Home » Gushing Again

Gushing Again

By wmadministrator

Although you won’t see many Texas-style gusher wells shooting oil in the sky as jubilant drillers celebrate in a shower of hydrocarbons, Kentucky’s oil and gas companies have plenty of reasons to be cheerful.

Fueled by high demand and global market forces, Kentucky is on track to have its first $1 billion year in oil and natural gas production, according to the William G. Barr III, vice president of NGAS Resources Inc. and president of the Kentucky Oil and Gas Association. High prices make it profitable for Kentucky companies to go after gas and oil reserves locked away under the soil.

“It’s a good time to be in the business because of the opportunities both from use of increased technology to lower finding costs with horizontal drilling and the opportunities from exploration,” Barr said.

However, Kentucky’s industry, made up of many small companies and a few large ones, faces challenges as well. For instance, nationwide about half the workforce is nearly eligible for retirement. Finding enough petroleum engineers, diesel mechanics and other skilled positions to sustain the industry’s growth could be a problem. Rising costs for steel pipe and diesel fuel to run equipment also are taking a bite out of rising revenues.

Still, with demand for fossil fuels little daunted by high prices, 2008 could be a record year for production and well-drilling permits in the state.

Kim Collings, director of the Division of Oil and Gas Conservation of the Department of Natural Resources, noted that 2006 saw a 20-year record for well-drilling permit applications. At the end of May 2008, applications already had soared 100 past those issued at the same point in 2006. “We may break the 2006 record,” Collings said.

The contribution of Kentucky’s oil and gas production to the energy consumption in America pales beside the coal industry, but it’s still significant.

In the past few years, Kentucky’s oil production has reversed a decades-long downturn. The state’s oil production peaked in 1959, when 27 million barrels of black gold flowed. Production followed the market’s ups and downs, but by 2006, output was down to 2.2 million barrels a year. In 2007, it spiked up to 2.6 million barrels and 2008 is expected to show another increase, according to Brandon Nuttall, a geologist with the Kentucky Geological Survey.

In 2006, the latest figures available from the Kentucky Geological Survey, Henderson County was the top oil producer with 316,000 barrels. Pike County was the top natural gas producer with more than 32 billion cubic feet.

Overall, the U.S. Energy Information Administration estimates Kentucky had about 18,000 oil wells or about 3.5 percent of the nation’s total in 2006. Gas wells, about 16,000 of them, account for a similar percentage of the nation’s capacity.

The majority are “stripper” wells, small wells that produce less than 10 barrels of oil or 60,000 cubic feet of gas per day. That’s in contrast to a well in Saudi Arabia that may produce more than 1,000 barrels of oil per day.

Kentucky’s natural gas production, most of which comes from the Big Sandy field in eastern Kentucky, typically accounts for less than 1 percent of the total annual U.S. natural gas output.

Skyrocketing prices for oil and gas fuels investment from the greater profits. Nuttall compared Kentucky’s small oil and gas operators who may have 100 wells producing a few barrels day to the heavy producers that pump many times that.

“If you’re producing 200 barrels a day from many wells, trying to compete with one well producing 1,000 barrels a day, your profit margins are going to be slim,” he said. But with oil prices at around $140 a barrel at the beginning of the month – a more than tenfold increase from a decade ago – there are profits.

Small wells pay off big
Increased prices make it profitable this year to re-open wells that were closed when prices fell or to drill new holes.

“When oil is $10 a barrel, there are a lot of wells that get shut down, but at $100 a barrel companies can afford to make an investment,” Nuttall said.

Rising prices led Matriks Energy LLC in Ashland to reopen some of the 43 wells it acquired from Columbia Gas. In June the company spent about $4,000 to lease and re-open a gas well drilled in 1929 that is now on the property of Paul Blazer High School. The school will share in the revenues from the well, according to co-owner Mark Parks.

Past production records are scarce, but Parks talked with people familiar with its history before reopening it. With natural gas prices hovering around $13 per thousand cubic feet, re-opening wells with a dubious record makes sense.

“It doesn’t have to put out a whole lot of gas to bear the risk that we’re putting into it,” he said.

Parks, who’s been in the energy business for 33 years, tries not to get caught up in the hype of high prices. He’s weathered the volatility of the market. When his company was considering buying the wells, gas was about $2.45 per thousand cubic feet. Now that prices are at record highs, the purchase looks like a wise move.

“When a commodity changes that much in pricing, it’s hard to schedule and plan on that revenue stream,” Parks said. “I’ve seen so many ups and downs, it’s hard for me not to be somewhat pessimistic.”

Exploring the hills
Eastern Kentucky contains the largest natural gas fields in the state, buried in the Devonian black shale, a fine-grained sedimentary rock laid down during the Devonian geologic period some 400 million years ago. Companies are using horizontal drilling, a new technology that unlocks the energy buried in the fractured rock layers. By drilling down then across through the top of multiple fracture zones rather than going straight into the ground in one section, a well releases a greater flow of gas.

