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News Release, Kansas Geological Survey, Sept. 18, 1998

Lower Prices Taking Toll on Oil Business

LAWRENCE--Lower oil prices may be good news for gasoline buyers, but they're taking a toll on the state's petroleum producers, according to geologists at the Kansas Geological Survey, based at the University of Kansas. And things don't promise to change anytime soon.

Oil prices in the state have plummeted since last spring, dropping from around $20 per barrel to around $10 for Kansas crude. The drop, researchers say, is yet more fallout from the rest of the world's economic problems.

"There's lots of oil on the market from places like Russia and Indonesia, countries that need hard currency," said Tim Carr, head of the Survey's petroleum research section. "The U.S. economy doesn't influence oil prices all that much. When the rest of the world's economy grows, demand will grow. Until then . . ."

Demand has dropped at the same time that supplies have held steady or increased.

"Eighteen months ago, global demand and supply were about in balance, and prices were slowly edging up," said Survey director Lee Gerhard. "But with the downturn in Asian economies, world-wide demand has dropped by more than a million barrels a day, and supply has held steady."

Much of that supply is the result of new technology, which has been aided by the evolution of increasingly powerful computers. In particular, scientists point to three-dimensional seismic studies (known as 3-D seismic, in the oil industry), which provide a detailed image of huge blocks of the subsurface. This technique has been applied extensively throughout the world; in southwestern Kansas, companies have used it to give a more accurate image of the huge Huogoton natural gas field and petroleum reservoirs that may lie beneath it.

Horizontal drilling has also made the world's oil fields more productive. With this technique, wells are drilled down and then sideways into horizontal layers of oil-bearing rock rather than simply drilling straight through them, as in conventional wells. Horizontal drilling has been used on a handful of Kansas wells thus far.

Other technologies, such as using carbon dioxide to push additional oil out of rocks, have yet to be widely applied in Kansas, but hold the promise of additional production.

All of these techniques have boosted production throughout the world, however, and that, tied with lessened world-wide demand, led to today's lower oil prices.

"With crude at $10 a barrel, that means oil costs about 24 cents a gallon," said Carr. "That's less than you'd pay for a gallon of water at the grocery store."

The upshot of lower prices is a dramatic impact on the Kansas oil scene, slowing exploration for previously undiscovered deposits and affecting the production of known oil. Oil exploration has all but halted in the state. Today, only 10 rigs are actively operating in Kansas. Even during slow oil times in the late 1980s, the rig count hovered around 30.

"We usually drill around 15 wells a year," said John O. Farmer, independent geologist from Russell, in the heart of Kansas oil country. "We won't drill any now until we see what happens. I'd love to be drilling some wells, but right now it doesn't make any sense."

It's a little early to know how much the state's oil production has dropped in response to lower prices. Production in the state was around 42 million barrels last year. Production has slowly declined in recent years, mostly because many of the state's oil fields are relatively old (or "mature" in the language of the oil business). Lower prices are undoubtedly accelerating that decline in production.

More than 90 percent of Kansas oil wells are stripper wells, those that produce less than 10 barrels of oil per day. Many of those wells bring up more salt water than oil, salt water that must be reinjected back into the deep subsurface. Most Kansas producers figure that the average cost of lifting water and oil from the subsurface is around $15 a barrel.

"Prices have averaged $12 a barrel for oil this year," said Farmer. "As a result, many lower-producing wells are shut down, and if they stay down, they may develop problems and never be returned to production."

The situation doesn't show any immediate signs of improving.

"It's difficult, short-term, to see the way out of this," said Farmer. "I'm not sure there's much hope of recovery this year. The oil economy is much worse than it was in 1986. People are losing jobs and companies are going out of business. In the long run, cheap oil produces lots more bad than beneficial for the Kansas economy."

Links of interest to this article:
Oil and Gas Information page from the Kansas Geological Survey
Kansas Independent Oil & Gas Association
North Midcontinent office of the Petroleum Technology Transfer Council (PTTC)

For more information, contact Tim Carr, (785) 864-3965
Story by Rex Buchanan, (785) 864-3965

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