Hemi Energy Group Inc. (fka HMGP)

[mike_t]

YW heres another one ..dont know if its been posted before ..http://cjonline.com/stories/120207/kan_222148521.shtml Oil and gas production have Kansans pumped
Two industries seeing resurgence with higher prices, new method
By Tim Carpenter
The Capital-Journal
Published Sunday, December 02, 2007
LA LOUP — Oil field worker David Ericson's perspective of the Kansas energy business is personal.

His career began in the early 1980s when oil production in the state topped more than 6,000 barrels a month. The massive Hugoton natural gas field in southwest Kansas was the envy of a nation. In the oil and gas patch, jobs were plentiful. Investors made fortunes. Royalty checks
The bubble was beautiful. Until it burst. Ericson was bruised by energy recessions — 1986 and 1998 stick out — that left his outdoor office dotted with rusted storage tanks, stacks of used pipe and worn-out pump jacks. In 1999, Kansas crude oil production plummeted to a mere 2,300 barrels a month. At one point that year, only four drill rigs were operating in the state. The inevitable decline of the Hugoton field didn't lift spirits.

"I was here when oil was $8 a barrel," said Ericson, who works for Iola-headquartered Colt Energy. "You were wondering if you had a job."

Now, this survivor is riding a wave of oil and gas optimism.

Surging crude prices — nearly $100 a barrel on the world market — continue to build interest in modest-producing oil wells that canvass Kansas. Drilling for a nontraditional natural gas — coal bed methane — is booming in southeast Kansas.

More than 110 drill rigs are now churning into Kansas bedrock. Impressive three-dimensional maps of underground rock layers point the way. Ericson, standing near La Loup in a Franklin County oil and gas field opened in the 1970s but still yielding fossil fuel riches, said time and technology hadn't replaced the only certain method of discerning what lies below.

"As always," he said, "the best way is to drill a hole and see what's there."

'Making money'

The state's first oil well was drilled in Miami County in 1860, with the initial gas well going in Montgomery County in 1873.

Serious production of both coveted energy sources began in the 1880s, and the industry has grown to rank below only agriculture as the state's most significant in terms of gross product.

"The history of oil and gas production in Kansas is a story of pioneers willing to take risks to bring economic prosperity to their communities," said Rep. Jerry Moran, R-Kan. "There have been times of good production and decent prices and other times of low prices and economic hardship."

Oil or gas is produced in 89 of Kansas' 105 counties — a roster that excludes Shawnee County. The state's 43,000 oil wells generate 35.6 million barrels of oil annually to rank eighth nationally among 31 oil-producing states. The 22,000 natural gas wells draw 375 billion cubic feet per year, ranking Kansas eighth of 32 states with a commercial gas industry.

The world consumes 85 million barrels of oil each day, and Kansas produces less than half that total in a full year. That keeps Kansas from influencing the market price, but the oil and gas industry still contributes billions of dollars to the state's economy through job creation, royalties and taxes.

Tim Carr, who worked for more than 15 years at the Kansas Geological Survey before accepting a distinguished professorship at West Virginia University, said the price climate should drive aggressive extraction operations in the state well into next year.

That ought to be sufficient to boost crude oil production for 2007 and slow the decline in gas production this year, he said.

"They're making money," Carr said. "We're in a period of good, solid prices for oil and gas."

Impediments

Body blows absorbed by the Kansas oil and gas industry over the past 20 years ran drilling and service companies into bankruptcy. Suppliers, truckers and field hands drifted away. College students turned to subjects other than geology and petroleum engineering that appeared to offer more stable long-term career potential.

It has proven difficult in the past few years to convince younger workers that this comeback in Kansas wasn't the tip of another collapse.

"That's one of the biggest challenges in the industry: equipment and people," said Ed Cross, executive vice president of the Kansas Independent Oil and Gas Association. "It's a nationwide problem. There is the same shortage in Oklahoma and Texas."

The labor issue is likely to linger after resolution of infrastructure problems, said David Bleakley, director of acquisitions and land management at Colt Energy. He estimated two-thirds of Kansas' oil and gas industry managers were within five years of retirement.

A program at Pratt Community College has turned out more than 400 entry-level field workers in the past two years. All were hired at an average starting wage of $36,000, but improvements in financial, health and retirement benefits can't keep enough in the fold. Working outdoors at a tough, dirty job will continue to be a hard sell, Bleakley said.

Jeff Kennedy, a Wichita lawyer specializing in oil and gas issues and a member of the Kansas Energy Council, said the industry's once-extreme equipment shortages had nearly abated.

"It used to be the wait for a rig was many, many months," he said. "You can now get a rig if you need one. It's still a little bit of a challenge. It's still a great time to be in the drilling business."