More gas companies are securing permits for horizontal drilling. According to Collings, in 2005 the state issued about a dozen permits for horizontal wells. At the end of May 2008, there were 111 horizontal-well permits on the books.

NGAS Resources, headquartered in Lexington, drilled seven horizontal wells in its main eastern Kentucky field through June, and the company plans a total of 20 horizontal wells in 2008. NGAS can operate four wells from a single hole in the ground.

Although the horizontal wells cost about a $1 million each, compared with about $300,000 for a conventional well, the investment pays off. “We usually see about eight times the production from a horizontal well over a vertical well,” said William S. “Bill” Daugherty, president and chief executive officer of NGAS Resources. “Horizontal drilling increase the reserves we can get out of a block of land, and it lowers our finding and development costs.”

Over the past several years, NGAS has acquired and built pipelines to get eastern Kentucky gas into the national markets. In 2006, NGAS purchased 116 miles of pipeline from Duke Energy that spanned southeastern Kentucky and southwestern Virginia and ties into Duke’s East Tennessee Natural Gas pipeline system. That helped open the way for Kentucky gas to be marketed to regional and national distributors.
The acquisition connected to 39 miles of gathering lines NGAS constructed in 2005. With a 619-mile pipeline system, NGAS can move its own gas as well as charge other producers for moving their product to market.

Equitable Resources, an energy company based in Pittsburgh, Pa., with extensive Kentucky operations, plans to drill at least 200 horizontal wells in 2008 and construct 470 miles of pipeline and compression facilities.

Signature Oil Corp., a Lexington-based oil and gas exploration company, is drilling in Knox and Laurel counties in Kentucky and several counties in Tennessee. Signature acquired rights to drill on nearly 7,000 acres in Knox and Laurel counties, with more than 30 productive wells in an operational field.

Drilling down
Kentucky is part of the Appalachian and Illinois basins, with oil and gas production dating back to the early 1800s. A report from the Interstate Oil and Gas Compact Commission called the Appalachian and Illinois basins – spanning 10 states – “the most drilled but least explored” reserve in the country. “After more than a century, the Appalachian and Illinois basins still contain at least as much oil and natural gas as have been produced to date,” the report said.

Exploration is spreading to western Kentucky where New Albany shale deposits are thought to hold trillions of cubic feet of natural gas, Barr said. Companies are acquiring leases to drill on property, but there’s a dearth of pipelines in the region and a shortage of drilling rigs and skilled people to operate them.

“If it turns out to be as good as we think it is, the challenge is going to be to gather the gas and get it to market in a basin that has not had substantial production for years,” Barr said.

While those in oil and gas industry know they won’t threaten King Coal’s throne, with even higher energy prices on the horizon, the potential for significant reserves means Kentucky’s oil and gas industry has a bright future.

Alternative Energy
Kentucky is home to high-tech projects seeking fuel from new sources

Alltech biorefinery
Alltech’s plans to build a refinery to convert biomass into ethanol in Springfield, Ky., continue to move forward. Alltech president and founder Dr. Pearse Lyons said an engineering firm has been selected to develop the refinery near an Alltech plant in Springfield.

The refinery will generate ethanol by breaking down the cellulose in biomass from a wide variety of plant materials or non-food-based agricultural waste such as corn cobs and stalks, saw dust and paper pulp, and crops such as switchgrass.

Alltech will employ a process known as a solid-state fermentation using natural processes to convert the biomass into ethanol and other refined products. According to Lyons, the plan eventually calls for algae to produce ethanol and sequester, or capture, carbon dioxide from the process. Lyons noted that algae could product as much as 7,000 gallons of ethanol per acre, compared to 400 gallons from an acre of corn.

The project received a $30 million funding from the U.S. Department of Energy and $8 million in state incentives from the Kentucky Economic Development Finance Authority. The refinery is expected to employ 93 people when it enters production.

Peabody Energy/ConocoPhillips coal-to-gas plant
The plan to turn Kentucky coal into natural gas is taking shape as Peabody Energy and ConocoPhillips continue feasibility studies on a proposed plant in western Kentucky.

Coal reserves may draw the plant to Union County, which could see more than 500 jobs from the project.

Beth Sutton, director of external communications for Peabody Energy, said the studies are expected to continue through the second half of 2008. “Projects like this tend to have long lead times,” she said.

The two energy giants are studying the possibility of a “mine-mouth” gasification project, using ConocoPhillips E-Gas technology.

E-Gas is a method of burning coal in a cleaner way that also produces pure carbon dioxide to use in other industries. The carbon dioxide can be used to pump into older oil reservoirs to drive the crude up out of the well, and in turn sequesters underground the carbon that might otherwise contribute to global warming.

Over its lifetime, the project could produce as much as 1.5 trillion cubic feet of natural gas.