Prices driving Kansas oil production up, gas down

08/21/2011 12:00 AM

08/21/2011 6:16 AM

Kansas' oil and gas industry this year resembles identical twins walking in opposite directions.

These are good days in the oil business. Generally high global oil prices — although falling in recent weeks as the global economy suffers — and new technology have re-energized the domestic oil industry. Drilling and production are up in the country and in Kansas.

On the other hand, low prices for natural gas, now around $4 per thousand cubic feet, is dampening interest in new wells.

Prices are driving exploration. Nationally, oil rig counts are up 66 percent and gas rigs are down 10 percent, according to energy consulting firm WTRG Economics.

In Kansas, gas production has fallen every year since the early 1990s, last year hitting 331.5 billion cubic feet. The state's oil production has risen since bottoming in 2004, reaching 40.5 million barrels in 2010, according to the Kansas Geological Survey.

"Oil is good; natural gas is not good at all," said Dick Schremmer, chairman of the Kansas Independent Oil and Gas Association.

And hanging over the whole industry is President Obama's efforts to change federal tax rules for oil and gas drilling. His proposals would reduce the ability of producers and investors to write off expenses involved in drilling and in the depletion of production.

"We are just mom-and-pop operations," Schremmer said. "The result will be less oil and less gas produced in this country, and then we'll be more dependent on foreign oil."

Regulation, drilling technology and a hundred other topics will be on the minds of the state's oil and gas producers and vendors when they gather Sunday in Wichita for KIOGA's annual meeting. The conference, at the Hilton Wichita Airport, runs through Tuesday.

Tale of two industries

Technology and opportunity lay behind the present divergence of oil and gas production.

In the natural gas industry, production has been outstripping demand, which puts downward pressure on prices. The weak economy played a role in that, of course, but the underlying reason is the success of the industry in finding new supplies.

In just the past five years, producers using hydraulic fracturing techniques in shale formations have tapped into trillions of cubic feet of natural gas across the country. The government expects shale gas to become the source of nearly half of all gas consumed in the country by 2035, squeezing out nearly all imports.

Natural gas is largely a domestic industry with a domestic market and prices. So when trillions of cubic feet of gas are found in the U.S., it drives down the U.S. price, say experts.

Oil, on the other hand, is a global product with a global market and prices. Kansas producers compete with the Kingdom of Saudi Arabia.

That means that although oil companies are beginning to exploit massive new oil reserves in shale oil formations in Texas, Oklahoma and North Dakota, it may not mean a long-term crash in oil prices in Kansas. The developing world's hunger for oil is expected to remain fairly strong for decades to come.

Horizontal drilling

The good news for Kansas is that horizontal drilling and hydraulic fracturing is now moving here, say producers.

The industry in Kansas hasn't used the new technology until now because of its high cost. But with high oil prices and improved techniques, producers are flooding into Kansas looking for opportunities.

Several producers even said that one of the major oil company has returned to Kansas for the first time in decades.

It's too early to say for sure the impact on Kansas production, said Lynn Watney, a geologist with the Kansas Geological Survey, but it looks promising. More research, he said, is being conducted to see the best way to exploit the formations.

But the industry is responding.

Dwight Keen of Keen Oil Co. of Winfield and KIOGA vice chairman, said he is seeing tremendous interest in horizontal drilling and fracturing in the southern tier of counties from Comanche to Cowley.

"Leasing activity has been frantic in recent months," he said.

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