Natural Gas

Natural gas accounts for approximately two-thirds of Kansas’ current energy production. Annual gas production peaked in 1970 at 900 billion cubic feet (bcf) and consumption peaked two years later at 600 bcf (Figure 21). Kansas is one of the top gas-producing states and remains a net exporter of natural gas primarily to the upper midwestern states. In the current year, Kansas should produce approximately 250 bcf more gas than it consumes. Gas production in Kansas is concentrated in southwest Kansas. The fields in this area of the state, including the Hugoton Field, produced 90% of the gas in Kansas (Figure 22). In 1999, gas production of 566 bcf in Kansas was valued at $1.174 billion at the wellhead. Production in 2000 is estimated at over 550 bcf and valued at approximately $2.052 billion. The increased value is attributed to significantly higher average wellhead prices during 2000 (Figure 23).

Economic conditions and government policies have affected Kansas gas production (e.g., the Energy Petroleum Allocation Act of 1973, the Energy Policy and Conservation Act of 1975, the Power plant and Industrial Fuel Use Act of 1978, and the Price and Allocation Decontrol in 1981). The dramatic decrease in gas production during the 1970's from 900 BCF per year to less than 450 BCF per year appears to be related to market distortions resulting from federal government policies (Figure 21). Subsequent decontrol in 1981 of prices, allocations, and uses of fuels, and the 1986 Kansas Corporation Commission's (KCC) modified spacing rules in the Hugoton Field contributed to a second production peak of just over 700 bcf in 1996 (Figures 15, 21). Production has declined since 1996, but appears to have stabilized at approximately 500 bcf. The production decline is attributed to decreased average reservoir pressure in the Hugoton area from over 400 pounds per square inch (psi) to under 60 psi today¹⁵. As reservoir pressures continue to decline, intelligent energy policies, significant investment capital, and new technologies must be developed to assure continued production.

Kansas gas production is dominated by the large fields of southwest Kansas (e.g., Hugoton, Panoma, Byerly, Bradshaw, and Greenwood). However, stripper gas production in Kansas is significant. Stripper gas production would generally be anything less than 90 thousand cubic feet per day (MCFPD). In Kansas, 63% of the 17,146 producing gas wells averaged less than 90 MCFPD and produced 24.1% of the gas¹⁶. As with oil, stripper gas production is sensitive to changes in the wellhead oil price and well operating costs (e.g., electricity, taxes, and wages).

In 1999, 1,015 different operators reported natural gas production. The average Kansas independent produced just less than 550,000 mcf of gas in 1999. The top ten producing companies produced approximately 78% of the gas in 1999. Seven of the top ten producing companies are independents. Kansas’ gas production is a mix of the largest integrated companies (e.g., Exxon-Mobil and BP-America) and independent companies (e.g., Anadarko and Helmrich & Payne)¹⁷.

The seasonal nature of natural gas production has changed significantly after the mid-1990’s. Prior the mid-1990’s natural gas displayed a seasonal pattern with peak production during the winter heating season (Figure 23). This variation in production was also reflected in seasonal price fluctuations. With the construction of underground gas storage, the development of futures markets, and the increased use of natural gas in electric power generation, seasonal variations in production and price have disappeared. As a result, during the summer there is no longer a cheap and plentiful supply of natural gas to power irrigation pumps in southwest Kansas.

Forecast - Demands on natural gas for electric power generation are absorbing all the excess natural gas supply during warm months, gas that traditionally was put into storage for use as a home heating fuel during the winter. As a result entered the winter of 2000-01 with very low natural gas storage levels and extremely high prices (Figures 23, 24).

The last few winters have had above-normal temperatures, masking the increased demand for natural gas resulting from the strong economic growth and the increased electrification. The winter of 1999-2000 had 3,404 Heating Degree Days (HDD). The normal winter is 3,958 HDD. As this winter appears more seasonable, wellhead prices are exceeding $9-10/MCF for periods of time. As storage levels approach historically low levels, the ability of underground natural gas storage facilities to meet peak demand will be significantly degraded¹⁸. By using natural gas to solve an electric supply problem, we have creating a gas supply problem.

