With the price of oil and natural gas far below what it costs to drill a well in Kansas, it’s to be expected that oil and gas drilling in the state would grind to a halt.
But a few companies are still drilling anyway. There were 21 active rigs in the state in January, down 80 percent from late 2014, according to the Kansas Independent Oil & Gas Association.
21 Active oil and gas rigs in Kansas in January
Producers are required by contract to drill in a newly acquired lease within a few years in order to maintain the land lease. It gives the landowners, who receive a percentage of the production as payment for the lease, a way to enforce their rights.
Ed Cross, president of the Kansas Independent Oil & Gas Association, said it forces producers to make a choice on which leases to let go and which to hang onto by producing. It’s a decision to run at a short-term loss in order to stay in the business long term.
“They have to maintain the leases, even though they didn’t necessarily want to drill,” Cross said.
More generally, producers said that one of the reasons they keep drilling is that it’s critical to the long-term success of the company — and the industry as a whole — to keep a nucleus of skilled oilfield workers and service companies working.
But there’s also a more calculating reason to drill when everyone else is not: taking advantage of low costs.
Many oilfield workers are out of work, and many oilfield service companies are idle. A producer could certainly get a project done for less money than in recent years.
Rod Andersen of Kansas Petroleum Resources of Wichita is still drilling a few wells in Pawnee, Ness and Rush counties, which he said are shallower and less expensive to operate in.
His investors know and understand the risk and the opportunity, Andersen said.
Nobody knows when it will come back, but everybody thinks it will come back.
Rod Andersen on prices in the oil fields
“Nobody knows when it will come back, but everybody thinks it will come back,” Andersen said. “We are in a worldwide glut. It will continue to rise in the months ahead, and we will have taken advantage of it. It won’t be immediate term, but in the longer term.”
The idea is to drill and test these wells at discounted prices and leave the good ones uncompleted so that they will be relatively easy and inexpensive to complete when the price turns up. An uncompleted well can cost $200,000 to $300,000 to drill, while a completed well is twice that.
Completing a well typically means inserting several layers of steel casing to protect groundwater and the bore hole, lining the hole with cement, perforating the lining and fracking the rock at the preferred depth.
Dick Schremmer, owner of Bear Petroleum in Haysville, said his program is to drill one new well every three months in a location he feels confident will produce. He expects to leave these wells uncompleted until production is profitable.
He said he would need oil prices to get up to $30 or $35 per barrel for a while to get him to finish his wells. Kansas Common crude oil now sells for about $20 a barrel.
There are 5,000 uncompleted wells across the state, many just waiting for the right time, he said.
What it means, he said, is that the industry is waiting for better times — and when they arrive, it won’t take long for the industry to revive.
Smart people know this won’t stay down. They’ve got some money, and they’re optimistic.
Dick Schremmer, owner of Bear Petroleum in Haysville
“Smart people know this won’t stay down,” he said. “They’ve got some money, and they’re optimistic.”
As for existing wells, producers have a lower financial hurdle to cross in making a decision because the cost of operating an existing well is much lower than the cost of drilling a new one.
The cost of pulling oil out of the ground ranges from $15 to $30 per barrel depending on the location. Even so, some existing wells may become uneconomical because of the need to replace equipment or the volume becomes too low.
But producers can’t just turn the pumps off and go home when prices fall too low. If they stop producing, they have 90 days to resume pumping, plug the well for good or get a Temporary Abandonment from the Kansas Corporation Commission.
Producers received Temporary Abandonment permits on 4,566 wells in the last year, and plugged about 2,000 more with cement, according to the KCC.
Some make the decision to shut down a well for good. It can cost between $10,000 to $20,000 to pour in the concrete that plugs a well.
But if they want to resume pumping at a later date, they must receive a Temporary Abandonment permit from the Kansas Corporation Commission.
A well can have Temporary Abandonment status for up to 10 consecutive years, after which the operator must file an exception application that could get three more years.