 million the company is spending for a well in the Eagle Ford field in Texas, where oil and natural gas is being recovered from shale.

A Kansas well will be profitable down to $55 a barrel, making it one of the best plays in the country. Oil was recently selling in the state for $89.

"I think optimistic is the right word," Radler said. "We like what we see."

So what should Kansans think as all of this unfolds?

It could take one to three more years before the full dimension of any boom is known, but there are already some signs of how it will go.

Ed Cross, president of the Kansas Independent Oil & Gas Association, said not all areas of the Mississippi Lime will be deemed productive enough.

"What we may have is a rolling boom," he said.

J.P. Dick, a petroleum engineer and owner of Pinnacle Energy Services in Oklahoma City, said if he had $3 million to drill one well in the Mississippi Lime he wouldn't do it. But if he had enough to drill 10 wells he would because the odds are several will be productive.

He said 1,100 wells have been drilled in the formation with most of those in Oklahoma. Production figures for 860 of the wells show an average after 30 days of production of 297 barrels of oil and natural gas a day, worth about $20,000 in today's market.

Nevertheless, the Mississippian number is significant, and as Brownback recently said, the "proof in the pudding" about the state's prospects is that the energy companies are investing a lot of money.

SandRidge Energy has drilled 91 wells in Kansas and plans to more than triple the number next year and spend another $700 million. In a recent presentation to investors, SandRidge executives said they have 64 producing wells in the state. The numbers were similar to what Dick reported. Just under half of SandRidge's production was oil, which is currently much more profitable than natural gas.

The results were good enough, when combined with the low cost of the wells, to be very profitable. In a November presentation to investors, SandRidge CEO Ward said the company recently decided it would try to sell some prized energy assets in Texas so that it can concentrate more on the Mississippi Lime.

"The problem with two fantastic plays is trying to feed them both," he said. "We can focus on the higher growth Mississippian."

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Distributed by MCT Information Services

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