Big Oil pushes small operators aside

Among all the smiles over the black gold rush in southern Kansas, one group stands grim-faced: existing Kansas oil and gas producers.

Last year’s arrival of large oil companies with their fat wallets and horizontal drilling rigs has forced up the cost of exploration for some mom-and-pop operators, cut their profits and sown conflict with landowners.

After Big Oil and Big Gas left Kansas in the ’80s, the oil and gas industry in Kansas consisted of dozens of local, family-owned companies. Some are large by Kansas standards, but most are small.

Year after year, the mom-and-pop operators consulted their maps and well logs, then knocked on a farmer’s door. They drilled more than 5,000 wells a year for decades.

In recent years a typical contract for mineral rights was a bonus of $10 or $25 an acre, plus 2/16ths of the revenues from the well.

Although SandRidge Energy, Chesapeake Energy, Source Energy MidCon, Unit Corp., Tug Hill Operating, Reeder Energy, Shell Oil and others are still assessing the feasibility of the play in Kansas, they already have spent hundreds of millions of dollars acquiring mineral rights on millions of acres. They did this by paying landowners signing bonuses of $500 or $1,000 an acre, plus 3/16ths of the well revenues.

They believe they can more than earn that back by using horizontal drilling and multi-stage hydraulic fracturing to extract larger volumes of oil than is possible by conventional vertical drilling.

It’s early yet, and many aren’t affected. Doug Bramwell, of Bramwell Petroleum in Spivey, said he hasn’t run into any problems because he works his own leases.

“We stay pretty busy with what we’ve got,” he said.

But others say the newcomers are already creating havoc with their operation.

“It’s changed our economics something terrible,” said Dick Schremmer, president of Bear Petroleum in Haysville.

Most of the large out-of-state companies have access to the capital markets and global investors such as hedge funds and private equity groups. The biggest player in Kansas, SandRidge Energy of Oklahoma City, has taken on massive amounts of debt to fund its foray into the region.

In others words, said Shremmer, they’re gambling with other people’s money.

“They’re not like the independents, who have a dog in the hunt plus have to get an adequate return for their investors,” he said.

Gas vs. oil

The people who are really being hurt are those who drill for gas, said Ron Molz, owner of Chieftain Oil of Kiowa, who has both oil and gas wells.

Rock-bottom prices for gas, below $2.50 per thousand cubic feet, means drilling gas wells already counts as marginally profitable in many places. Driving the lease price up by 20 times could tip lots of projects into unprofitability.

“You will see a lot of wells shut down that won’t pay the bills,” he said.

On the other hand, Molz said, the price of oil is sufficiently high – Kansas Common went for $97 a barrel Wednesday – that they can probably keep leasing land even at these prices, if they can find it.

“It takes 25 percent of the profit right out of your pocket,” he said.

Producer vs. landowner

One of the hot emerging issues is the conflict between some mom-and-pop producers and the landowners whose land they own the mineral rights to.

In some cases, a producer might control a quarter section of land and have a single well on it pumping a few barrels of oil a day.

Leases typically allow producers to retain mineral rights as long as they continue to pump oil or gas.

But when a landowner is getting a small slice of a few barrels of oil while his neighbor just signed a contract for $1,000 an acre plus the prospect for a larger piece of more oil, the landowner might wonder if there’s a way to change the contract.

Schremmer said he is fighting a lawsuit in Sumner County in which a landowner demanded he release unused acreage on a quarter section to which he holds mineral rights.

His little stripper well takes only a few acres, he said, so he released the land the first few times as a courtesy. But he began to wonder why landowners got all the money when he had the contractual rights to the ground.

He sees the hand of landmen working for the Big Guys.

“Our friends from Oklahoma come in and get the landowners all stirred up,” he said. “They should be coming to me directly to work this out.”

No whining

But many people in the industry want to make it clear that they aren’t complaining about their situation. People in the industry are proud of their ability to ride out whatever comes their way.

This is the free market at work, and it works best, they say, even if they are being punished by it right now.

“I’m sure there is frustration,” said Dwight Keen, chairman of Kansas Independent Oil and Gas Association. “But overall we are better served by letting the free market work.”