Winners and losers among Kansas energy producers

02/28/2013 3:13 PM

02/28/2013 3:13 PM

Energy producers in Kansas were sharply divided into winners and losers last year, and it looks like that won’t change in 2013.

Kansas oil producers have been rewarded by oil prices in the $70 to $95 a barrel range. That should translate into another year of accelerated production.

Wind energy had a crazy building year in 2012, as developers doubled electrical generating capacity ahead of a change in federal tax incentives. Those incentives were renewed at the beginning of the year and more wind farms are expected this year and next.

But energy economics have not been kind to the state’s natural gas producers – who are often also its oil producers – as low prices caused them to cut back.

And the state’s once booming ethanol industry will continue to shrink as it is boxed in by declining demand and high costs.

Oil

Oil and natural gas are both being pulled out of the ground in ever greater amounts because of horizontal drilling and fracking. The big difference is that oil can be sold overseas, while gas is distributed primarily in the U.S.

In Kansas, oil producers filed 6,861 oil drilling permits in 2012, up more than 25 percent over 2011. As a result, drillers found 43 million barrels, up 4.2 percent over the year before, according to Ed Cross, president of the Kansas Independent Oil and Gas Association.

About half of that gain in production came from horizontal drilling, which accounted for 292 wells last year.

Horizontal drilling is expected to continue to grow in 2013. But some companies say that early rosy forecasts that it would create tens of thousands of jobs were overplayed. Some complain privately that the oil-bearing layers undulate too much to keep the 4,000-foot-long bore hole in the oil-bearing rock the whole way. The result is too much water and not enough oil. In November, SandRidge Energy, which has the biggest position among horizontal drillers, told analysts that it has seen oil production in the wells tail off more quickly than expected and produced more gas and less oil than expected.

But horizontal drillers aren’t giving up on Kansas. While a few companies are pulling back, others are expanding. SandRidge alone is saying that it plans to about double the number of wells it will drill in Kansas, to 200.

Natural gas

Over the last two decades, the number of gas wells in Kansas has steadily risen, according to the Kansas Geological Survey, even as the amount of gas produced from them has fallen.

But falling gas prices halted that trend. In 2012, gas prices were generally between $2 and $3.50 per million BTUs, and the number of gas wells drilled was down about 3 percent from a 2009 peak.

Jim Williams, of industry consultant WTRG Economics, said he thinks natural gas prices nationally have hit bottom and will rise in the second half of the year. And that, he said, will spark more drilling.

“The current rig count is not enough to support the price,” Williams said. “By the second half of the year, as the price passes $4, you will start seeing some decent activity.”

However, he cautioned, the bottleneck at the pipeline hub at Cushing, Okla. will serve to cap some of the benefit from rising prices for Kansas producers.

Wind

Because federal tax credits and other incentives were set to expire on Jan. 1, wind farm developers stampeded into Kansas to make sure their projects were operational by the end of 2012. The state added more than 1,000 megawatts of capacity.

Although Congress ended up renewing the incentives, the wording is that construction only has to start in 2013, not finish. That allows developers to break ground by December and then finish projects later.

A few wind farms are far advanced. TradeWind Energy, based in Lenexa, has said it will build Buffalo Dunes, a 200-plus megawatt wind farm southwest of Garden City on 42,000 acres of land area in Finney, Grant and Haskell counties.

Others are in earlier stages. BP Wind Energy said it is planning an expansion of its Flat Ridge complex, with the 130-megawatt Flat Ridge 3 wind farm. It is also planning the 150-megawatt Ninnescah Wind Farm, about 20 miles northwest of the Flat Ridge complex. And Ford County may see two new wind farms started in 2013.One of those Ford County projects, Western Plains wind farm, will come in somewhere between 200 and 400 megawatts.

The Kansas Legislature is considering a bill that would eliminate the renewable energy standard, a state mandate for large utilities to have 20 percent of their power from renewable sources by 2020. The elimination won’t have much impact because most utilities already have invested heavily in wind energy, said Scott White, founder of the Kansas Energy Information Network.

The new wind farms being built will sell their electricity to utilities farther east.

But, White said, eliminating the renewable energy standard could hurt Kansas’ reputation within the wind energy industry.

Ethanol

The ethanol industry, which is tied to government action, is expected to shrink this year.

Ethanol, which is typically made from corn, depends on a government requirement that gasoline sellers mix in about 10 percent ethanol. Ethanol makers saw blistering growth in manufacturing capacity and productivity over the last decade, but a few years ago the industry hit something called the blend wall when it produced enough ethanol to equal 10 percent of the nation’s gasoline supply.

And that’s where it stands today. The industry now grows and shrinks as demand for automobile fuel rises and falls, and lately it has fallen because of fewer miles driven and greater automobile efficiency.

Last year, the Environmental Protection Agency approved allowing the ethanol mix to rise from 10 to 15 percent, but EPA regulations give the petroleum blenders control over whether to go that high. And, said David Vander Griend, president of ICM, an ethanol plant operator based in Colwich, they don’t want to. The oil industry objected to the increase, citing concerns over engine performance and wear. Vander Griend said it is because it cuts into oil companies’ market share.

He said he met with senior EPA officials last week and was told not to expect any help from the government to push fuel blenders to raise the ethanol percentage. The result: stagnation, or worse, at least in the next few years.

Ethanol has also has been targeted by industries that rely on corn, particularly the livestock industry and human food processors, who compete with ethanol facilities for corn, driving prices higher, especially through the past year’s drought.

And the discovery of massive amounts of gas and oil in shale in the U.S. has blunted much of the ethanol’s political appeal as home-based energy.

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