The steep drop in global oil prices has producers shutting in wells, storing crude, and hoping for better times.
Friday afternoon, Mike Hertel was pumping a well on the Oldham lease south of Hays.
“If things were good, I wouldn’t be able to talk to you,” Hertel said. “I’d be so busy.”
That wasn’t the case late Friday afternoon, for sure.
“During the boom, the phone would ring seven days a week, day and night,” he said. “Now you have to check it to see if it’s still working.”
Family owned Hertel Oil Co. opened its doors in 1980. A producer, operator and service company that is still family owned, the Hertels now maintain wells seven days a week, their own and others, from cleaning tanks and pumping salt water lines, to keeping up lease roads and pumping wells.
With more than 40 wells, Hertel Oil’s chemical costs alone can run to $6,000 a month, he said.
“Nobody can make money at these prices,” said Hertel of the steep drop in oil prices. “With some of these wells it takes $30 a barrel to make your operating costs.”
With Ellis County the No. 1 oil producing county in Kansas, many feel the pain.
Ellis County will lose about 50% of its oil valuation, according to Ellis County Appraiser Lisa Ree. Assessed value for 2019 was $32 million. For 2020 it will be more like $13 million to $14 million, Ree has said.
The county in 2019 had 2,597 wells and produced 2.53 million barrels of oil, according to the Kansas Geological Survey. That was 7.6% of the state’s total oil production.
Shutting in wells
Rome Corp. of Hays has been operating since 1980 and has 50 wells sprinkled throughout Ellis, Rooks and Barton counties, according to Marty Patterson, owner and president.
“I shut all my oil wells off, as of today,” Patterson said Friday. Of the 40 employees who work for one of Rome’s three companies, including Western Well Service, Patterson has had to let go half. The federal Paycheck Protection Program made it possible to keep 20, mostly pulling-unit and wireline hands, he said.
“Oil usage has dried up,” Patterson said, noting in particular the big consumers like commercial jets. “There’s so much oil right now. We’re pretty much awash in oil.”
At this point, it costs more to produce oil than what it brings.
“We’re losing money here,” Patterson said.
Russell-based independent John O. Farmer Inc. has 400 wells in Russell, Ellis, Graham, Rooks, Ness, Barton and Norton counties.
“We’ve shut almost all of them in, maybe in the last week or so, due to extremely low price,” said Matt Dreiling, John O. Farmer vice president.
Shutting in wells is costly and risky, they all said, with maintenance still necessary. Just one of the many challenges is corrosive bacteria that go to town when a well is shut in.
“There are bugs down there that will eat your iron up if you don’t keep it circulating,” Patterson said.
Corrosion means a well might require a pulling unit to repair tubing leaks and broken down pumps, Hertel said. And reservoirs don’t stand still when water injection is used to increase pressure and stimulate production.
“You can’t shut these wells down, because they’re on water flood,” Hertel said of some of the company’s wells. “The reservoir under the ground is like a river, you gotta keep ‘em pumping or the oil will go to the neighbor.”
Tanks are filling up
Rome Corp. has 100 storage tanks that are full, waiting for prices to come up. At 200 barrels a tank, that’s 20,000 barrels of oil, Patterson calculated.
“I would imagine everyone’s doing the same thing,” he said.
John O. Farmer had been selling their oil when the price was upwards of $20 a barrel. Now its storage tanks are anywhere from a half to three-quarters full, Dreiling said.
Hertel emptied its storage tanks in March, selling its stored crude at about $23.75 a barrel to make room for more, Hertel said.
With a well pumping five barrels a day, it will take about a month to fill up a storage tank, he said. When the tanks are full again, and price remains low, options are slim.
“Investors don’t want to sell at this price,” Hertel said. “They want to store or shut it down. And there’s only so much you can store.”
Tanks full of oil in open pastures raise the spectre of spring and summer thunderstorms that bring with them plenty of lightning, say the oil men.
