September 29, 2011

Technological advances revive Kansas oil fields

MEDICINE LODGE — There's a new land rush on the Oklahoma state line, but this time it's not settlers stampeding south, it's oil companies flowing north.

MEDICINE LODGE — There's a new land rush on the Oklahoma state line, but this time it's not settlers stampeding south, it's oil companies flowing north.

Expensive new technologies that bring new life to old oil fields have prompted several large oil companies to buy up leases on hundreds of thousands of acres in Kansas.

In what may be the most significant move, Shell Oil bought two very large lease tracts in Kingman, Harper and Barber counties from Wichita oilman Wayne Woolsey, the first time the company has been back in Kansas in two decades.

Chesapeake Energy and SandRidge Energy, major independents based in Oklahoma City, have also entered the state in a big way. Others are said to be here already or rumored to be on their way.

Oil company landmen have swarmed landowners and county offices in the bottom two tiers of Kansas counties. They are trying to lock up the most promising areas for exploration.

A normal day at the Barber County Register of Deeds office in Medicine Lodge was four or five people, said deputy register Kathy Armstrong.

This year, 20 people a day camp out in the office searching through records for the names of landowners. One day, she said, they had 40 people crowding in the office and sprawling out into the hallways.

"We keep thinking there can't be any more, but it just keeps growing," she said.

That wave may be cresting, at least in those counties. Now the clock starts ticking because the leases typically run for three years.

Dean Pattisson, exploration and production manager for Woolsey Operating Co., estimates out-of-state companies have spent $2 billion on land leases in Kansas this year. Lease prices have risen 10 times, even 100 times in a few places, to well over $1,000 an acre in the hottest areas.

The next phase is drilling. And, already, crews hired by those companies have started putting in wells.

As production cranks up, money will flow to local oil services companies and retailers. And, in another year, taxes on oil production will boost revenues for hard-pressed state and local governments.

Gov. Sam Brownback, on a tour of the area Tuesday, said he was encouraged, but was cautious about the size of the ultimate impact.

"It looks large, but we'll see what comes out of this," he said. "These rates are higher than anybody has seen for a long time."

What's different

Kansas' oil production peaked in the late 1950s and has declined steadily ever since.

Kansas producers have continue to drill — more when prices are high and less when prices are down — but the amounts recovered have gotten smaller over time.

Drilling technology has also continued to evolve to better recover oil left in existing oil fields, and to reach ever harder-to-exploit deposits.

In the last five years, advancing drilling technology and techniques — and high oil prices — have spurred development of massive new fields deep below North Dakota and south Texas. Chesapeake recently announced it has locked up 1.2 million acres of eastern Ohio for oil production.

Horizontal drilling — in which the drill bit is manipulated so that it cuts at an angle until it runs level through oil-bearing rock — isn't new. Nor is fracking, short for fracturing, where water and sand are pumped down a well at high pressure to fracture oil-bearing rock and improve flow.

But the two together, along with further refinements, can dramatically improve the amount of oil collected from formations.

South of Medicine Lodge, Woolsey just finished a horizontal well.

The special crews brought in used advanced technology and long experience to steer the drill bit into the relatively thin layer oil-bearing rock 4,700 feet down and then stayed in that layer for 4,000 feet.

After the hole was drilled, the frack was done by a large crew running a fleet of powerful pumper trucks that forced 4,200 gallons a minute of water — enough to fill an average swimming pool in eight minutes — plus sand and a small amount of potassium chloride. The fluid, pushed through holes in 30-foot to 80-foot sections of the steel pipe, cracked the rock at the edge of hole. The sand is forced into the cracks to hold them open.

The cost of such a well is four to six times the cost of a vertical well. SandRidge puts the cost of a horizontal well and supporting infrastructure at $3 million.

Whether spending that kind of money on a well in Kansas is worth it is really the $2 billion question, but hopes are high.

The geological formation the oilmen are mining is a layer called the Mississippian limestone. Mississippian limestone covers most of Kansas and stretches south into Oklahoma, where the layer is thicker.

SandRidge, in a recent presentation to investors and analysts, said it estimates that its wells in the Mississippian limestone will average 300,000 to 500,000 barrels of oil or its equivalent in other hydrocarbons.

At today's price of $80 a barrel for oil, each well would produce $24 million to $40 million over its lifetime.

Economic impact

It's too early to know exactly what the economic impact will be, but probably large and long-lasting.

The cash inflow from the leasing has already been robust and will mean a lot of farmers paying off loans and buying new equipment. That money will ripple through the economy, paying for dinners out, shopping trips and new cars.

"I think all of us in community are hoping for any type of growth from anything," said Lou Lynne Moss, owner of the Flower Shoppe in Pratt.

In a year, state and local governments will start collecting a piece of the oil revenue and can use that to fund better services.

And, all of this activity will require more oil workers, which could mean reopening training programs in the area and lead to more high-paying jobs.

That's the good news, but beyond that, the picture grows more complicated.

While it takes more people more time to drill and finish a horizontal well, many of those companies are from Oklahoma City or Dallas.

Many of the local oil services companies, one of the backbones of the local economy, may not see much impact at all because they are too small, or not connected with the major oil producers.

They will largely continue to rely on the existing mom and pop Kansas oil producers drilling old-fashioned vertical wells, said the manager of one oil services company who asked not to be named.

"As the long as the independents continue drilling we will do fine," he said. "It won't help us, but it won't hurt us."

But that's a big if. As the price of leases has skyrocketed, the mom and pop drillers have been priced out of the market for new sites. They'll have to move north to find less expensive land.

But that might not be the worst thing. Mississippian limestone undergirds about 80 percent of the state, although the thickness of the oil bearing layers vary. Landmen are already making trips to more northerly counties.

But, overall, production in the state is likely to go way up. That's good news for Kansas.

"Unless there's a price collapse, the number of wells will just grow," said Woolsey's Pattisson. "We expect it to have a huge economic impact."

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