Agriculture in western Kansas depends on natural gas to run irrigation pumps and is particularly vulnerable to high gas prices. Utility companies have a percentage of winter demand covered by longer-term contracts for natural gas. This will partially buffer utilities (and residential consumers) from short-term price increases or at least delay the onset of them. Agricultural interests generally do not have such contracts, buying gas on the spot market. Farmers could be hit with an immediate doubling or tripling of energy costs to irrigate fields. Also, the highest prices may coincide with the end of the heating season and the onset of irrigation as storage levels reach their lowest levels (i.e., April-May-June, Figure 20). Similar negative impacts could be felt in the chemicals industry (e.g., ammonia production).

If we limp out of the winter 2000-01 with less than 500 Bcf of gas in storage, we will barely get storage back to even half-full before newly installed summer gas-fired electricity plants are cranked up. If summer weather is hot, particularly in the population areas of the eastern U.S., gas storage withdrawals may occur in the summer. If this does not happen in summer 2001, it will almost certainly occur a year later. Once gas withdrawals begin in the summer, the U.S. has one winter left before our storage system runs dry. These demand-side pressures begin to raise questions such as:

• How can enough gas be produced to meet demand at affordable prices?
• Can we increase gas production fast enough to keep up with a demand increasing from 21 trillion cubic feet (tcf) in 1999 to 30 tcf in 2020 or sooner?¹⁹

The recent low price for natural gas over the last few years has depressed exploration and development efforts in the U.S. and Kansas. In addition, restrictive or prohibited access to federal lands has limited access to many prospective areas for new gas discoveries²⁰. With the recent price increases, industrial activity and gas production have increased. However, the U.S. and Kansas industry has been decimated. It will take significant time, increased investment capital, and application of advanced technologies to increase natural gas production. Present rig activity in the U.S. and Kansas needs to increase approximately six-fold in order to sufficiently increase natural gas supply to catch up with the rapidly increasing demand²¹. It will require significant effort and cooperation to increase Kansas rig activity from 25 to 150 along with all the related geologic, geophysical, and engineering activity.

Last year (1999) the value of natural gas production at the wellhead in Kansas was $1.034 billion. This year, we project that figure will reach $2.052 billion. This will certainly have a positive impact on state tax revenues. Severance tax revenues will probably double to over $100 million. Additional Kansas ad valorum and income tax revenues from increased economic activity will be even greater.

Figure 21 - Kansas natural gas production and consumption, 1960-2000, with major national and international events that affected both production and consumption.

Figure 22 - Gas production in Kansas showing the importance of production from gas fields in the Hugoton area. (BCF = billion cubic feet of gas). Chart from Kansas Geological Survey, Public Information Circular 5, http://www.kgs.ku.edu/Publications/pic5/pic5_1.html.

Figure 23 - Monthly Kansas natural gas production and average monthly wellhead price 1990-2000. Kansas production shows significant changes in production patterns. The seasonal production pattern of the first part of the decade disappeared. The steady decline from early 1997 is attributed to declining pressures in the major gas fields of southwest Kansas. However, the decline has slowed and monthly production may be increasing during 2000. Production is through August 2000 and prices are the average daily-posted wellhead price through December 2000.

Figure 24 - Monthly U.S. natural gas stocks from January 1998 with forecast until June 2001. Sources: U.S. Department of Energy and American Gas Association. Stocks through 12/29/00 total 1,729 bcf. Forecasted projections follow average monthly storage changes for previous year. Kansas along with the rest of the U.S. could face spot shortages during the spring of 2001.

Updated January 2001
Comments to webadmin@kgs.ku.edu
URL=http://www.kgs.ku.edu/PRS/publication/2000/ofr69/naturalgas.html