Just a gas

The Hugoton natural gas field underneath southwest Kansas is one of the world's giants. Production of 35 trillion cubic feet of gas from 12,000 wells in Kansas and Oklahoma since the field's discovering in 1922 gives it a credible claim to that title. Sufficient natural gas has been drawn from the region to supply every Kansas household for more than three centuries. Much of the gas, however, is stored and exported to other states.

Inspired by a production decline from 600 billion cubic feet annually in the 1960s to 250 billion cubic feet last year, the Kansas Geological Survey recently completed the first comprehensive report analyzing the entire two-state field and its many geologic layers. The 3-D computer model will help operators extend the field's life and improve the recovery of remaining gas.

"This model is a tool to identify intervals and areas where gas still resides," said Martin Dubois, survey geologist.

A lucrative gas resource is locked in coal beds of southeast Kansas. Much of the coal in the region is mixed with "unconventional" methane gas. Hugoton gas is viewed as conventional because it is held in limestone and sandstone layers.

Carr, formerly chief petroleum researcher at the Kansas Geological Survey, said methane gas wells don't produce huge amounts but can remain active for decades.

"It could potentially produce as much as the Hugoton," Carr said.

Oil slick

Nick Powell bought Colt Energy in 1986 when the price of a barrel of oil stood at $12.

"If you would tell me in 1998 the price would be $10, I would never have got into the business," he said. "Our costs went up substantially in that 12 years. Our lifting costs in 1998 were about $18 a barrel. We were laying people off, scrambling around, looking for help."

The company survived to focus on the oil and gas business in eastern Kansas, and it is doing well at the moment. The steady drum of news about rising crude and gasoline prices is a worry, he said.

All that attention will inevitably prompt politicians in the Kansas Legislature or Congress to consider new taxes on the industry, Powell said.

"When things are bad it's kind of like, 'Just let the market work.' When the prices are high, we're a target for more taxes and regulation," he said.

Cross, of the industry group KIOGA, said too few people appreciate that investing in oil and gas production still involves huge risks. Most of the oil drawn in Kansas comes from modest-producing "stripper wells." The daily average for a Kansas oil well is under three barrels.

However, Cross said, drilling a well 1,000 feet deep in eastern Kansas can take a couple of days and easily cost $100,000. The price rises as rigs move west. Wells in western portions of the state can top $500,000 because they go to depths of 5,000 feet or more, Cross said. These can take 10 days to two weeks to complete.

From the time a geologist identifies a promising site for a well, it could be three to five years before the developer begins pumping revenue.

"There is a long investment horizon," Cross said.

The drilling process pays big dividends for the Kansas economy, given that about 5,000 new wells are drilled annually in the state.

"In our mind," Cross said, "we're one of the few industries that will invest $1 billion annually into rural Kansas."

Share the pot

With new money floating around in Kansas, it comes as no surprise there is renewed debate about allocation of revenue.

Hugoton resident Joe Larrabee, president of the Royalty Association of Kansas, said the state should rethink the compensation drilling companies provide property owners.

Thousands of new wells are being bored and old wells are being reworked to boost capacity, Larrabee said. Digging brings heavy equipment onto agricultural land, he said, resulting in temporary and permanent crop production losses. Proper compensation of landowners is important, he said.

"It's something with the oil companies all the time," Larrabee said. "They have their perspective of what everything should be and the royalty owners have their view."

An interim legislative committee is studying the possibility of adopting a "surface damage act" to improve relations and settle damages caused by oil and gas exploration and production. There will be opposition from industry interests who discount the need for intervention by state lawmakers.

Carr, formerly of the Kansas Geological Survey, said the Legislature and Congress should consider significantly expanding funding of research and development projects designed to benefit small-scale producers.

"The U.S. is the only country that is a major oil and gas producer that doesn't have research and development," he said.

No justice

Gov. Kathleen Sebelius has a front-row seat to the revitalization of the state's oil and gas sector. She is pleased to see folks like David Ericson, of Colt Energy, have renewed optimism about an industry that has served along with agriculture and aviation as the three legs of the state's economy.

"Anybody who is drilling oil wells is happy right now," Sebelius said. "When you see $90 to $100 barrels of oil, I don't think anybody in their lifetime ever thought that possible. The consumer pinch on one side is investor happiness on the other side."

Not even folks in the Kansas refinery towns of Coffeyville, El Dorado and McPherson escape the downside of prosperity in the fossil fuel business.

Galen Menard, vice president for supply and trading with a cooperative operating the McPherson refinery, said the outfit sells about 100,000 barrels of gasoline, diesel and propane daily. Still, employees of the central Kansas facility don't get a discount.

"That's been a debate for a lot of years," he said. "We do no retail. It's sold at the gate and the market takes over."

The same is true in Coffeyville, where residents pay more for gas than the state's average.

"We have higher gas prices than Topeka," said Larry Trotter, a city building inspector. "The only thing I can say is we have fresher gas."

Tim Carpenter can be reached at [phone] or [e-mail].