“When lightning hits a tank, it sets it ablaze and it’s gonna be gone in a couple hours,” Patterson said.
Drilling on hold
The equipment yard at Discovery Drilling, 1029 Reservation Rd.,was quiet Friday morning. Trucks and trailers sat idle in the huge gravel lot, along with a drilling rig, drilling mud pumps and lots of other equipment.
“We’re just mainly trying to hold it together,” said Jason Alm at the yard on Friday.
Of the 50 employees the company has, about a dozen or less are coming in to work now, he said.
“We’re just maintaining equipment,” Alm said. “We’ve been painting a lot of stuff, and servicing equipment that maybe we didn’t have time to do before.”
Founded in 1984 by Alm’s parents, Tom and Glenna Alm of Hays, Discovery Drilling celebrated 25 years in October.
One of the larger privately held drilling contractors in western Kansas, Discovery’s last two wells were drilled in Rooks and Pawnee counties, finishing up just as Gov. Larua Kelly issued the stay-at-home order.
The 3,800-foot well in Rooks struck oil, while the shallower 2,500-foot well in Pawnee County was dry.
“I think we’re more or less playing the waiting game,” Alm said Friday. “We do have customers wanting to drill, but they want to wait until the virus clears up, and see what the environment is.”
As it is now, operators and service companies have to hunker down, said Hertel, citing the electrical and chemical expenses of keeping a well operating.
“If you take 160 barrels in a tank and sell it for $5 or $10 a barrel, you aren’t making any money for yourself or your investors,” he said.
Rome won’t fire up its wells again until the price of oil comes up and holds steady for about a month, Patterson said. Like others in the industry, he’s watching the benchmark crude West Texas Intermediate. When WTI trades at $35 a barrel on the New York Mercantile Exchange, Kansas crude will bring about $25 a barrel.
“WTI is closing a little less than $20 today,” said Danny Schippers, president of operator DaMar Resources Inc., 234 W. 11th, on Friday. “It’s $19.78, closing today on the NYMEX. That puts Kansas crude at $9.78.”
Short of storing or selling, there’s shutting in, Schippers said. Most in the area gave the shut-in order starting around April 15, he said.
“No operator wants to sell oil today at $9.75,” he said. “It’s absolutely a losing proposition.”
With wells being shut in, the oil field service and supply sector is being hit hard.
“They are extremely responsive to the producers,” Schippers said. “Now their equipment is ready, their manpower is ready and they need to be dispatched. But there are no calls.”
Operators and producers are concerned that the service industry is at risk right now.
“We can minimally keep wells going just to help the service and supply sector,” he said. “But when the price of oil gets to such a low level, your hand is literally forced to shut in.”
When WTI is $35 for two weeks to a month, wells may come back online, Schippers said.
“You can’t let these daily markets gyrate your thinking,” Schippers said, when it comes to making major field changes. “Most operators would respond kind of slow.”
Wait and see
Lifting costs for John O. Farmer average $25 to $30 a barrel, but vary lease to lease, said Dreiling.
“All of our leases are unique in that they all have different lifting costs. One set of leases may be profitable when WTI is $30 a barrel,” Dreiling said. “Another set it has to be $40, while another set we have to see $50 for them to be economic.”
When prices do return higher, it’s hard to say how fast the industry will respond.
“We’re in such uncharted territory,” he said. “I think it’s extremely difficult to make any kind of projection until you see planes back in the air and people driving again.”
It could take months to see how much demand there is relative to today’s high crude inventories.
“Until we see the draws on those inventories, we won’t know,” Dreiling said. “We’ve never been in anything like this. We’ll just wait and see what happens.”
Operators won’t just turn wells back on, though, it will be a gradual ratcheting back up, he said.
For now, Hertel sees more and more operators shutting in wells.
“I might be doing that too shortly,” he said. “It’s a really, really sleepless night right now trying to make the right decisions for family and investors. But I’ve been through this stuff before, and it’s gonna come back.”